What to do with an off-shore company anno 2020
Many of us, including myself, decided in the late nineties – early 20th. century to put their property in an offshore structure and maybe even put it in Trust.
Basically, there are 3 ways you could have acquired the shares of an offshore company:
- You already owned the property and sold it to an offshore company
- You took over the shares from a third party
- You bought a property and set up the company yourself.
Nobody could foresee what the future would bring or what one event (in this case 09/11) could have an impact on worldwide control on money laundering.
The advantages of an offshore company at the time were easy to explain:
- Easy transfer of a property by selling just the shares.
- Avoiding transfer tax (for buyer) and capital gains tax (for the seller) in case of a sale.
- At the time it was affordable, and the fees were reasonable.
First, many countries (jurisdictions) were declared black-listed and the majority had to re-domicile. We had mainly 2 options left: either Malta or Delaware. Nobody was fully aware what the difference was between the 2 and Malta felt safer for many people, being it in Europe.
The rest is history.
Things have changed dramatically and having an offshore now is a burden and hardly anybody will be still interested in buying the shares, although there are always exceptions.
But the majority is faced with high expenses and would rather today than tomorrow get rid of it.
What are the options
- Trying to bring it onshore as some companies promote.
- Winding it up when selling the property
- Selling it to or back to yourself.
It is the latter I want to explain in more detail.
In many cases the shares of the offshore companies were held by other nominee companies who were in turn holding the shares for you. This way the name of the Beneficial Owner(s) was hard to trace. This all changed in 2018 when Europe and Portugal introduced a compulsory registration to show who in the end are the beneficiary owners. This register in Portugal is called RCBE.
Any national and international authority now can check who in the end is/are the beneficial owner(s), Furthermore a transfer of the property or shares is not possible anymore without the Notary given a copy of the RCBE registration.
In case you opted to buy a property in offshore than you should, depending on in which country you are a fiscal resident, have declared that you were the owners of shares. Basically, you also should be able to explain were the money came from to buy the shares. In case of a sale of shares with or without a profit, capital gains tax or dividend tax could be levied in Portugal and maybe even also in the country where you are a fiscal resident. Furthermore, it would have been advisable to make a Will and indicate what should happen with the share’s in case of your demise.
But suppose you have nothing to hide than you can consider putting the property back into your own name or maybe in name of a third person, for example your children. However please realise that officially this could mean that you gift to your child during life and gift tax could be applicable in your country of residence and in Portugal.
To put the property in your own name is a rather complex and time-consuming operation, but not impossible. In case it is bases in Malta it is more complicated than if it was in Delaware.
What is involved:
- The offshore company sells the property to the beneficial owners.
- This is considered as a normal sale with all taxes if it was a new sale.
- This means that the buyer (you) must pay transfer tax and all other related taxes and fees which come with a purchase.
- The seller, the offshore company, must wind up the company and submit a tax return within 30 days of the sale.
- In case there is no profit good luck but normally some C.G.T. (Capital Gains Tax) must be paid.
- There will be also considerable expenses to be paid to the Administrator of your company.
What is the value to be declared for the purchase /sale and what are the consequences and are you free to choose that yourself?
We first must establish for how much the offshore company bought the property is owns at the time. Not unlikely that a low figure was declared as that was common practise at the time.
Suppose in the year 2000, € 100.000 was declared. To find the countervalue of this figure after inflation we can consult the official inflation figures published by the Portuguese authorities. For a property bought in 2000 the factor is 1,42. This means that the starting value can be € 142.000.
But we also must look what the VT (Rateable) value is today. This is the value on which today´s rates are based and paid. Suppose this value is € 200.000
But the market value is € 300.000.
In a way it would be best to declare the latter figure, but this means that you will have to pay more transfer tax and more C.G.T. as the company on paper makes over € 150.000 profit. This profit will be taxed at a flat rate 25%.
How is the gain calculated?
It is the difference between the purchase price and the sales price as known by the Portuguese tax authorities. But wat is the purchase price, also called starting value??
- It is the price mentioned in the title deed when the offshore company bought the property. This value can be corrected for inflation and expenses made for the purchase can be deducted. Furthermore, improvements made on the property 12 years prior to selling can be used, but it is the taxman who decides if he accepts.
- It also can be the first VT value after the house was build. Sometimes this could have a higher value.
- In case you had the house build you can use the value of the purchase of the land + all cost for building upon prove of official receipts and VAT paid.
- Unfortunately, in case you took over the shares from a third party, the price you paid for the shares at the time is irrelevant for the calculation of tax to pay. Suppose you paid € 250.000 to take over the shares this is considered a transaction taking place outside the fiscal jurisdiction of Portugal. That deal is not registered in Portugal and the transfer of sale of the shares is one between parties.
To resume: You can use the highest suitable value for you.
However, if the property is held by a Malteser company another step must be undertaken and a tax return must also be submitted in Malta by an official accountant. The tax to be paid in Malta, will be 35%! Tax paid already in Portugal can be deducted. This is a very complex procedure with might easily take 6-12 months and you must pay the 10% difference upfront and will at a later stage get part of it back.
In the above-mentioned example, the cheapest option seems be to declare the € 142.000 as in that case the company does not make any profit and the transfer tax is relatively low.
However, as the VT value is € 200.000 the fiscal laws in Portugal state that we never can declare a figure lower than this VT value of € 200.000.
This means that transfer tax must be paid over this account and consequently the selling company makes a profit of over € 50.000 and will be taxed accordingly as described before.
But there is something else. As all money movements are now controlled, in the title deed it also will be mentioned how the money was paid to purchase the property. That means that the Notary is obliged to mention in the title deed the cheque number and the account it is coming from. So, you must show the Notary a copy of the cheque whereby you (buyer) pay an amount of for example € 200.000 to the offshore “ABCD Ltd.”
Please note that in case you sell once the property is in your name for € 350.000, you as a non-resident will have to pay CGT on the profit (€ 350.000 - € 200.000). Suppose the property at the time of selling is your permanent residence (thus you pay tax here), you can reinvest the funds in another property also destined for permanent Residence.
Part of the procedure is that the company ceases activity in Portugal as well as in Delaware / Malta and will be wound up.
It is obvious that each case is different and extensive research must be done.
There is more to it, but this is the basic procedure.
If it is worthwhile putting in your own name depends on many factors.
First try to establish what the offshore company cost you extra:
- Yearly fees to maintain offshore, quite often € 2000 +
- Additional tax (AIMI), could also be € 1000 +
- Fiscal representation
Furthermore, before deciding, establish the following:
- Do you intend to sell within 5 years?
- Do you want to keep it longer than 10 years?
- Do you want it to go over to your Heirs?
- Did you decide of this asset in your Will?
- What is the estimated present market value of the property?
- How much did you pay for the shares at the time?
- Do you have the funds to carry out this expensive operation as it can easily cost you € 50.000 or more?
If the property was bought over 15 years ago it is not unlikely that it has increased considerably in value and in that case it could be worthwhile to consider the option to sell although you also should take into consideration what the consequences are from an inheritance point of view.
Any questions, please do not hesitate to contact me.