Changing offshore taxation

Insights into what is involved in buying, selling & living 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 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 € 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.

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:

  1. 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..
  2. Companies will be presumed to have made a minimum return on income estimated at 1/15 of the V.T.
  3. 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. Obs: For most of the offshore companies renting out through RoYoL this was normally done already.

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 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.

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 will change as from January 1st. Although it looks cheaper on paper I have been told with several stamp duties on top it will not.

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 le

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