The fiscal law The State Budget for 2023 (OE 2023) amended the criteria for granting an IMT exemption on the acquisition of properties intended for resale. Law 24-D/2022 of December 30 amended the exemption regime for the municipal real estate transfer tax («IMT») on the acquisition of real estate intended for resale in Portugal.

The IMT Exemption Scheme for the Acquisition of Real Estate Intended for Resale in Portugal

Although this amendment was not originally included in the relevant bill, it was added following the specialized debate on the 2023 State Budget Act.

Impact and Assumptions of the Exemption

The IMT is levied on the purchase and sale of real estate, whether new or used. However, if the buyers are IRS/IRC taxpayers and are registered as purchasers of real estate intended for resale, they may be exempt from the IMT.

In this context, the conditions for this exemption are as follows

• The buyer must be an IRS/IRC taxpayer and be registered to engage in the purchase, sale, and resale of real estate (CAE 68100); ;
• At the time of purchase, the deed must state that the real property being purchased is intended for resale.
• The property will be resold within three years
• that the acquired asset is not intended for any purpose other than resale and, finally, that the asset’s accounting treatment reflects its status as a current asset.

If these conditions are met, the IMT exemption applies to property acquired for resale, including residential and nonresidential buildings and land.

However, properties built for sale and properties undergoing major renovations are excluded from the exemption because, in these cases, it is considered that the property is being used for a purpose other than its intended one.

Automatic Exemption and Exemption by Refund 

As for the’exemption IMT when purchasing a property for resale; this can occur in two different ways.

On the one hand, under the rules of the program, the exemption is granted through a refund: in this case, the buyer pays the tax at the time of acquiring the property intended for resale, and when the property is resold—provided all required conditions are met—the buyer is reimbursed for the IMT initially paid. In practice, upon request by the purchaser, duly accompanied by documentation proving that the resale has taken place, the previously paid IMT is canceled by the competent tax office.

On the other hand, with regard to the exception rule, the exemption may also apply automatically and immediately. In this case, by proving the normal and habitual conduct of business as a purchaser of goods intended for resale, the exemption is recognized at the time of acquisition of the goods (deferral effect). To do so, however, the purchaser must request a certificate issued by the competent tax office, which must state that, during the preceding two years, the taxpayer has resold goods previously acquired for that purpose.

This certificate must be submitted before the date of the transaction, which can be done via the electronic system, by email, or by mail to the appropriate tax office.

Law 2023 and the Change to the Definition of Resale Activity

Under the 2023 Finance Act, the concept of the normal and customary conduct of business as a purchaser of real estate for resale has been modified, with greater restrictions on the applicability and scope of the previous automatic exemption regime.

Until 2023, the requirement for engaging in the business of reselling—for the purposes of automatic exemption from the IMT—was met when, during the preceding calendar year, the taxpayer had acquired or resold a property that had been previously acquired.

However, the 2023 Finance Act introduced a new definition of “resale activity,” and only those who, during the preceding two years, resold property acquired for that purpose will be considered taxable persons for the purposes of the IMT exemption.

Thus, whereas previously, for the automatic exemption to apply, it was sufficient for the taxpayer to have acquired or resold property during the previous year, following the current legislative amendment, the purchaser is considered to be habitually engaged in the activity only if this is demonstrated over the course of the two preceding years, and in each of those two years, the purchaser must have resold at least one property. 

A violation of the constitutional principle of good faith? 

In this context, given the drastic restriction on access to the IMT exemption resulting from the change in the definition of the “resale of real estate” activity, it is important to consider a few points.

According to constitutional doctrine and case law, there is a violation of the principle of protection of legitimate expectations when

• The government has engaged in actions that are likely to create an expectation of continuity among citizens; ;
• these expectations are legitimate, justified, and based on sound reasons; ;
• citizens have made life plans based on the expectation that the government’s «behavior» will continue; and
• There are no public interest considerations that, in and of themselves, justify the discontinuation of the conduct that gave rise to the pending situation.

Consequently, could this constitute a violation of the principle of trust?

In fact, the amendment under review undoubtedly makes it more difficult to qualify for the exemption, without providing for a transitional arrangement that protects the legitimate expectations of taxpayers who acted in a certain way the previous year based on a legal provision that has since been made more restrictive.

Regardless of any disputes that might arise from this change, the truth is that, given these stricter requirements for recognizing the concept of a resale business, we believe the legislature’s intention is to limit the applicability of the automatic exemption regime in question, which had been firmly established until now.

On the one hand, the reference period has been extended, requiring actual proof that the individual has been engaged in the business of reselling real estate. Whereas previously only the preceding year served as the reference period, the two preceding years must now be taken into account.

However, while until now it was sufficient for the taxpayer to have, in the year preceding the exemption, acquired a property for resale or, failing that, resold a previously purchased property, starting this year, in order to qualify for the prior IMT exemption, the taxpayer must have sold a property in each of the preceding years.

For example: An entity or taxpayer that, in 2020, acquired two properties for resale and, in 2021, resold one of them but, in 2022, did not resell the other one; under this new, more restrictive interpretation of the concept of engaging in the resale business, in 2023, that entity or taxpayer will not be entitled to an automatic exemption from the IMT on the acquisition of properties for resale.

In any case, it should be emphasized that the automatic exemption from the IMT is an exceptional provision; therefore, even with more significant restrictions on the applicability of this provision, the IMT taxpayer, provided they meet the other requirements, will still be entitled to the application of the regime’s rule—the refund rule—and will therefore be able to receive a refund of the IMT initially paid on the acquisition of the property intended for resale.