C.G.T. = Capital Gains Tax = Mais-Valía
An issue people in the past never worried about when selling a property was tax, but now it is!! Everyone will agree this is a valid concern. What most people do not know is that it is at the point of purchase that one should be concerned about capital gains. Why? Because the purchase structure will play a significant role in the final bill and thus have an important influence if an investment in Portugal, being profitable or not in the end.
Only properties purchased after 31st. of December 1988 are subject to capital gains (CG). An exception however are building plots! If you bought yours before that date then you are exempt.
Purchase structures
There are several possible property purchase structures, some more common than others. We can divide “the buyer” into four different common structures:
• Individual.
• Quarter shares.
• Limited company.
• “Offshore” limited company.
Individual
This is the most usual and basically means you buy the property in your personal name. If you are a Resident and thus tax liable in Portugal only half of any CG will be added to your income and will then go into your Portuguese individual tax statement (IRS).
If you are a non-resident, then this is a flat 25 per cent of all Capital Gains.
Quarter shares
This is the same as the individual structure, with the nuance that you only own a quarter of a property. It is very commonly used by investors and holidaymakers, who will then share the purchase price in equal amounts and also share the 12 months of usage in equal amounts. For the CG, the calculation is the same as individual, each owner is only responsible for its quarter.
Ltd company
When buying a property using a Limited (Ltd) company, CG are put in the Portuguese Company tax statement (IRC) of that company and taxed at a flat rate of 25 per cent, like any other profits the company makes.
If you pass on the property by selling the company that owns it, then you need to be aware that selling shares also makes you tax liable, unless the company is an SA (which is a different structure from Ltd) and you own the shares for more than one year.
When selling shares, the buyer might save on Property Transmission Tax, if one of the buyers does not purchase more than 74 per cent of the company shares. If that happens, the government will consider the transaction as a masked property sale and IMT tax needs to be paid as well.
A possible solution to this is passing on the company shares to two different entities/individuals, one with 26 per cent and the other with 24 per cent.
“Offshore” Ltd company
Offshore is normally the term that people use to refer to a “Tax Haven”. By “Tax Haven”, we mean all places which have very favourable tax laws for local companies owned by non-residents.
However, since 9/11 and the consequent concerns about terrorist money being hidden in offshore companies, the tax regulations have been tightened.
In my opinion, most countries just used 9/11 as an excuse to implement a series of tax irritations to businesses set up by companies registered in these “Tax Havens”. Some of these countries were “blacklisted” and taxes on businesses operated by companies from such countries suffered a series of increases.
There are still some which are not blacklisted, like Delaware (American State) and in fact nearly all American states qualify as also not black-listed. Most people redirected their offshore company domicile to Delaware when Gibraltar, Guernsey and others were blacklisted.
In terms of capital gains tax when a property is sold, if the offshore company sells the property, then tax is 25 per cent.
If the owner of the offshore company sells his shares in the company, then it will be like the sale of any offshore company. Legally you need to declare any income you make, even offshore. But, the control governments have over sales of offshore companies is very limited, as these are protected by very severe local regulations. The identity of the beneficial owners of offshore companies can only be revealed if there is suspicion of terrorism activities and a court order.
Capital gains formula
So far we’ve been talking about how much tax one pays over the CG. This is very important, but the first step is to calculate how much that CG actually is.
Let’s demystify one thing first. CG is not just selling price minus purchase price. The formula looks like this:
CG = Sp – (Pp x C) – Exp – Impr
Sounds complicated, but it is not and I will explain it in detail:
• Sp is your selling price, which is then deducted from:
• Pp which is the Purchase Price, updated with a currency correction factor. This factor is based on the year of purchase and is published in Diário de Republica every year. It allows for the value of the currency at the time of purchase to be updated according to current values. Meaning 100 euros 60 years ago is worth much more today and that is accounted for.
• You can then deduct any expenses you incurred when buying or selling the property, including IMT on the purchase and real estate agent commissions on selling. You can also include structural improvements you made to the property in the last five years.
The CG calculated using this formula will then be taxed as explained before.
Re-investing your capital gains
One of the possibilities in order to avoid being taxed on the CG is to reinvest that gain into a new property, if:
• You use the CG money to buy or improve a property in the 24 months following the sale.
• You use the money to pay off a mortgage you have made, up to 12 months before.
• The property where you apply the CG is located in Portugal.
• The property you apply the CG into is your main living address.
Uncomplicated process
Capital gains calculation itself is not complex. The problem is that there are accompanying variables, like purchase structure and reinvestment possibilities, that can influence the amount of tax you pay on those gains.
When in doubt, you should always seek the help of experts. But get references and do your research, as most real estate agents (and even some lawyers) are not aware of the full ins and outs of this subject.
Anyway investing in Portugal has been for many still a healhty investment.
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