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Property Ownership Structures |
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» Introduction
» Buying
a property in the United Kingdom
» Buying
a property in Spain
» Buying
a property in France
» Buying a property
in Portugal
» Buying
a property in Bulgaria
» Buying
a property in the USA
Buying a property in Portugal
An Overview of Portuguese Property Ownership
Since the end of 2003 and effective from 1st January 2004, the Portuguese
property owners have been forced to review the ownership structures
of their property, from the traditional offshore company route,
to a route involving either the transfer or re-domiciliation of
the current holding entity to a jurisdiction that has not been indicated
in the Portuguese property corporate owners black list, which includes
almost all offshore jurisdictions.
Purchasing Portuguese property through an offshore company has,
for many years, been favoured as the most tax effective way to own
high-value property. But effective from 1st January 2004, the Portuguese
government proposed a series of changes to the property tax system.
These changes will affect all existing and potential property owners,
but are especially punitive for those who own or plan to own Portuguese
property through an 'offshore' corporate structure.
The new legislation introduces large tax increases for property
owned in offshore jurisdictions appearing on the Portuguese blacklist.
The blacklist includes Gibraltar, Isle of Man and British Virgin
Islands - all favoured jurisdictions for Portuguese property holding.
The proposals followed the introduction by the previous government
of a two per cent flat rate Municipal Tax for property held offshore.
The current government proposes that this rate be increased to five
per cent in addition to the introduction of a 15 per cent property
transfer tax. Properties owned by individuals will not be affected.
On first reading the proposals appeared to make offshore property
holding an unattractive choice. So what should potential and existing
property owners be doing and why is corporate ownership of high
value property such a popular option?
The main issue is that despite the imposed tax reforms there are
still good reasons for owning high value Portuguese property through
a corporate structure.
Corporate ownership can eliminate capital gains tax if the property
is resold through the transfer of shares in the owning company.
This leaves the title to the property unaltered, thereby avoiding
a tax liability occurring in the country where the property is situated.
The transfer of shares also means that the prospective buyer can
avoid paying legal fees, notarial fees and transfer taxes in the
place where the property is situated. Additionally, it bypasses
the lengthy and protracted procedures that are necessary to register
new title deeds enabling the sale and purchase to be carried out
quickly and cheaply.
The purchaser of the shares, however, would be foolish not to have
a corporate lawyer prepare a proper contract for the sale/purchase
of the shares. The lawyer should also check that the company does
own the unencumbered title to the property.
On resale the property would be subject to Imposto Municipal sobre
Transmissoes (IMT) and Imposto Municipal sobre Imoveis (IMI) - the
replacements proposed as part of the tax reforms for SISA (transfer
tax) and Contribuicao Autarquica (municipal tax).
On properties worth €500,000 and over IMT will be charged at
maximum six per cent. IMI will be between 0.2 and 0.8 per cent,
depending on the tax valuation of the property and its age. This
could cost up to €34,000.
The sale would yield a profit of €130,000. Portuguese capital
gains tax is charged at a flat rate of 25 per cent for non-residents,
so the capital gains tax would come to approximately €32,000.
Add to this registration and legal fees and the total bill could
come to well over €80,000 - a cost that could have been avoided
by using a corporate structure.
The proposals to introduce punitive taxes appear to make offshore
property holding structures a less favourable option but the good
news is that the advantages are still available.
The key is to find a corporate structure offering the benefits of
offshore ownership without the new tax liability. This means incorporating
in a non-blacklisted territory with a favourable tax regime.
For potential property owners this is a great option. But what about
those who already own Portuguese property through a blacklisted
offshore jurisdiction?
For most, transferring the property back into their own names will
not be an option as it could result in high capital gains liabilities
and transfer taxes.
Therefore there are two possible routes that have been favoured
since the change in the law, the re-domiciliation of the corporate
entities to either Malta or Delaware, neither of which are on the
Portuguese black list of companies for property holding.
For new projects, where the property is to be acquired from a local
company, a popular alternative is to have the ownership registered
in the name of either a UK or Irish resident company acting as a
bare trustee for an on behalf of either an offshore company or offshore
trust / foundation. Thus, when the time comes that the property
is to be sold, the shares of the company can be transferred to reflect
the change of ownership and not actually a change in title on the
registry. This is similar to what occurred during the days of offshore
company ownership.
For specific advice regards the appropriate structure, please do
not hesitate to contact one of our Directors or Consultants at our
London
office.
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