Capital gains tax.
This is an article explaining the capital gains tax consequences of selling property that is in an offshore company.
1. The Situation
2. Options one and two
3. Option three and the conclusion
MANY OWNERS of offshore companies, both black and white listed, reach the point where, for any number of reasons, they wish to sell up.
Yet most are uncertain of the capital gains tax consequences of such a sale, particularly since there are a number of different ways to structure the transaction.
While individual proceedings sometimes present unique circumstances, the following example should prove illustrative of most sales. Respective costs and savings ought to be proportional in most cases.
The situation:
Non resident owners selling a property in an offshore company:
1. In 1992, an offshore company purchases a property in Portugal for 200,000 euros (inflation-adjusted price in 2007). Therefore, both the property and the company are worth 200,000 euros at this point.
2. In 1999, a non resident couple buys the shares of the company for 300,000 euros. While the company now has a share value of 300,000 euros, the book value of the Property remains 200,000 euros.
3. In 2003, the company moves its headquarters and effective management (re-domiciliation) from Gibraltar to Delaware. No change in respective values is registered.
4. In 2007, the owners wish to sell the property/company for 550,000 euros. This can be realised by one of three ways:
a. the company sells the property directly to the buyers;
b. the owners of the Delaware company sell their shares to the buyers or;
c. the Delaware Company is first moved to Portugal, then owners of the Portuguese nominee company sell their shares to the buyers.
1. Situation
2. Options one and two
3.Options three and the conclusion
Tax consequences for buyer and seller
a) The company sells its property
The capital gain on the sale of the property is the net difference between purchase cost (200,000 euros) and sales price (550,000 euros) minus capital improvements in the last five years minus deductible buying and selling costs. This net gain is then taxed at the rate of 25 per cent.
The final result might look something like this:
550,000 euros (sale) – 200,000 euros (purchase) – 15,000 euros (improvements) – 5,000 euros (expenses) = 230,000 euros (net gain) X 25 per cent (non-resident tax rate on sale of property) = 57,500 euros (capital gains tax).
The buyer will also pay the following acquisition taxes of 33,000 euros (municipal tax) + 4,400 euros (stamp duty) = 37,400 euros (total acquisition taxes).
Since it is a Delaware company that is selling the property, then the taxable gain will be to the company. However, it is more than likely that the distribution of these profits to the shareholders will also incur an assessment to owners in the home jurisdiction on these “dividends”.
b) Sale of the shares of the Delaware company
The shares of the Delaware company are sold to the buyer. In accordance with the US-Portugal Tax Treaty (Article 14), this is treated as a sale of property rights, since the US Company as a resident entity under the Treaty, consists principally of immovable property located in Portugal.
Therefore, the gain may be taxed in Portugal in an identical fashion as above (a) with a net capital gains tax due of 57,500 euros.
Since the sellers are non-residents in Portugal, they will also be taxable on the worldwide income in their home jurisdiction. In this instance, the transaction will no longer be seen as a property rights transfer but merely as a sale of shares (movable assets).
After application of any capital gains allowance, a second capital gains tax assessment will be due on this gain. Given the deemed natures of the perceived transaction, together with the triangulation of the jurisdictions involved, there is no way to eliminate double taxation.
Option one bottom line: Seller taxed 57,500 euros and the buyer is taxed 37,400 euros.
Option two bottom line: Seller is taxed 57,500 euros and the buyer pays no tax.
This is the concluding article of a three-part series exploring the capital gains tax consequences of selling a property that is in an offshore company.
1. Situation
2. Options one and two
3. Option three and the
conclusion
Tax consequences for buyer and seller
When a Portuguese company is sold, the gain is calculated as follows:
First, the Delaware company must move to Portugal. As part of this re-domiciliation, an appraisal is performed of the property, determining that the company’s sole asset is valued at 530,000 euros.
Therefore, at the time of the move to Portugal, the company is worth 530,000 euros and the now Portuguese company’s shares reflect this value.
The shares are then sold as follows:
550,000 euros (sales price of shares) – 530,000 euros (value of shares upon re-domiciliation to Portugal) = 20,000 euros X 10 per cent (tax rates on sale of shares) = 2,000 capital gains tax (CGT).
The buyers will also pay 25 euros (Stamp duty on Share Transfer Deed).
As the sellers are non resident, they may also be liable for CGT in their home jurisdiction. In this case, the tax paid in Portugal will normally serve as an international tax credit, reducing or eliminating any eventual CGT assessment. Needless to say, while the rate may be different, the basis should be the same.
Option three bottom line: Seller is taxed 2,000 euros and the buyer is taxed 25 euros.
Conclusion
As you can see, there is considerable difference both for buyers and sellers when re-domiciling to Portugal. By selling the Portuguese nominee company, rather than the company selling the property or the shares of the Delaware company, both sellers and buyers save appreciably. In comparison, the costs of re-domiciliation and the subsequent share transfer should prove only a minor inconvenience.
In addition, due to Portuguese fiscal transparency rules, owners of nominee companies are free from any possible double taxation in Portugal since liability for potentially chargeable events is transposed out of the company directly to the shareholders and is never assessed to both.
This is the final article in the series.
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