169-E Off-Shores & Trusts.

To many people purchasing property in Portugal, either as a holiday home or as a permanent residence, can seem fraught with difficulties. You are in a foreign country with a foreign language, foreign laws, taxes and customs, and will rely heavily on your legal advisor or the sales agent to guide you. In your mind you want to be sure that you have proper legal title to your new property, that you do not pay any unnecessary taxes and that your investment is secure, not only for you but especially for your successors.

Traditionally, one of the most suitable ways of owning property abroad, whether you intend to retire to it permanently or just use it as a holiday home, is through a company formed in another country. This need not necessary be what is loosely termed an “ Offshore Company “, but may for example, be a company in a country such as the United Kingdom or Holland. It is also worth noting that the ownership of property world-wide in this way, not just in Portugal, can be beneficial, subject to the individual tax requirements in each different country.

Company registered ownership has become increasingly popular in Portugal over the years so why is it suggested, and what are the specific benefits in Portugal ?

To start with, constituting an “offshore company” is a quick process ( less then 3 weeks ) and the costs  of the formation and annual maintenance is relatively low. At present it will cost approx. £ 1.200 which includes already the first year maintenance. What we are dealing with is a share company. The offshore company permits  the participation of the whole family in the purchase of the property (each member holding a determined number of shares) and at the same time it provides the beneficiaries with anonymity throughout the whole process of the transaction.

The beneficiaries of the company can be individuals or they even can be other companies already formed or trustees.

Ease of registering has to be one of the principle reasons - you simply choose your company jurisdiction, perhaps subject to the advice of your lawyer, and have the company incorporated. Many firms have companies ready and available on their “shelf“.

Once the company has been incorporated, it is in this name that the purchase of the property in Portugal will be finalised. After completing all the legal procedures from the signing of the promissory contract of purchase and the sale to the signing of the public deed of purchase and sale the property then will be registered in the name of the company.

Those who hold the shares of this company are then the proprietors of all assets acquired in the company name. When you buy a property noy yet held offshore than there are no cost savings: all the taxes and expenses normally paid by individuals have to be paid. But as soon as you wish to sell, the case changes radically.

When a company is the registered owner of the property, SISA tax ( land and building sales tax ), Notarial and Land Registry fees are not applicable. This is because the shares of the company are sold rather than the property itself. A saving which makes the purchase a more attractive proposition to a buyer if you decide to sell. The saving on Notarial and Land Registry and legal fees are approximately 2-3% of the contract price and the SISA tax an average 10% of the contract price.

Therefor when the beneficiary or beneficiaries intend to proceed with the sale of their property the only thing that is required is to transfer the shares of the company to that of the potential purchaser thus automatically transferring all assets registered in the company name. The whole operation could take less than a couple of days, thus very simple and very quick.

Although the transfer of shares is easy as we can see somebody still should do a proper title search to see if the off-shore company has legal title of the property it owns in Portugal, also if there are no debts outstanding to tax department and other public service providers like electricity, water and telephone companies and has no claims against it, besides that a search should be in the jurisdiction the company is registered to prove that the company is in good-standing.

But the fiscal advantages do not end here.
Also the beneficiaries of the company do not pay any taxes preceding the sale of  the property, once again because there is no public deed of purchase and sale, but merely a transfer of shares.

The traditional Capital Gains Tax which the vendors of immovable assets are normally subject to, in this case does not exist (see my article about tax in Portugal)

When a property is registered and owned by an individual, and that individual dies, Portuguese inheritance tax (“IHT”) is chargeable. This is the case even when the beneficiary is a surviving spouse and can range between 0% and 50% depending on the value of the property and the beneficiaries relationship with the deceased. However, company registered ownership of the property not only means that IHT is not charged, as a company never dies but also the associated« costs of transferring property into a beneficiary’s name and winding up of an estate in Portugal are also saved. Possible succession law problems ( i.e. exactly who you may leave your property to and in what proportion ) are avoided which is important because these laws differ in Portugal to countries as the United Kingdom, Germany and Holland.

On the disposal and re-registration of immovable property in Portugal capital gains tax is payable by both resident and non-resident vendors. The assessment is based on one half of the national gain being added to the tax payers income for tax purposes. However, company registered ownership of your property means that this does not apply provided you sell the shares of the company and not the property itself. This has the additional advantage that simplifies the sale process, making it straightforward and inexpensive.

The final benefit of company registration of your property is confidentially of ownership. The company name, not your name, will appear on the Portuguese Land Registry and often, if you wish, the firm looking after your company will provide your company with nominee shareholders and directors which ensures the confidentiality of ultimate ownership.

It is only fair to say that against these advantages you have to set the cost of forming and maintaining your company. The company must be maintained in good standing with annual general meetings being held, annual returns filed and in some jurisdictions audited accounts prepared and filed with the relevant authorities. You should therefor choose your jurisdiction carefully and with a view to these ongoing costs. This is certainly where your lawyer or one of the professional firms in this field can assist you.

Recent changes in tax legislation in Portugal:
Some of you may have heard for some time rumours that offshore companies, holding properties in Portugal are under attack by the Portuguese tax authorities.

Earlier this year 2001 it became evident that in the Portuguese state budget, proposals were made to make offshores less attractive to hold.

The 2002 budget has now been approved and passed into law and will become effective on January 1st. of 2002.

Over the years offshore structures have been used to purchase properties in Portugal and the advantages were obvious:

In case the house/shares were transferred no Sisa (transfer tax) was applicable, nor other expenses involved like Notary and Registration.

Due to the fact of it being a share transfer taking place outside Portugal no Capital  GainsTax will be paid.

In case of demise of one of the beneficiaries one can avoid the Portuguese process of probate and no inheritance tax is applicable.

The system also had some (financial) drawbacks.

The company, owner of the house does not qualify for exemption of up to 10 years regarding payment of Contribução Autarquica (Rates)
Obs: One in fact only qualified for this if the owner was a resident in Portugal and it was his first house for permanent habitation.

There were annual fees involved in the maintenance of the offshore company. On average Î 1.000 p/y.

In case the house was purchased by means of a mortgage the expenses involved and interest are not tax deductible or considered as a tax credit.

Obs: Not many clients needed the facility of a mortgage and the amount which can be deducted in Portugal is low.

It was to be expected that Portugal, following the example of France and Spain was going to introduce a system to penalize such offshore structures. The new measures which will be introduced on January the 1st. 2002 are the following:

Instead of the normal approx. 1% (the local councils have the possibility to charge between 0,7 and 1,3%  of the ratable value) a tax levied on the Valor Tributável (V.T.) a tax of 2% will be levied on the value of V.T.

Companies will be presumed to have made a minimum return on income estimated at 1/15 of this V.T.

One is obliged to file a tax return for IRC. This profit will be taxed at a fixed rate of 25% unless expenses can be proven.

The consequences:
They will differ from case to case. The most important factor in the whole story is the ratable value of your house. This value can be found on your Caderneta Predial. Normally older houses are rated much lower than newer ones. In case of any doubt please contact me to get the right figure.

In my opinion it will make a slight difference if the house is used for permanent living and not rented out and will be less penalizing if rented out and such rental income has been declared by means of tax return for I.R.C.  If beneficiaries owners livce in the house and therefore are most likely tax resident here it is advisable to enter into an official rental contract with the off-shore company.

Although this turn of events looks bleak for some owners it is probably too premature to take immediate action. The law will only come into effect on January 1st. of 2002 and taxes will be paid only in 2003.

Although I have heard already that some owners have been advised to put the property they indirectly own back into their own names, with all financial consequences involved, this seems premature to me.

Also for some time we are waiting for the existing heavy Sisa tax to be abolished. Notary fees also have changed as from January 1st. 2002.  Although it looks cheaper on paper I have been told with several stamp duties on top it will not in all cases.

Only time will tell, however that expenses will increase seems without doubt. On the other hand it seems that many people forget that at least for me the most important issue is the fact that in case of the demise of one of the beneficiaries the rights will pass on to the heirs with much less hassle compared to what one has to go through the with whole bureaucratic, time consuming, costly and frustrating process of probate and no capital gains has to be paid.

Clearly then, the advantages of owning your property through a company are significant and it is a path you should definitely investigate before purchasing.

One of the companies dealing with setting up off shores for Portuguese properties and also maintaining them in Sovereign Portugal Ldª. and by their courtesy they allow me to publish the following info with summarises the advantages. 

As part of THE SOVEREIGN GROUP we are able to offer the above plan especially designed for property holding in Portugal. Substantial tax advantages may be gained by individuals who purchase Portuguese property through an offshore company and thereafter effect any subsequent transfer of the property by transferring the shares in the property owning company leaving the title to the Portuguese property unchanged.

The main advantages may be summarised as follows:

1. AVOIDANCE OF PORTUGUESE INHERITANCE TAX - The rates of tax applicable vary between 0% and 50% depending on the size of the gift and the relationship between the deceased and the recipient.  Portuguese inheritance tax is payable on the death of the owner of Portuguese property irrespective of the tax residency of the owner and even between spouses. As a company never dies, a Portuguese property owned by a company will not be subject to any charge to inheritance tax in Portugal.
   The purchase of property by a company gives further planning opportunities in respect of the eventual transmission of ownership on death. The establishment of a discretionary trust to hold the shares of the company offers considerable advantages which may include any or all of the following:  (i) avoidance of the considerable expense and delays of probate;  (ii) asset protection; (iii) capital or income tax savings; (iv) confidentiality; (v) flexibility. For further information please see refer to the leaflet at the end of this information sheet.
2. AVOIDANCE OF PORTUGUESE CAPITAL GAINS TAX - Portugal taxes individuals under a unitary individual income tax. Capital gains are therefore amalgamated with income for tax purposes.  Only half the capital gain is actually taxable so the higher rate of tax is effectively 20% on capital gains.  This tax may be avoided by transferring the shares in the property owning company ensuring no transfer takes place in Portugal.
3. SAVING OF PURCHASE COSTS - A purchaser of property in Portugal is liable to pay a property transfer tax called “sisa tax” and will also incur notarial and registration fees.  Sisa tax is charged on a sliding scale on the valuation of the property but would normally be around 10% of the property value of a medium sized house.  Notarial and registration fees would generally add approximately 2% to this figure.
   If a purchaser is offered the opportunity of purchasing shares in an offshore company he may avoid incurring these expenses.  This makes the purchase an attractive proposition for the purchaser and would normally allow the seller to charge more for the property. The savings made by an eventual purchaser of the shares would usually, if invested, earn more than the cost of maintaining the company.
4. EASE OF SALE - Transferring shares in an offshore company avoids the lengthy and protracted procedures which are necessary to register a fresh title in Portugal.  The sale and purchase can thus be effected much more quickly, easily and cheaply.
5. PROPERTY FINANCE FACILITY - The shares of an offshore company can be used to secure a loan for the purchase of the property.  Commonly, the shares are charged to the bank in return for a loan equal to a proportion of the value of the property
6. PRIVACY, CONFIDENTIALITY AND ASSET PROTECTION - These are other advantages of offshore company ownership. It is relatively straightforward to hide the beneficial ownership of the property with subsequent advantages under the above headings.

PLEASE NOTE:-

1. The fees shown for an Isle of Man company are quoted on the basis that the company is not in receipt of rental income and may therefore be structured so as to be resident in the Isle of Man for tax purposes.  As the company is resident it would be required to file accounts with the Tax Department proving that no profit has been made. If the company is in receipt of income then we would suggest that the company applies for exempt status and pays a fixed rate of duty of £400 p.a. The company would then not have to file accounts with the Tax Department but there is still a requirement within the law requiring accounts to be presented to the annual general meeting.
2. The fees shown for a Gibraltar company are on the basis that the company would be non-resident of Gibraltar. Such a company would not be taxable on any income as long as that income was not remitted to Gibraltar. All From 1st April  2000, all Gibraltar companies are required  to file financial statements with the Registrar.
3. Neither Bahamas nor B.V.I. companies are required to file accounts. There is a strict requirement within the relevant Ordinances for them to be prepared but no stated penalty for failure to do so.
4. Administrative offices of the Sovereign Group are able to assist clients with the preparation and submission of annual accounts for their companies. In normal circumstances the cost of preparation and filing of accounts for a company that only holds one property would be £150 per year. This fee is on the understanding that the client provides the relevant information for accounts to be prepared in a timely manner. If information is not forthcoming we reserve the right to increase costs according to the extra time spent.

DISCRETIONARY TRUSTS - A BRIEF GUIDE
The concept of a trust was first used in Anglo Saxon times and is an arrangement whereby property is transferred from one person (The Settlor) to another person or corporate body (The Trustee) to hold the property for the benefit of a specified list or class of persons (The Beneficiaries).   Although a trust can be created solely by verbal agreement it is normal for a Trust Deed to be prepared which evidences the creation of the trust, sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries.

Virtually all common law jurisdictions, and now many Roman law jurisdictions as well, recognise and uphold the concept of trusts and their courts rigidly enforce the terms of trusts which are created within their jurisdictions ensuring that the rights of the Beneficiaries under the trust are strictly upheld.

DISCRETIONARY TRUST
There are various types of trust which it is possible to create but, generally speaking, the greatest tax advantages and flexibility will accrue to the Beneficiaries of a Discretionary Trust.   Under this type of trust the Trustees have the discretion as to the amount and the timing of any distribution of trust income or capital.   This allows the Trustees to make distributions only when it seems appropriate or necessary and otherwise to accumulate both income and capital for the maximum period allowed (in the Turks and Caicos Islands there is no maximum duration provided by law whereas in Gibraltar the maximum period is 100 years).   This can have substantial advantages in that it allows the Trustees to take account of any changes in the situation of a given Beneficiary and to plan distributions from the trust in such a way as to minimise tax.

As mentioned, the Trustees do have an absolute discretion as to the amount of distribution they make and when to make distributions but it is normal for the Settlor of the trust to indicate to the Trustees what would be his wishes in relation to the trust assets by writing a formal "Letter of Wishes" to the Trustees.   The Trustees are not legally bound to follow the wishes of the Settlor but would normally do so unless, for example, a change in circumstance led them to believe that following those wishes would have undesirable implications for the Beneficiaries.   The letter of wishes can be amended and updated as often as required during the lifetime of the Settlor.

TRUSTEES
Either an individual or a corporation may act as the Trustee of a trust but it is becoming increasingly common to use a licensed corporate trustee as this avoids problems which might result from the death, illness or retirement of an individual trustee and provides for continuity of administration.  Our organisation has two licensed trust companies in place being Sovereign Trust International Limited and Sovereign Trust (TCI) Limited.  We are therefore able to offer our clients the possibility of using professional trustee corporations located in Europe or in the Caribbean.

ADVANTAGES OF A DISCRETIONARY TRUST
Once the assets have been transferred into trust they no longer form part of the estate of the Settlor and this may have any/all of the following advantages:-

1. The Settlor would not generally be taxable on the income and/or capital gains generated by those assets.
2. On the death of the Settlor the need to obtain probate in relation to the trust assets would be avoided. The trust provides a flexible and orderly mechanism for the distribution of the Settlor's estate allowing the Settlor to retain complete confidentiality over the size of his estate and to avoid the delays and publicity associated with obtaining probate.  
3. On the death of the Settlor there would generally be no inheritance tax to pay on the value of the assets held within the trust.
4. As the trust assets no longer belong to the Settlor it is extremely difficult for any creditor of the Settlor to claim that any cause of action they have against the Settlor can attach to the trust assets.   The assets are therefore substantially protected against a claim resulting from any future difficulties that the Settlor may have.

TAXATION
The Turks and Caicos Islands are historically a no tax area, and have neither tax in respect of income nor capital.  The Islands are a British common law jurisdiction with a most up to date trust law in the form of the Trusts Ordinance 1990 and are therefore an excellent jurisdiction in which trusts may be administered.

A Gibraltar trust set up by a non-Gibraltar resident Settlor for the benefit of non-Gibraltar resident Beneficiaries would not be subject to Gibraltar tax. Capital gains tax does not exist in Gibraltar. Gibraltar therefore provides a convenient and tax efficient jurisdiction from which to administer trusts.  

It is possible that the setting up of the trust will result in tax consequences for the Settlor and also possible that, although no tax would be payable in the country in which the trust is established, there may be ongoing tax consequences for the Settlor and/or the Beneficiaries in their Country of residence. These possible tax consequences will depend upon the domicile and tax residency of the Settlor and Beneficiaries and therefore local advice should be sought on these matters.  

SOVEREIGN TRUST INTERNATIONAL LIMITED and SOVEREIGN TRUST (TCI) LIMITED.
Both Sovereign Trust International Limited and Sovereign Trust (TCI) Limited are licensed professional trustees, the TCI trustee company having licence number 029 with the Gibraltar trustee company having licence number FSC00215B.  In order to obtain licensing as a professional trustee, the applicant company must meet the following criteria:

1. The directors and shareholders of the company are honest and reputable
2. The directors have the necessary expertise in trust matters
3. The applicant company has sufficient financial resources to ensure stability.
4.  The methods and systems used within the company are of a type and standard appropriate to a professional trustee.

We would also point out that each of our trustee companies has a very high level of professional indemnity insurance.

Fees for establishing a suitably drafted trust and for provision of trustee services will be quoted on a case by case basis. Please contact your nearest Sovereign office for a copy of our brochure and/or an exploratory discussion

DISCLAIMER
The contents of this memorandum are to be used as a general guide only and do not constitute any form of advice whether legal or otherwise.

Anybody considering setting up a Discretionary Trust is advised to seek appropriate advice from his usual lawyers and/or accountants and, in particular, should carefully examine whether the setting up of such a trust will have local tax consequences.