Portugal Property

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Portugal Property: Purchase Contracts

Date: 10/10/2008

Overview

The first stage in buying a property in Portugal is usually the signing of a promissory contract (contrato de promessa de compra e venda), which sets out the details of the contract such as the identity of the owner, a detailed description of the property and land boundaries, registration and tax numbers, purchase price, deposit and date of completion. It may be possible to obtain a draft in English. It’s also possible to have a notary draw up the deed of sale (escritura) without having a promissory contract. However, when you’re paying a deposit, which is usual, it’s necessary to have a promissory contract drawn up.

Buying ‘Off-plan’

When buying an unbuilt property ‘off-plan’, i.e. a property still to be built or which is partly built only, it’s usual to pay a small holding deposit, e.g. €750, to reserve a property until a promissory contract is signed (usually around four weeks later). When buying off-plan, payment is made in stages. Stage payments vary considerably and may consist of a 20 per cent deposit; 20 per cent on completion of the roof; 20 per cent on tiling the bathroom and kitchen (or when the doors and window frames are installed); 20 per cent when the building is complete; 10 per cent when the exterior work is completed (such as the patio, pool and landscaping); and the remaining 10 per cent on completion (which may be withheld for 6 or 12 months as an insurance against defects, provided you can get the builder to agree to this in the contract). An alternative may be 15 per cent on signing the contract, 20 per cent on the completion of the foundations, 20 per cent on completion of the walls, 30 per cent on the completion of the roof and 10 per cent at completion. If a property is already partly built, the builder may expect a higher initial payment, depending on its stage of completion.

The contract must contain the timetable for the property’s completion; stage payment dates; the completion date and penalties for non-completion; guarantees for building work; details of the builder’s insurance policy (against non-completion); and a copy of the plans and drawings. The floor plan and technical specifications are signed by both parties to ensure that the standard and size of construction is adhered to. The contract should also contain a clause allowing you to withhold up to 10 per cent of the purchase price for 6 to 12 months as a guarantee against the builder not correcting any faults in the property. The completion of each stage should be certified in writing by your own architect before payments are made. It’s important to ensure that payments are made on time, otherwise you could lose all previous payments and the property could be sold to another buyer. It’s important to verify that the builder or developer has an insurance policy (or ‘termination’ guarantee) to protect your investment in the event that he goes bust before completing the property and its infrastructure. If he doesn’t then you shouldn’t buy from him!

Buying a New Completed Property or a Resale Property

When buying a resale or a new finished property (i.e. not off-plan) it’s usual to sign a promissory contract (contrato de promessa de compra e venda) and pay a deposit (sinal). Before signing a contract, it’s important to have it checked by your lawyer. One of the main reasons is to safeguard your interests by including any necessary conditional clauses (see below) in the contract. The deposit is usually equal to 10 to 20?? per cent of the agreed purchase price (the actual amount may be negotiable), the balance being paid at the completion when the deed of sale (escritura) is signed. A deposit is refundable under strict conditions only, notably relating to any conditional clauses such as failure to obtain a mortgage, although a deposit can be forfeited if you don’t complete the transaction within the period specified in the contract. If you withdraw from a sale after all the conditions have been met, you will not only lose your deposit, but may also be required to pay the estate agent’s commission. On the other hand, if the vendor withdraws he must repay you the amount of the deposit plus compensation, which is usually equal to the amount of the deposit (you therefore receive double the amount of the deposit). It’s possible to include a clause in the contract for ‘specific performance’, which means that you can insist on a sale being completed rather than be compensated for breach of contract.

Make sure that you know exactly what the conditions are regarding the return or forfeiture of a deposit. Many Portuguese estate agents or lawyers don’t have the legal authority to hold money on behalf of their clients and deposits should be deposited only in a separate (preferably bonded) account. It isn’t recommended to make out cheques for deposits or other monies in the name of an estate agent. Note that it’s quite usual in Portugal for a deposit to be given to the vendor, although this should be avoided because if there’s a dispute and the purchase isn’t completed, it can take some time to get your deposit returned.

Conditional Clauses

All contracts, whether for new or resale properties, usually contain a number of conditional or annulling clauses (cláusula de anulação) that must be met to ensure the validity of the contract. Conditions usually apply to events out of the control of either the vendor or buyer, although almost anything the buyer agrees with the vendor can be included in a contract. If any of the conditions aren’t met the contract can be suspended or declared null and void, and the deposit returned. However, if you fail to go through with a purchase and aren’t covered by a clause in the contract, you will forfeit your deposit or could even be forced to go through with a purchase. If you’re buying anything from the vendor such as carpets, curtains or furniture that are included in the purchase price, you should have them listed and attached as an addendum to the contract. Any fixtures and fittings present in a property when you view it (and agree to buy it) should still be there when you take possession, unless otherwise stated in the contract (see also Completion below). There are many possible conditional clauses concerning a range of subjects, including the following, and you should discuss whether conditional clauses are necessary with your lawyer.

• being able to obtain a mortgage (although it’s common in Portugal to have a mortgage approved before signing a contract);

• obtaining planning permission and building permits;

• plans to construct anything (e.g. roads, railways, etc.) which would adversely affect the enjoyment or use of a property;

• confirmation of the land area (by a surveyor) being purchased with a property;

• pre-emption rights or restrictive covenants over a property (such as rights of way);

• contingent on the sale of another property;

• subject to a satisfactory building survey or inspection.

Inheritance & Capital Gains Tax

Before registering the title deed, carefully consider the tax and inheritance consequences for those in whose name the deed will be registered. Property can be registered in a single name; both names of a couple or joint buyers’ names; the name or names of children, giving the parents sole use during their lifetime (usufruto/Interesse vitalício) or in the name of a Portuguese or foreign company (see below). However you decide to buy a property, it should be done at the time of purchase, as it will be more expensive (or even impossible) to change it later. Discuss the matter with your lawyer before signing a contract.

Buying Through an Offshore Company

There are considerable advantages to owning a home in Portugal through an offshore company, particularly for non-residents, although the Portuguese tax authorities have recently introduced new tax measures designed to impose taxes on offshore companies. Under new legislation introduced in 2002 several restrictive measures were introduced meaning that it now isn’t quite so advantageous to buy through an offshore company. Property tax is paid at a fixed rate of 2 per cent (normal rates are from 0.7 to 1.3 per cent) and rental tax is also payable on all properties whether the property is rented or not. There are still advantages, however, and you should consult with a fiscal expert if you are considering this option. Owning a property through an offshore company is often an advantage when you’re selling, as the sale can be effected much more easily, quickly and cheaply, and it may help to increase the asking price (although a prospective buyer may not appreciate or want the advantages). Some of the advantages include:

• Avoidance (in most cases) of SISA (transfer tax), and notarial and registry charges upon resale of a property. SISA, legal, notarial and registry fees can amount to as much as 15 per cent of the value of a property.

• Ease of the sale of the property, which simply involves transferring ownership of the company shares to the buyer. This also avoids the lengthy and protracted procedures which are necessary to register a title in Portugal, resulting in lower legal fees.

• Avoidance of local inheritance taxes on the property, including any potential liability to double taxation.

• Ease of transfer to heirs in the event of the owner’s death and avoidance of local succession laws, which may stipulate to whom the property must pass. A number of people (e.g. in a family) can be part owners, each holding a number of shares, or a couple can own a property as a joint tenancy (which isn’t recognised in Portugal) and on the death of either partner a simple transfer of his or her shares can be effected.

• The shares of an offshore company can be used to secure a loan for the purchase of the property. The shares are charged to the bank in return for a loan equal to a percentage of the value of the property.

• Confidentiality (the buyer can remain anonymous), asset protection and limited liability.

• By holding a property through an offshore company, the company shares can also be held on trust.

There are a few disadvantages in owning a Portuguese property through an offshore company, one of which is the cost of setting up the company and annual fees (although this is potentially less than the possible savings). The cost varies according to who establishes the company and where it’s incorporated, but there’s usually a set-up fee of between €1,050 and €3,240 plus an annual amount (from €800 to €2,450) for administration fees and taxes. Gibraltar is generally considered to be one of the least expensive and most reliable jurisdictions. Jersey and the Isle of Man are also popular jurisdictions for offshore companies in Portugal. If you own a property through an offshore company, you cannot claim remission from property tax (contribuição autárquica) for the first ten years of ownership as a ‘normal’ owner can. There are a number of companies who can establish an offshore company, including International Company Services (Portugal) Limitada, Av. Denfensores de Chaves 15, 6th Floor, Suites F & G, 1000 Lisbon (213-142 030, port@ICSL.com).

Bear in mind that the laws regarding the ownership of Portuguese property through offshore companies are currently in a state of change and all advantages may be annulled or further reduced in the future. Source: PropertyIndex

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