The double whammy on offshore (and almost offshore) property companies
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.
Part 1: Brussels demands overhaul of capital gains tax laws
Part 2: CGT for individuals – tax relief for residents
Part 3: The double whammy on offshore (and almost-offshore) property companies
Part 4: Small Portuguese property holding companies – the best of both worlds
For those who purchased their property via an offshore property company, capital gains tax assessment can be a nightmare. It can be even worse for those who thought they were running for cover, by moving their company off the ‘blacklist’. There is a potential ‘double whammy’ on the sale of the shares – first, tax liability on profits to the company and second, personal assessment on dividend distribution to shareholders.
A background of poor record keeping:
Most offshore companies (or their current Maltese or Delaware spin-offs), suffer from a common ill – poor record keeping. Upon the formation of the company, it was customary for the owners to draw up a ‘shareholders’ loan’, to make the property acquisition. However, only in exceptional instances was this event recorded at the time as an outstanding debt that could later be offset against an eventual sale of the shares or the property. But, the problem doesn’t end here. The declared value on the deed of purchase was routinely under-declared to reduce transfer tax (SISA). This 10 per cent SISA rate savings would prove short-sighted given the eventual 25 per cent tax liability on a now exaggerated capital gain. Finally, while many owners made substantial improvements to the property over the years, most failed to receive proper invoices (facturas), to substantiate these additional expenditures. When totalled, there is often little or next-to-nothing to prove what was quite a considerable out-of-pocket investment. Coupled with the strong appreciation of Portuguese real estate over the years, many owners are faced with a massive capital gains tax liability. In the ‘good old days’, the barriers of offshore secrecy were sufficient protection to overcome this problem. However, for better or worse, time has marched on. In addition to the crumbling of the walls of tax-haven confidentiality, specific sanctions have been passed into legislation in Portugal, in recent years that entrap many company owners.
There are, however, two potential gains to take into consideration. The first is the company’s profit that is assessable in Portugal, at the non-resident rate of 25 per cent. The second, is the distribution of dividends to the shareholders. If the owners are fiscal residents in Portugal, this IRS assessment could be as high as 40 per cent. Non-residents will be assessed according to the rules of their home country.
For companies registered in ‘white-listed’ jurisdictions, the problem can be even worse. Portugal has tax treaties with over 40 countries around the world and a comparable number are under different stages of negotiation. These agreements specify the rules for taxation as well as establishing channels for information sharing. In the case of Malta and Delaware, USA, the two most commonly used jurisdictions, the treaties allow for double assessment – Portugal has the first right of taxation. Malta or the US may then tax, after granting a credit for any Portuguese levy. Not only is there no confidentiality, it seems improbable that Portugal will waive their legitimate treaty rights, given the high profile of company re-domiciliation, to escape Portuguese sovereignty issues. While ‘white-listed’, re-domiciliation may resolve the short-term problem of punitive property tax (IMI), it embroils the company in international tax treaty rules, as well as complicating the CGT assessment, according to the vagaries of the legislation of the new host jurisdiction. In other words, the long-term problem remains unresolved and perhaps even aggravated.
Small Portuguese property holding companies – the best of both worlds