2. Why move a Delaware Company to Portugal
Offshore has become a “four-letter word” throughout the EU in recent years. Properties held in Delaware Companies, for example, once a popular solution within the expatriate community in Portugal, will soon become a scourge in 2018.
Property tax rates, normally 0.4%, will skyrocket to 7.5% next year for US companies. This means a property valued at €300,000 pays an annual tax of €22,500 rather than €1,200! Coupled with the new AIMI levy, the annual tax due will reach €45,000.
When a company redomiciles to Portugal, there is no asset transfer: no crystallisation of Capital Gains, no IMT, no Stamp Duty on Real Property. Only the headquarters and effective management move. The assets remain safely within the Company. Thus the alternative term for Redomiciliation: Continuance. Continuance opens an attractive opportunity for tax mitigation.
Updated Basis for Capital Gains Tax
Following Company registration in Portugal, a Balance of Accounts needs to be presented to mark the starting point as a Portuguese resident entity. This Balance Sheet must be based on current rather than historical values. Thus, the Company’s assets reflect either their book value or the present market value of the property. Any Shareholders’ loans into the Company as well as any mortgages (if one exists) show as “Liabilities”. “Capital” is the paid-up share capital as well as Reserves, reflecting any appreciation in the value of the property. As such, there is a fresh start and many historical problems, such as under-declared deed values or lack of bonafide invoices for capital improvements, can be rendered mute.
The move to Portugal constitutes a transformation, not a transfer of ownership. The latter is at the core of any chargeable event. However, if a Company moves across the street or resettles to another jurisdiction, it is not seen as a transfer because of the nature of continuance, meaning, despite a new permanent establishment in a new jurisdiction, there is no fundamental change seen in the Company.
From this new base as a resident Portuguese entity, Capital Gains Tax on the eventual sale of the Company is reduced to 14%, as compared to 28% that may normally be assessed to other Portuguese companies. The combination of these factors alters what is normally a colossal problem into a very manageable inconvenience.
Capital Gains Tax mitigation can take one of two forms. With the uplift in share value upon registration of the new Portuguese entity, the shares can be sold at full value with little or no gain. Alternatively, the company can be wound up (liquidation) and the assets distributed to the shareholders. As in the previous instance, with similar documented values, there is little or no tax to pay.
Potential Transfer Tax Exemption
If the Company assets include Portuguese immoveable property, the sale of the shares may be exempt from IMT depending on the circumstances of the eventual buyer of the Company. Under Portuguese law, when one does not exceed a concentration of more than 75% of shares to any one of the shareholders, no Property Transfer Tax (IMT) is due on the underlying assets. If eligible, the buyers may potentially save many thousands of euros, thus making such an acquisition more desirable than purchasing in one’s own name.
When property changes hands, many organs of government get into the act. Finanças records the change of ownership and updates the VPT evaluation (rateable value) in a somewhat cumbersome and laborious process. The Council checks to see that current technical drawings match the building on site. The Land Registry verifies that boundaries and areas are correctly recorded. In short, a sea of bureaucracy that can be both slow and expensive.
A transfer of ownership of shares is normally a simple notarial process. While there is some paperwork involved in amending records to reflect the changes of Company domicile or ownership, the process is normally straightforward and does not trigger reevaluations of the underlying property nor any latent licensing problems inherent in many older properties.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.