Portugal is one of the most desirable countries to have a second home for holidays both for foreign and national citizens. Usually foreign citizens would purchase a property in Portugal in their individual names (this requires to schedule deeds at a Public Notary and subsequent registration of the purchase at the local Land Registry and Tax Department) or through an offshore/onshore company. The main reasons why persons buy property owned by a Company that is not domiciled in Portugal is connected with a much faster and less bureaucratic purchase process (Transfer of Shares that does not require the use of a Public Notary nor new entries on the Land Registry), also because this transfer does not imply Portuguese Acquisition Tax known as IMT (former SISA tax) or Portuguese notary and registry fees (stamp duty included) on subsequent sale and purchase of Shares and also does not imply Portuguese Inheritance Tax.
Portugal has introduced recently new tax legislation that significantly increased the costs obligations and formalities involved in using offshore companies as property owning vehicles. Under this legislation the Portuguese Government produced a list of 83 jurisdictions that are considered as «tax havens» meaning, jurisdictions subject to very favorable tax regimens. This means that should a property be owned by a Company that it is not incorporated in such jurisdiction taxation will be done upon onshore premises.
The main changes under the new legislation are:
The Council rates applied to properties owned by offshore companies increased to 5% of the rateable value (this is a value fixed by the tax department to all properties) instead of the former 2%;
On top of this rate tax (former contribuição autárquica nowadays IMI) the offshore company is presumed to have an income on the same amount of 1/15 of the rateable value, from which some expenses can be deducted as the rates themselves, structural/improvement expenses, condominium fees, insurance, etc and on the balance the Company will be taxed with 25%. This rule does not apply to onshore companies;
All properties will in due course be revaluated under new criteria, namely but not limited, will considerer price per square meter of cover area, garden area, location of the property, luxury items in the property, neighborhood, etc, that will bring the new rateable values to amounts nearby the market price (till the present moment the valuations were usually lower than the market price);
New law regarding tax evasion and money laundering. Therefore all non residents, individuals or corporations, need to appoint a tax/fiscal representative resident in Portuguese territory in order to perform all the tax duties (namely but not limited to the rates) and represent the individual and/or the company on any tax affairs in Portugal;
Portuguese Inheritance tax is no longer applicable between parents/children and spouses;
Reduction of the property acquisition tax from 10% to 6%;
Rates to properties owned onshore decreased from 0.8%-1.2% to 0.3%-0.8%.
In a global perspective these depth changes on the Portuguese legislation brought a fairer situation regarding the council rates because until now old luxury properties would pay less Council rate then a new 2 bedroom apartment in a city due to the fact that the old valuations were usually extremely low and the real estate market had been booming during the last 15 years in Portugal, in particular in the Algarve. In-between this period of time no reevaluations were done. Also the Inheritance tax exemption in the situations above-mentioned is a very positive sign. However this new legislation created problems to persons that own property using offshore companies.
Due to the present situation offshore owners have adopted several different strategies in order to avoid the massive tax impact on offshore companies, namely but not limited to redomiciling the company to an onshore jurisdiction, buy the property from the company to their individual names, gift, liquidation of the offshore company, etc. For those caught in this situation it is imperative that an independent professional advice is sought before making a final decision.
The transfer of the property out of the Company will almost certainly create a Portuguese capital gains tax charge on the Company. This will amount to 25% of the difference between the base cost – the original price on the deeds when the Company purchased the property plus construction/capital improvement costs (provide these can be evidenced by IVA receipted invoices in the Company’s name), plus indexation/inflation and today’s transfer/market value.
Should you decide to purchase a Portuguese property I strongly recommend to consult a legal advisor in order for him to help you to decide the best structure that would serve your best interests and allow you to fully enjoy your property.