Portugal has long been a popular choice for people, particularly from the colder climates of Northern Europe, looking to purchase a holiday home or a retirement home. Traditionally they have done so using offshore companies, mainly to avoid estate taxes. Unfortunately Portugal, along with some other countries, has made this route considerably less attractive by the imposition of swingeing tax penalties on offshore companies. The magnitude of these penalties can be seen from the examples below,
Real Estate Transfer Tax
This tax is paid by the purchaser, at progressive rates of up to 6% (5% for rural property) on property used exclusively for residential purposes, on the higher of the registered value or the purchase price agreed between the parties. This is usually the purchase price.
For offshore companies this rate has been increased to 15%.
Municipal Property Tax
This is a tax, at a rate set annually, levied by the local authority and based on the registered value. The rates are different for urban and rural properties and the total is typically about 1.6%.
For offshore companies the rate has been increased to 5%
Tax on a Deemed Rental Income
Where a property is owned by an offshore company, it is treated as having produced a rental income, which is charged to income tax, of one-fifteenth of the registered value.
There are other taxes, which have to be taken into account and these are,
Income tax
Where a property is rented out, the rent is charged to income tax and on a sale 50% of the chargeable capital gain is subject to Portuguese income tax.
Stamp duty
There is a stamp duty of 0.8% on the transfer of real estate.
Donations tax
Gifts to a spouse, antecedent or descendant are tax- free but other donations attract a tax of 10%
A Solution
Fortunately there are territories, which are not on the Portuguese black list and by purchasing a property in Portugal through a properly structured corporate vehicle incorporated in one of these locations, it is possible to avoid the penalties on offshore companies. These arrangements may bring with them other benefits such as,
As taxes and the manner in which they are applied change frequently specialist advice should always be taken before entering into any arrangements.
Taxation of Isle of Man Companies from April 2006
At the present time a company incorporated in the Isle of Man, owned by non-residents and which complies with the other statutory requirements, is not liable to Isle of Man taxation. Whilst locally trading companies pay tax at 18%, a qualifying offshore company pays a flat annual tax of £475 or £1,000.
Yacht and Ship Registration in the Isle of Man
The maritime history of the Isle of Man dates from the eighteenth century and the Island is recognised internationally as an efficient and well- run centre for both registration and management. It was ranked third in the world by Port State Authority in September 2004.
Buy to Let Property Investment
In recent years buy to let has been a popular way of investing in residential property. Stock markets are out of favour with many investors who have seen the values of their portfolios, endowment policies and pension funds shrink, whereas property has generally continued to rise in value. Interest rates are at historically low levels and mortgage finance is readily available on competitive terms from major banks and building societies. This brings property investment within the means of more investors than ever before. In these notes we will take the example of a foreign domiciled person, a non-resident of the United Kingdom, buying a property in London with the benefit of loan finance, but the general principles can apply to many other markets.
