In this series, we investigate the ins and outs of the assessment of profits from the sale of real estate, the impact of new legislation, as well as eventual changes in the wind to future taxation.
Whether your property is in an offshore company or you are in the market for a new home, a small Portuguese property company may prove to be an effective vehicle for mitigating capital gains tax liabilities. If you do not use your house or apartment in a commercial activity, this type of non-trading structure can provide both stability and benefits that are ideal for many foreign property owners in Portugal.
Although many overlook this possibility, such small companies have existed in Portuguese legislation since the 19th century and have been embraced in subsequent reforms ever since. Therefore, they are not subject to the punitive laws that have made offshore property companies a pariah – no deemed income assessment, no five per cent ‘rates’ bill. If you do have a company in Gibraltar or elsewhere, it can be re-domiciled without crystallisation of either transfer tax or capital gains tax.
The resident advantage
As a resident company, one of the main advantages of such structures is the reduction of the capital gains rate on the sale of the shares. CGT assessment is only 10 per cent – substantially lower than the conventional 25 per cent rate for non-resident companies – and is also ‘flat-rated’ so any profit will not push up the rest of your income into a higher tax bracket. In addition, there is a potential exemption from transfer tax for the new buyer. Like other assets in Portugal, gifts during your lifetime or bequests after death are tax exempt to next-of-kin – spouse, children, grandchildren, parents or grandparents. All others will be assessed a stamp duty of 10 per cent.
These companies can be useful in specialised situations as well. For example, sometimes homeowners buy a new home intending to sell their old one within the one year time period to achieve rollover relief. However, market conditions are not always favourable and the unlucky sellers may be faced with an eventual capital gain that they had intended to avoid. An 11th hour sale to such a small Portuguese company would qualify for rollover relief and limit the cost of the transaction to IMT and closing costs. Although not a perfect solution, it’s a lot better than paying an otherwise massive CGT assessment!
There are certain restrictions to such structures. Whether these limitations prove to be negative or not depends on the situation of the owners. First of all, there is no confidentiality. Any eventual assessments, although calculated by company tax code rules, will be levied directly to the shareholders, not the company. There are also some constraints on shareholding. These small companies must have a minimum of two shareholders but no more than five. These shareholders must be individuals, not other companies, so such a structure cannot be held in trust. The company is required to have an administration in order to meet basic corporate compliance obligations. However, these are not extensive and annual operating costs are quite modest, often a fraction of typical annual offshore charges.
Auxiliary overhead requirements are also minimal and this type of company does not have to pay a minimum tax (PEC). In fact, the administrative structure can provide an important support structure of knowledgeable, local professionals if and when things start to go wrong (which is all too often!).
Best of both worlds
This form of home ownership embraces many of the advantages that property buyers once sought in offshore property companies but achieves these objectives in a compliant, mainstream fashion. The ‘resident advantage’ – low operating costs and long-term stability – make this alternative worth serious consideration.