The evolution of the real estate market and investment in Portugal over the past years, with a particular focus on major metropolises, has highlighted a sensitive situation where elderly individuals (65 years or older) often reside in old buildings.
In this context, many old buildings, often not even constituting horizontal property, have been acquired by investors or investment funds, which have frequently encountered tenants aged 65 or over or even those with lifelong rentals.
Generally in Portugal, measures are in place to protect tenants over 65 or with a proven disability rates equal to or greater than 60%, who have lived in the rented property for over 15 years, from eviction proceedings.
However, there are exceptions that allow the landlord to request the tenant's eviction, namely for reasons of significant remodeling or renovation of the rented property or the need to rent for self-occupation or to first-degree relatives.
Now, in a situation where there are elderly tenants or tenants with lifelong protection in the building acquired in its entirety by an investor, a very advantageous solution may be to negotiate and formalize a rental termination agreement.
This agreement, aimed at compensating the tenant for the inconvenience of leaving the rented property, typically involves stipulating a monetary amount and making the respective payment to the tenant. It is, therefore, a pecuniary compensation.
It is worth noting that the compensation in such an agreement does not have to be limited to stipulating the payment of a certain amount of money, but may, for example, take the form of compensation in kind, such as "providing" the tenant with another property. One could consider and agree to a simple physical relocation of the tenant and their belongings to a location with characteristics equivalent to those of the rented property, perhaps even where the lease could be maintained under the same conditions.
However, it is important to emphasize that each of the situations mentioned above may have a different tax framework. Hence, it is crucial that each of them be subject to prior legal analysis, among other regimes, considering Portuguese tax law rules.
This is because, underlying compensation for a rental termination agreement is typically a situation of onerous waiver of a contractual position inherent in contracts related to real estate.
In this regard, Article 9(1)(e) of the Portuguese Personal Income Tax Code ("CIRS") states that "compensations due for onerous waiver of contractual positions or other rights inherent in contracts related to real estate, with the exception of compensations legally due for the termination of indefinite-term lease agreements for properties that constitute the taxpayer's permanent residence, in cases provided for in Article 1101 of the Civil Code."
Thus, from a Portuguese tax perspective, the compensation, capable of falling within the concept of asset increase, constitutes income of category G, subject to IRS taxation at a rate of 28%.
However, the aforementioned Article 9(1)(e) of the Portuguese Personal Income Tax Code exempts from taxation compensation due in the event of termination of a contract when the rented property constitutes the tenant's permanent residence. In practice, this raises a very pertinent question. What happens if the compensation to be paid exceeds the limits defined by law?
It seems evident that the response would involve the taxation of any amount exceeding the defined limits, under the general terms of Category G, and the recipient must declare it in the respective Annex G of the Modelo 3 declaration. This is the position of the Portuguese Tax Authority.
On the other hand, those who pay compensation have no ancillary tax obligations, in the sense that they are not obliged to withhold the amount of tax due at source, contrary to what happens for other asset increases listed in Article 9 of the CIRS.
Contractual issues and their tax implications are always quite complex and often raise questions that should be addressed by qualified professionals. Belzuz has lawyers with extensive experience in real estate and tax law who can provide advice on negotiations and termination of life rental contracts in Portugal.
Departamento Derecho inmobiliario | Departamento Derecho Fiscal (Portugal)
Belzuz Abogados SLP
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