THE SOVEREIGN PORTUGUESE PROPERTY PURCHASE PLAN
Since 2002 there have been various reforms of property taxation by the Portuguese authorities, including the introduction of a penalty tax rate which increased the level of Municipal Tax (rates) payable in respect of properties held by companies included on the Portuguese Finance Ministry “blacklist”. That tax rate is now set at a flat 7.5% of the “Valor Patrimonial” (Rateable Value) making the tax payable unacceptable for most properties. The same changes also imposed a tax on a presumed rental income calculated at 1/15th of the “Valor Patrimonial” in the case of a property held by such a blacklisted company.
Notwithstanding the above, there are still advantages to be achieved by holding Portuguese property in the name of a suitable non “black listed” non resident company including:
1. SUCCESSION CONSIDERATIONS
Whilst inheritance tax in Portugal was abolished as from 01.01.2004, it has been replaced with a 10% stamp duty based on the tax department value of the asset - unless the inheritors are close family members. The tax department has now completed revaluing all properties upwards to a more realistic market level and accordingly that 10% stamp duty charge can be meaningful. Thus in cases where a property investment is to be held by non-related parties it is often better to have the title held by a company with the shares issued to the beneficiaries in the appropriate percentages. As a company never dies, a Portuguese property owned by a company should not be subject to any charge to stamp duty in Portugal.
It should also be noted that the purchase of property by a company may give tax planning opportunities in respect of the eventual transmission of ownership on death, where the beneficial owner of the company is subject to inheritance tax in his or her home jurisdiction. 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 contact us.
2. AVOIDANCE OF PORTUGUESE CAPITAL GAINS TAX
Portugal taxes resident individuals under a unitary individual income tax, capital gains being amalgamated with other income for tax purposes. For residents only half the capital gain is considered as taxable and thus the effective rate of tax payable on a gain could reach a maximum of 24%.
There is an opportunity for tax residents to “roll-over” a gain into a similar investment either within Portugal or the EU area. For non-residents, however, any gain made is taxed at a flat rate of 28% on the whole gain – there is no exemption. 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 I.M.T. (Imposto Municipal sobre Transmissões) and will also incur notarial and registration fees. I.M.T. is charged on a sliding scale on any property with a value above €92,407. The maximum rate is 6% which applies to properties valued at €550,836 and over. As an example, a property valued at €500,000 would attract I.M.T. of €28,964.75. Notarial and registration fees are fixed by law at reasonably low amounts but Stamp Duty is charged at 0.8% of the value. Plots of urban building land are charged at a flat rate of 6.5% of the value concerned. 2
If a purchaser is offered the opportunity of purchasing shares in a non resident company he or she 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 a purchaser of the shares would often, if invested, earn more than the cost of maintaining the company.
4. EASE OF SALE
Transferring shares in a non resident company avoids the potentially lengthy and protracted procedures which are necessary to register a fresh title in Portugal. The sale and purchase can thus usually be achieved more quickly, easily and cheaply.
5. PROPERTY FINANCE FACILITY
The shares of a non resident 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. This can also be advantageous when two or more parties join together in an investment and/or development project as loan agreements between the parties can be drafted and shareholders agreements entered into to protect or determine future decisions.
6. PRIVACY, CONFIDENTIALITY AND ASSET PROTECTION
These are other advantages of company ownership. It is relatively straightforward to hide the beneficial ownership of the property with subsequent advantages under the above headings.
SUITABLE JURISDICTIONS FOR PROPERTY HOLDING
As mentioned at the start of this information sheet, the traditional holding company jurisdictions of Gibraltar & Bahamas etc are now penalised simply due to their low corporate tax basis. Whilst it is still possible to use these, the higher tax charges imposed normally make it unwise to do so.
Sovereign believes that the most suitable corporate vehicles to hold Portuguese property are those incorporated in either Malta, Delaware - USA, or the UK. None of these appear on the Portuguese black list of offshore jurisdictions and Sovereign believe that it is extremely unlikely they will be added to that list in the light of their EU membership, in the case of Malta and the U.K., and the fact that all are tax treaty partners of Portugal.
In the case of Malta, the vehicle used is subject to Malta corporation tax. In the case of a property company this would normally only be in respect of rental income which would be taxable in the first instance in Portugal due to the fact that the income producing asset is sited there. Whilst that income should be declared as well in Malta the more generous system of allowances and rebates in operation there would normally mean that there would be no further tax to pay although some added accounting costs would need to be considered. Please also note further Maltese tax issues under the heading “Capital Gains” on page 4 of this information sheet.
Delaware corporations only pay a nominal level of State taxes but are liable for US Federal tax (15%-39%). This would generally only be imposed on US source income but for the avoidance of doubt, Sovereign advises that the use of a Limited Liability Company (LLC), where the tax liability flows through to its members, is the preferred structure. Under normal circumstances Sovereign would provide the Members to a Delaware LLC thus providing a measure of tax protection to the beneficiaries.
In respect of the UK, it is vital to ensure that the Portuguese property is held by the UK company holding as “nominee” for the beneficial owner. Under this arrangement title of the property is registered in the name of the company but at the same time a legal agreement is prepared which makes it clear that the company is not the real owner but is holding the asset for the beneficiary and that all financial benefits, being any rental income and any capital gains produced by the sale of the Portuguese assets, are the absolute property of that beneficiary. As such all income and capital gains would be declarable by the beneficiary as being income and capital gains belonging to him or her and the company will always file zero returns at the UK Company Registry and tax department. 3
Whilst the power of attorney issued by the Company to acquire the property can be prepared in the Portuguese language it may also be necessary to provide the Land Registry with a translation of the notarised and legalised copy of the Certificate of Incorporation. This translation is not included in the attached Schedule of Fees and would normally be attended to by the client’s lawyer or other legal representative. However if necessary, Sovereign can arrange for this translation to be effected for an additional cost of €160.00 inclusive of IVA/VAT.
A company acquiring property in Portugal must apply to the central commercial registry for a fiscal number. This again would normally be arranged by the clients legal representative but if necessary can be provided through our services at an additional cost of €300 inclusive of IVA/VAT. Administrative offices of The Sovereign Group are able to assist clients with the preparation and submission of annual accounts for their companies. The costs quoted for accounts support on the Fee Schedule are on the understanding that the client provides the relevant information for accounts to be prepared in a timely manner and that the property is not receiving rental income. If information is not forthcoming Sovereign reserves the right to increase costs according to the extra time spent.
Capital Gains Tax in Portugal may be avoided if the transfer of the property takes place by transferring the shares of the property owning company leaving title to the property unaltered. However, any capital gain made by selling the shares may be taxable directly on the beneficial owner of the property according to the rules of wherever that owner happens to be tax resident at the time the gain is made. If a buyer does not wish to acquire the company and requires a transfer of title of the property to him/herself, then any capital gain made will be taxable in Portugal at the rate of 25% less limited deductions. The gain may also be taxable wherever the beneficiary resides but generally the tax paid in Portugal may be set off against any personal tax liability in that country. It should be noted that in the above circumstances, capital gains tax would be payable in Malta at the rate of 35%. After deduction of tax paid in Portugal the balance of tax due may be able to be mitigated by the introduction of other deductible expenses.
If the property is let then any rental income must be declared in Portugal and Portuguese tax may be payable following allowable deductions. The income may also have be declared in your own home territory depending on your tax status and local advice should be sought. For details on letting corporate held property to achieve an effective rate of only 3,75% on the income please contact Sovereign – Consultoria Lda via port@SovereignGroup.com.
Any non-resident individual or company, resident outside the EU, who acquires property, must appoint a resident fiscal representative. The fiscal representative is the tax department’s contact point in all fiscal matters in respect of the property. The Sovereign office in Portugal is able to provide this service for a very reasonable initial and annual fee thus ensuring all fiscal matters get dealt with promptly and efficiently. Further details are available on request
Irrespective of the requirements of a mortgage lender, it is important that a property is adequately insured. Sovereign Insurance Services Limited (SIS) can give advice on a wide range of insurance – property or otherwise They will liaise with various insurance companies to obtain the best policy for you. Please contact us for a quotation, without any obligation.
Sovereign Asset Management:
Sovereign Asset Management Limited (SAM) is the division of the Sovereign Group that provides advice and management on investment related matters, specific to client needs. Please contact us for further information.