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Background

For many years Portugal allowed, and some might argue even encouraged, the ownership of villas and apartments through offshore companies in order to help promote its development and construction industries and indeed many buyers were obligated to purchase their properties from developers in this way. The advantage to the owner being that upon an “effective” sale of the property the purchaser simply acquired the shares of the offshore company and since that involved no recordable transaction in Portugal no taxes or property transfer or legal costs were incurred by either the seller or the buyer.

Few would argue that property taxation reform in Portugal is necessary and overdue, but in respect of the Offshore owned Property Companies the previous Government is guilty of using a sledge-hammer to crack a nut and because of the lack of thought given to the introduction of these taxes and the ill considered attack on the Offshore sector it is perhaps understandable that many such property company owners feel that they have been shabbily treated.

In 2001 Portugal enacted new laws which introduced financial penalties specifically targeted at properties held in offshore companies based in any of the so-called 83 blacklisted jurisdictions around the world (the list is shown at the end of this introduction).

On the 1^st of January 2002 “assumed rent income” tax for offshore companies came into effect. The Portuguese tax authorities decreed that a rental income was being enjoyed and from henceforth would be taxed on an annual basis calculated at 25% of 1/15^th of the valor patrimonio (i.e. value of the property recorded in the Local Finance Department). The tax is levied even if the owner can prove that the property is never rented.

It also became a legal requirement for the company through its fiscal representative in Portugal to submit certain fiscal documents and data to the Tax Authorities with penalties if such submissions were not effected.

On December the 1^st 2003 a further law (the Reforma do Património) came into effect requiring blacklisted offshore property companies to pay annual rates (previously called autarquica and now renamed IMI tax) at 5% of the valor patrimonio as compared to the 0.7% previously payable.

Introducing this law on December 1^st was significant in that in Portugal whoever is registered as the owner of a property on the 31^st December is responsible for the payment of the annual rates for the preceding year (i.e. 1^st January to 31^st December) payable in April (and sometimes also September if the tax payment is split into 2 half yearly payments) of the following year.

These new property taxation provisions, harsh though they undoubtedly are, will pale into comparative insignificance when the new property valuations are introduced.

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The Portuguese Government are currently in the process of updating all property valuations throughout the country. The old “valor patrimonio” valuations are substantially less than the real value of the property. When the new valuations are registered, which will be more in line with market value, the percentage of tax demandable will be reduced from 0.7% to 0.2-0.5% but will be based on the new upgraded valuations. Blacklisted offshore companies however will continue to pay at the penal 5% rate. That would effectively mean that if a local tax authority elected to charge at the lower rate of 0.2% in their particular area, a blacklisted offshore company would be paying 25 times more than its non-blacklisted counterpart. Unfortunately many Local Finance Departments have made a complete mess of levying the new penal annual rates by sending out thousands of incorrect property rate assessments and many uninformed offshore company owners may be wondering what all the fuss has been about. Any complacency in this regard will regrettably become a very costly matter for the tax payer. Local Finance Departments are now correcting their earlier errors and demanding the back-taxes in respect of assumed rent income payable from January 2002 and 5% of the Valor Património (rateable value) in respect of annual rates from January 2003. The longer owners delay in facing the situation the larger the tax and penalties they will eventually have to pay.

What are the options?

One thing which is absolutely clear is that you cannot allow your company to remain in a blacklisted jurisdiction. Whether you are planning to stay or leave Portugal, you need to put your offshore property company affairs in proper order. If you have been advised that your only option is to transfer the property into your own name, or that potential purchasers are only interested in acquiring privately owned property, don’t be bullied by such comments, don’t cut off your options, and examine the benefits of re-domiciliation, both to the seller and the buyer. The potential overall costs and tax implications of transferring the asset into your personal name will in most cases be considerable. The consensus of opinion seems to be to re-domicile the offshore company to a whitelisted jurisdiction.

Many Lawyers have also been of little or no help on this subject matter and have failed their clients abysmally. Many have simply turned their backs, never having properly explained to clients the new laws, their implications and options, and the need for proper Fiscal Representation. Their standard advice generally seems to have been to transfer the property from the offshore company in to the owners private name, not withstanding all the cost and taxation liabilities that such action would incur. In one case that recently came to our notice, the lawyer having advised his client to transfer the asset into his private name, then arranged a mortgage for the client who could not otherwise afford to pay the costs and taxes involved following which he then proceeded to charge that client a substantial additional fee (and no doubt plus IVA!) for arranging the loan. Another who advised her client in 2003 to do nothing until matters were clearer the following year consequently cost her client penal taxes for the whole of 2003.

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Property owners whose lawyers have advised their clients to transfer the property from the offshore company to their personal name should be aware of the following:-

If you transfer the asset into your own name you will face the following costs:-

1. Lawyers Legal Fees.

2. Registration Fees.

3. Notarial Fees.

4. SISA Tax (now known as IMT Tax) which can be up to 6% of the true value of the property.

5. Capital Gains Tax.

6. Distribution or dividend Tax.

In respect of the Capital Gains Tax, owners should be aware of the recent Law which states that if the transfer price is declared for an amount below the real value, the Local Authority have the right (within a period of two years from the date of the transaction), to seize the property paying only the amount of the low value declared. The Authority can then sell it and keep the profit. Historically nearly every transaction had a declared purchase price well below what was actually paid and therefore the Capital Gains now being charged will represent a much larger gain than is actually the case. This effectively amounts to a “stealth” tax which whilst technically defensible is morally indefensible, and can be avoided if the Company re-domiciles to an acceptable jurisdiction. Upon a transfer of the asset to an individual, the Capital Gains Tax will be payable immediately or via a withholding tax. If there is a transfer of the asset by the company into the owners own name without any actual payment, this would amount to a dividend payment by the company and would attract a distribution tax on the whole amount of the transaction price payable by the person receiving the asset. This tax is payable in addition to the Capital Gain payable by the Company.

One so-called incentive to transfer the property into one’s own name is the abolishment of inheritance tax in Portugal. This will probably be of no help to most U.K. expatriates.    To become domiciled in Portugal a person would have needed to live here for a very considerable period of time and have cut off all ties with the United Kingdom in order to demonstrate the intention of never again regarding the U.K. as “home”.  Most people will remain domiciled in the U.K. and therefore liable to pay U.K. inheritance tax on their worldwide assets. It is certainly not the case that a U.K. expat can establish a domicile in Portugal by having a resident’s card and staying more than half the year here. These qualifications will however convey the obligation to pay other taxes in Portugal!

Transfer into a personal name will also facilitate the exchange of information between different national revenue authorities and owners in the U.K. for example should be aware that ownership of second homes abroad will now be taxed on a similar basis to the annual taxation imposed for company cars.

The Portuguese Government have also recently introduced concrete guidelines to their taxation authorities when conspicuous consumption patterns of individuals do not match declared income, and remember if you are now resident for tax purposes in Portugal i.e. if you live here for more than 6 months of the year you are obliged to submit a Portuguese tax return.

The following table shows the “presumed” income level when specified assets or benefits are acquired.

Re-domiciliation of the Company from the existing Blacklisted Jurisdiction to an acceptable Offshore Jurisdiction.

After the initial concerns of Property company owners, and Estate Agents directly affected by this new legislation, we are now finding that many individuals and their Agents consider Delaware to be the jurisdiction of choice – a view which we share and endorse. The United States is still the strongest economy in the world and is of course a major trading partner of Portugal and other EEC Countries.

Malta has been proposed by some advisors as an acceptable jurisdiction to redomicile property companies currently domiciled in one of the 83 black listed jurisdictions, which is fine, but if you are contemplating that route do bear in mind that there are likely to be many taxation changes in Malta in the coming years.  The article by Robert Lee, Tax-News.com London 19^th August 2003 – “EU Commission identifies 7 Maltese “Harmful” Tax Measures” is relevant in this connection.  The European commission has described the seven “harmful” tax measures that it wants the Maltese government to abolish as part of its attack on tax measures in the ten accessing nations that it fears will distort the single market.

Delaware operates in an extremely friendly business environment with more than 50% of major American corporations being based there. One myth which has been propagated in respect of that domicile and which should be exploded is that a company which has been re-domiciled to Delaware cannot then re-domicile elsewhere - this is totally erroneous as the U.S. Statutes specifically provide for such an eventuality. The cost is minimal which is in stark contrast to the costs of cessation in such jurisdictions as the Isle of Man, Guernsey, Jersey, etc. Re-domiciliation to Delaware is straightforward and the most cost-effective available.

SMEC LLC through their representatives in Portugal offer services which include:-

1. Liaising and dealing with clients existing Managing Agents in the current jurisdiction.

2. Re-domiciling the Blacklisted Company to Delaware, with the provision of all new company documentation.

3. Translations and notarisation of documents in Portugal.

4. Notification of the new domicile to Company’s House in Lisbon, Portugal.

5. Liaising with the Clients Fiscal Representative in Portugal or advising on the appointment of a new Fiscal Representative.

6. Registration of the new domicile at the Land Registry in Portugal.

7. Annual Management/Resident Agent Services and the payment of Government Taxes in Delaware for the inclusive sum of £395 per annum (for 2005).

8. Powers of Attorney, etc.

SMEC have formed an association with one of the Algarve’s leading firms of Accountants, Qualix Consultores Financeiros (Sr Miguel Alves) - Rua Miguel Bombarda,

Ed. Varandas de Faro, Blc A, Traseira Esq. 8000-394  Faro  Algarve, Portugal, Telephone Number 289 891 620, Mobile Number 91 7812541, Fax Number 289 891 629, Email miguel.alves@qualix.pt who are specialists in regularising any previous omissions or compliance procedures with the Portuguese Tax Authorities and offer competitive rates for ongoing fiscal representation at 100€ plus IVA per annum (rate for 2005).

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