Investing In Spain And Portugal

Portugal - An Overview

COUNTRY FACTS >>
MAJOR LEGAL ENTITIES >>
THE PORTUGUESE LEGAL SYSTEM >>
BUYING A PORTUGUESE PROPERTY >>
PROPERTY & FISCAL RESIDENCE >>

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COUNTRY FACTS

Country: Portugal is one of the oldest states in Europe. It traces its modern history to A.D. 1140 when, following a 9-year rebellion against the King of Leon-Castile, Afonso Henriques, the Count of Portugal, became the country's first king, Afonso I. Afonso and his successors expanded their territory southward, capturing Lisbon from the Moors in 1147. The approximate present-day boundaries were secured in 1249 by Afonso III. By 1337, Portuguese explorers had reached the Canary Islands. Inspired by Prince Henry the Navigator (1394-1460), explorers such as Vasco da Gama, Bartolomeu Dias, and Pedro Alvares Cabral made explorations from Brazil to India and Japan. Portugal eventually became a massive colonial empire with vast territories in Africa and Latin America (Brazil) and outposts in the Far East (East Timor, Macau, Goa). Dynastic disputes led in 1580 to the succession of Philip II of Spain to the Portuguese throne. A revolt ended Spanish hegemony in 1640, and the House of Braganca was established as Portugal's ruling family, lasting until the establishment of the Portuguese Republic in 1910. During the next 16 years, intense political rivalries and economic instability undermined newly established democratic institutions. Responding to pressing economic problems, a military government, which had taken power in 1926, named a prominent university economist, Dr. Antonio Salazar, as finance minister in 1928 and prime minister in 1932. For the next 42 years, Salazar and his successor, Marcelo Caetano, appointed prime minister in 1968, ruled Portugal as an authoritarian "corporate" state. Unlike most other European countries, Portugal did not play a combatant role in World War II. It was a charter member of NATO, joining in 1949.  In the early 1960s, wars with independence movements in Portugal's African territories began to drain labor and wealth from Portugal. Professional dissatisfaction within the military, coupled with a growing sense of the futility of the African conflicts, led to the formation of the clandestine "Armed Forces Movement" in 1973. The downfall of the Portuguese corporate state came on April 25, 1974, when the Armed Forces Movement seized power in a nearly bloodless coup and established a provisional military government.*

* Source United States Department of State

• Location: Portugal occupies the Western part of the Iberian Peninsula (along with Spain) and also includes Madeira and the Azores. Mainland Portugal is mostly
plateaux with forestry in the north and open arid land in the south. The country covers an area of 92,391 square kilometres, about the same size as the Island of Ireland.
• Climate: Temperate North and warm Mediterranean South. Madeira and the Azores have a constant temperature between 20 and 30 degrees
• Population 10,560,000
• Development: The per capita gross domestic product of Portugal in 2006 was
US$14,600 per person.  Portugal is by far the least economically successful country in the Western part of Europe and has fallen significantly behind Slovenia and Greece – The GDP of the UK by comparison is US$27,700perperson (The 24th wealthiest country) whilst Ireland has a per capita GDP of US$38,812 per person (The 4th wealthiest country).
• Capital City: The capital city of Spain is Lisbon. It has a population of approximately 1,800,000. World famous for its museums, architecture and nightlife. Other cities of note include Oporto in the North of the country
• Currency: The Euro is used in Spain together, at the time of writing, with Ireland,
France, Portugal, The Netherlands, Belgium, Luxembourg, Germany, Austria, Italy,
Greece, Sweden, Slovenia and Finland. The new accession states plus the UK and Denmark currently use their own currencies.
• Education: According to the OECD the current literacy rate in Portugal is 93% compared to a 99% level in the UK and Ireland.
• Language: Portuguese
• Trade Block Membership: Portugal has been a full member of the European Union since 1986 and is also a member of the Organisation for Economic Co-operation and Development (OECD)

MAJOR LEGAL ENTITIES

In Portugal there are two major separate commercial legal entities:  A joint-stock or public limited liability company (SA or Sociedade Anónima) or of a private closed stock limited company (Lda or Sociedade Por Quotas). In addition, since 1997 there have also been single partner limited liability companies as required by EU law (Lda - Sociedade Unipessoal). As with most other European jurisdictions the major distinction between both commercial entities is that in the case of SA’s shares can be purchased by the general public (on the Lisbon Bourse) whilst, like UK private limited companies, the shares in a Lda are not available to the general public but only to private investors. The capitalisation requirements for a SA are €50,000.00 whilst for a Lda the minimum is €5,000.00. As in Spain the transfer of shares requires the confirmation and validation by a Portuguese notary public whilst the company formation procedure is exceptionally slow and bureaucratic especially where tax benefits are sought such as those available on the Portuguese Island of Madeira. However, such concerns are generally ‘moot’ as most foreigners will set up an offshore company to own their Portuguese property with re-sales avoiding local capital gains, inheritance and stamp duties simply by selling the shares in the offshore company and not the property itself. Notwithstanding, such a positive environment one should be aware that Portugal like Spain has a ‘Black- List’ of jurisdictions akin to that of its larger neighbour – Therefore, obvious tax havens such as Gibraltar and the British Virgin Islands (BVI) cannot be successfully used but non-prescribed tax free non-resident jurisdictions such as Delaware non-resident LLCs can be very beneficially employed and save their owners many thousands of Euro. For further information please contact a SCF Tax Planning Consultant

THE PORTUGUESE LEGAL SYSTEM

Civil Law

The Portuguese legal system is based on the Code Napoleon and as such is primarily codified and relatively inflexible. Unlike common law countries such as the UK and Ireland, where judges have the ability to create law through precedents and/or actively interpret statutes (Acts of Parliament), their Portuguese counterparts must slavishly adhere to the Civil Code -This having both positive and negative consequences. In particular, it should be noted that Portugal has no equivalent of the laws of equity, which specifically allow judges considerable flexibility to develop case law without the need to consider a codified instrument provided such case law doesn't directly conflict with an existing statute. Another key distinguishing fact between Portugal and common law jurisdictions is that it has no tradition of trusts, a creation of the laws of equity, and further it is not a signatory to the Hague Convention on Trusts in 1984. This means that their use in tax planning is more limited than in other jurisdictions and should only be used after having received expert tax planning advice.

BUYING A PORTUGUESE PROPERTY

The Tax Planners Dream!

In common with most civil law countries, fiscal residents of Portugal are subject to taxation on their world-wide income. However, unlike France and Spain, Portugal has not introduced legislation specifically aimed at preventing the use of offshore or non-resident companies for property acquisition. This deficit in it's legislation effectively means that those investing in Portugal, resident or not, can very often legally circumvent all indigenous capital and transfer taxes, whether the property is of a residential or commercial nature. In addition, as in most other civil law countries, the 'legitima portia1 principle will apply, making it more difficult for testators to effect dispositions in favour of non-family members. In Portugal, this is achieved by a sliding scale of taxation whereby a taxable disposition over €500,000.00 made to a testator's child will only be taxed at 23%, whilst dispositions to distant relatives and unrelated beneficiaries will be liable to a 50% rate. Nevertheless, as with France and Spain, such 'forced heirship1 can be avoided, together with the inheritance and gift tax (imposto de suces§es e doac§es), by the imposition of a suitable offshore undertaking. Indeed, Portugal's relative lack of anti-avoidance legislation makes the use of such mechanisms much more easy than in France or Spain.

PROPERTY RELATED TAXES

REAL ESTATE TRANSFER TAX: This tax must be paid directly to the notary, as a 'stakeholder', before the signing of the notarial deed. The general rate will be 10% for urban housing/development land or 8% on rural land. The appropriate rate being based on either the rateable value or the actual purchase price, whichever is the higher. However, if the main modis operandi of the company/individual is property acquisition/development then the real estate transfer tax can be avoided if:
(i) the property is sold within 4 years of acquisitions,
(ii) no major re-development of the property has taken place save for normal upkeep or,
(iii) the purchaser is not a 'marchands de biens' (a property speculator) intending a resale.

MUNICIPAL REAL ESTATE TAX: All companies or individuals owning property in Portugal are subject to pay a municipal real estate tax (contribuicao autarquica) similar in concept to the British council tax. The annual tax liability is based on a division of the 'true' value on a ratio of 15:1 for urban and 20:1 for rural real estate. Land Registry values will increase between 2% and 4% per annum depending on location.

CAPITAL GAINS TAX: In Portugal, there is no special or separate capital gains tax. Gains realised on capital being treated as income for tax purposes. In the case of companies the standard rate is 36%, whilst for individuals there is a sliding-scale from 15% to 40%. For both individuals and companies the Portuguese authorities have sought to prevent the 'flight of capital' by providing significant exemptions if certain re-investment criteria are satisfied. In the case of an individual, full exemption will be given on a property related capital gain provided:

(i) it is the normal home of the taxpayer and,

(ii) proceeds from the sale are re-invested in another home within 2 financial years from the date of the said sale. Importantly, it should be noted that individuals are only taxed on 50% of a property related capital gain, albeit at the normal income tax rates. For companies, a total exemption will normally be granted provided:

(a) the company undertakes to re-invest the proceeds of the sale in either tangible fixed assets or financial fixed assets;
(b) that such re-investment is made within 2 financial years.

TVA AND STAMP DUTY: Apart from the three taxes mentioned above and inheritance/gift tax, there will also be value added tax ramifications on professional services rendered, together with stamp duties on the submission of various forms/documents.

PROPERTY & FISCAL RESIDENCE

RESIDENT IN PORTUGAL FOR FISCAL PURPOSES:

(i) INDIVIDUALS: Both nationals and non-nationals resident in Portugal are taxed on the their world-wide income. Generally, residence will be ascribed if more than 183 days are spent in the jurisdiction or possibly less, if an individual has a residential dwelling available at the end of the calendar year (the 31st of December). A person deemed non- resident in Portugal for fiscal purposes will only be taxed on a remittance basis, however, such a person will be liable to capital gains tax on the direct disposition of a Portuguese property.* In addition, as the physical property is 'immovable' the lex situs principle will apply. In other words, a resident or non-resident testator will find that any such Portuguese 'assets' will be covered by local 'forced heirship' rules and inheritance taxes.

• IT SHOULD BE NOTED THAT A PERSON NOT RESIDENT IN PORTUGAL FOR FISCAL PURPOSES WILL FIND IT DIFFICULT NORMAL PLACE OF ABODE IS LOCATED IN THE PORTUGUESE REPUBLIC.

(ii) COMPANIES: In Portugal, the main non-fiscally transparent companies are; sociedades anonimas (SA) and sociedades por quotas (Lda). The former are principally for larger concerns and have a minimum capitalisation requirement of 138 81 Portugal Portugal 11 1 0 €50,000.00 and may have 'bearer' shares. The latter are the equivalent to a British 'limited' company, have a minimum capitalisation requirement of €5,000.00, but cannot have 'bearer' shares. By definition, such companies will be deemed Portuguese resident and can avail of the above-mentioned exemptions if re-investments are made. For non-residents the advantage a Portuguese company has over a direct property purchase is that it may be possible to circumvent capital gains tax. Selling the ‘shares’ in the company, which in turn, of course, would own the applicable property, does this. Capital gains realised by non-residents on the sale of shares in a Portuguese company not being subject to any Portuguese tax. For resident individuals, an indigenous company could also make sense if the property to be purchased was not a personal dwelling. From the inheritance/gift tax point-of-view, a shareholder in a resident company who was also personally resident would be fully subject to such taxes and the legitinia portia principle. For a non-resident shareholder, in the same shares in the company are gifted by the testator to a non-resident beneficiary. In synopsis, a local company may provide benefits but such a structure will result in formation fees, full ownership transparency (unless the company is a 'bearer' share SA), potential corporate taxes and annual auditing fees.

NON-RESIDENT IN PORTUGAL FOR FISCAL PURPOSES:

(i) INDIVIDUALS: As stated, such individuals are fully subject to local capital gains taxes and the legitima portia principle on a direct sale. If the property is owned by a local company and there is a sale of shares and not physical property these problems could be circumvented (see above).

(ii) COMPANIES: To establish that a foreign company is not fiscally resident in Portugal, it is necessary to prove that it is only trading 'with' and not 'in' Portugal. In other words, there must not be a 'permanent establishment' in the Republic of Portugal. Under Portuguese law this is deemed to be "... any fixed installation or permanent representation through which an activity of commercial, industrial or agricultural character is carried on." Thus, provided the acquired property, residential or commercial, is owned by the offshore company and that such company is 'passive', i.e. delegating rent collection and management to independent local representatives, there should be no problem. Even more interesting is the fact that Portugal has no anti-tax haven legislation, which, in effect, means that it would be possible to use a simple and relatively cheap West Indian bearer share company. The end result, provided the shares are sold in the company which owns the property, being that:

(a) Both resident and non-resident individuals could circumvent capital taxes. Shares being deemed 'movable' property and generally subject to the tax regime, if any, of the jurisdiction of registration. Note, in the case of resident individuals - who are theoretically taxed on their world-wide income - it would generally be advisable to insert another offshore company to hold  any gain and hence, not altering such an individual's world-wide tax position;

(b) real estate transfer taxes, on a subsequent sale, could be avoided. The differential, perhaps 10%, being potentially extra profit for the vendor;

(c) the legitima portia principle would not apply and no inheritance/gift tax liability would nexist;

(d) total anonymity is possible; and

(e) it may be possible to avoid the submission of annual
 

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» Spain - An Overview

» Spain - Tax & Legal System

» Spain - Buying a Property

» Spain - Setting up a Business

» Spain - Buying, Selling Or Using A Car

» Spain - Mortgages

» Spain - Pension

» Spain - Healthcare

» Portugal - An Overview

» Spain - Property & Fiscal Residence