In general, taxes on immovable property may be static – periodic in nature, with reference to the fiscal period corresponding to one year – or dynamic – when they are levied on gratuitous or onerous transfers.
In Portugal, the Real Estate Tax (henceforth ‘RET’) is a periodic tax, which is levied on the patrimonial tax value of rural and urban properties[1] located in the Portuguese territory, constituting revenue for the municipalities where they are located.
The tax rates of RET vary, as in many cases the legislator only establishes the maximum and minimum of the rates, leaving the correspondent municipalities the authority to determine the rate applicable in its land.
As such, the rate for rural property is set at 0,8% and the rate applicable to urban property varies between 0,3% and 0,45%.
Traditionally, taxes on immovable property should be low, as they concern the holding of assets, which, despite revealing wealth, do not reveal an increase in assets. Property is, by definition, an asset, so its increase in value constitutes a capital gain only upon the transaction of such property.
The legislator has focused more and more in an increase of recurrent taxes on real-estate property, because, on one hand, they are low and therefore a potential source of increased revenue, and on the other hand, are viewed as a viable option, given that they seem to make less of a dent in economic growth, when compared to a potential increase in taxation of work income.
In fact, this increase in focus has translated, in 2017, in the introduction of the Additional to RET, applicable to property used for housing purposes.
In 2019, recurrent taxes on immovable property have earned Portugal 1.7 billion EUR, roughly 0,8% of the Portuguese GDP.[2]
Regarding the potential inequity of the RET, it is to be noted that, in general, the impact of personal taxation on inequity lies in tax progressivity.
As we know, most tax systems rely on a semi-dualist system, in which progressive taxation applies to work and pension income, and taxes on capital/property income are flat rated.
Furthermore, as mentioned above, the taxes on property are calculated, not based on income, but on the property’s value.
For years now, housing affordability in Portugal has been an issue, well before the COVID-19 crisis, due to strong pressures on housing prices, with housing costs for poor households increasing by 28% compared with 7% in the EU on average. Housing supply has not responded to the increase in housing demand prompted by the low-interest rate environment, high demand for tourist accommodation and policy incentives to foreign residential investment.[3]
In result, prices of properties have substantially increased. Although the patrimonial tax value is not entirely dependent on the purchase price of the property, the Portuguese legislator is planning to adjust its calculation, to reflect the increase in housing prices, namely in Lisbon.
With (i) the rapid increase of property value, (ii) housing costs increasing at a much greater rate than salaries and work related income, and (iii) considering the fact that RET focuses on value of property as opposed to actual available income, it poses the question: are property taxes promoting inequity in Portugal, namely in the urban centers where housing costs have been increasing for years?
Maria Lima Ferreira
Gómez-Acebo & Pombo
March 2022
[1] For RET purposes, property is any fraction of land, including waters, plantations, buildings and constructions of any nature incorporated with a degree of permanence. A large number of disputes have took place between the Portuguese Tax Authority and taxpayers regarding the concept of property, as the PTA has considered a rather broad concept for the purposes of applying RET. One of the best known disputes concerns the constituent elements of a wind farm, an issue which, due to its complexity, will not be analysed in detail here.
[2] Source: Taxation Trends in the European Union: Data for the EU Member States, Iceland, Norway And United Kingdom – 2021 Edition: https://op.europa.eu/en/publication-detail/-/publication/d5b94e4e-d4f1-11eb-895a-01aa75ed71a1/language-en.
[3] Source: OECD Economic Surveys: Portugal – OECD 2021. https://www.oecd.org/economy/surveys/Portugal-2021-OECD-economic-survey-overview.pdf.