Many expatriates have found it tax-efficient to own property through a corporate structure. If you own Portuguese property this way, or are thinking about buying a home here through a company or trust, you need to be aware of some recent changes that may affect your tax planning.
New capital gains liability
In a corporate structure, the beneficial owner is often a shareholder of a non-trading holding company that purchases the property or the shares may also be held in trust. However, a new law giving Portugal taxing rights on non-resident shareholders has greatly reduced the tax advantages of this approach.
Previously, a non-Portuguese company owning property in Portugal was considered ‘opaque’ in the sense that it and its non-resident shareholders were outside the scope of Portuguese taxation. This meant that non-resident owners – whether an individual, trust, partnership or even another company – were not charged Portuguese capital gains taxes on the sale of the property.
But since January 1, 2018, where a non-resident company’s value consists of 50% or more in Portuguese real estate, the gain on the transfer of shares may be subject to a new Portuguese corporation tax of 25%.
The charge only applies where the double tax treaty between Portugal and the company’s country of incorporation gives Portugal the right to tax the transaction. This will be the case, for example, for USA-owned companies, but not for those based in the UK or Luxembourg (although corporation tax is instead payable in those countries).
Meanwhile, Portuguese capital gains tax charges for individual property owners vary according to residency. Portugal residents can pay nothing on the sale of a main home if they reinvest the proceeds into another home within Portugal or the European Economic Area (EEA); otherwise 50% is taxable at the income tax scale rates. Non-Portuguese residents generally pay 28% on the whole gain.
No exemptions for wealth tax
Since 2017, a form of ‘wealth tax’ on higher-value properties has been in place. The Adicional ao Imposto Municipal Sobre Imóveis (AIMI) applies when the total value of Portuguese property owned exceeds €600,000, whether through joint or sole ownership. Regardless of residency, annual rates are 0.4% for properties held by companies, 0.7% for individuals and 1% where the combined property value is over €1 million.
While a €600,000 allowance is available for individuals and estates, only companies where at least half of their main activities are agricultural, commercial or industrial are eligible. There is no wealth tax exemption at all for companies trading in properties or those incorporated in a ‘tax haven’ (the definition of which has recently broadened – more on this later).
This means that corporate-owned properties now attract a tax of 0.4% on the property’s entire value. This is in addition to the Portuguese version of council tax, Imposto Municipal Sobre Imóveis (IMI), with rates between 0.3% and 0.8%.
Conversely, if you and your partner jointly own a Portuguese home as individuals, the property will only attract wealth tax if it is worth over €1.2 million, and then only on the value above this.
The new definition of ‘tax havens’
If your property is owned by an offshore company, depending on where it is based, you may also be affected by recent ‘blacklist’ rules that redefine how the Portuguese authorities recognise tax havens.
Before 2017, you could identify blacklisted jurisdictions from an official list, but the definition is now decided on a case-by-case basis. If the authorities see that tax rates levied in a jurisdiction are less than 60% of the equivalent Portuguese taxation, they may consider it blacklisted and impose taxation of up to 35% on residents holding assets there.
Is there anything you can do to reduce exposure?
If you own a Portuguese property through a corporate structure, it is not necessarily in your interests to change anything. You should carefully weigh up your options, as it could prove more expensive to extract a property from corporate ownership than just accept the new tax rules.
Also, beware of ‘re-domiciling’ a holding company to the UK to avoid the new 25% Portuguese corporation tax. While the UK rate of 19% is lower, this could have unwelcome personal tax implications, so take advice to establish the best approach.
Taxation is complicated, especially when you have to take into account cross-border circumstances and the changing rules of a foreign regime. This is where the guidance of an experienced, locally-based financial adviser can be of particular benefit. Whether you live in Portugal or just own property here, make sure you do not get caught out by unexpected taxes, and take steps to do what is right for you and your unique situation.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.