158-E  POSSIBLE CHANGE IN OFF-SHORE TAXATION.

Three years ago, the previous centre-right coalition government unveiled new property tax laws that resulted in numerous home owners and prospective investors in Portugal taking their money elsewhere. But according to the 2007 state budget tabled for voting this week by the Socialist government, owners of real estate registered through an offshore company can look forward to considerable property-related savings as from next January.

According to the state budget proposal, the annual council tax rate (IMI) on properties owned by companies in listed low-tax jurisdictions will be reduced from five percent to one percent from 2007.

In effect, should the assessed taxable value of an offshore registered property be one million euros, its owner can now look forward to a cut in IMI from a current figure of €50,000 to €10,000 – a saving of more than €3,000 a month.

But this alteration still leaves owners of properties registered in offshore companies paying double the IMI of all other homeowners.

In comments to The Portugal News, John Duggan of PricewaterhouseCoopers (PwC) explained that this turn around by the government is more a result of the government realising the damage the 2003 offshore legislation has done rather than any particular efforts from lobbyists.

“Bad publicity and the realisation that receipts had not increased as much as they had intended made them realise the law no longer posed any major advantages”, explained Mr Duggan.

PwC believes however that “the damage has been done” by this offshore legislation, which in 2003, provoked a mini-exodus of furious ex-pats who carried out their threat of “taking their money elsewhere”.

But this was not the only area where Portugal was made to pay the price of its leaders’ contentious fiscal policies.

“Apart from the investors who were put off by the legislation and, simply, took their money elsewhere, many existing owners had to go through expensive restructuring of their affairs. In many cases, this resulted in no additional tax being paid, but did add to the bad image of Portugal as a place to invest”, laments John Duggan.

When the 2003 law came into effect, a home owner who eventually sold his villa in Almancil told The Portugal News that one of Portugal’s “unique selling points” had always been the possibility of saving considerable amounts of money, that would be payable in any other EU country bordering the Mediterranean.

“With the new legislation,” he explained, “Countries like Spain suddenly have new appeal. Cheaper cost of living, better infrastructures and now, similar, if not more competitive property taxes to Portugal.” At the time The Portugal News conducted an online survey, asking readers how they perceived the new legislation. A total of 69 percent of owners of offshore properties in Portugal said they would sell their properties as a direct result, many citing the inability to pay inflated council taxes as the principal reason for their intention to disin vest in Portugal.

Despite this negative influence, recent studies, such as the one conducted at the beginning of the year for the well-known television programme, A Place in the Sun, found that on a global scale, Portugal is rated third in terms of returns on real estate investments outside the UK.

In the meantime, the government’s changes to property tax systems this year have not been limited to the IMI payable by properties registered with offshore companies.

Property acquisition tax (IMT or previously known as Sisa) has also been reduced under a stipulation in next year’s state budget.

Under the budget, IMT will be almost halved, coming down from 15 percent to eight percent.

“This seems strange, as the avowed intention of the earlier legislation was to deter ownership through offshore companies, with apparent success”, PwC explained in a statement sent to The Portugal News.

Meanwhile, PwC in a newsletter circulated among expatriates, high net worth individuals and investors in Portugal, also highlighted a number of other changes to the 2007 state budget.

Tax-free gifts among family members, especially real estate, will now be closely scrutinised in order to cut down on people donating property with the sole aim of avoiding taxes that would otherwise have been payable.

Another change that will affect the expatriate community in Portugal is that from 2007, all interest and dividend income, irrespective of source, will be taxed at an autonomous flat rate of 20 percent.

Prior to this law, dividends received from non-EU companies were usually subject to higher taxation than those which came from Portuguese sources.