Real Estate Taxation In Portugal. Acquisition – Asset Deal While the non-free transfers of urban property (both the first and the subsequent ones) are subject to Value Added Tax (‘VAT’) they benefit from an exemption since they are also subject to Transfer Tax which is currently 6% (permanent residence property) or 6.5% (other property) levied on the purchase price or on the patrimonial value, whichever is higher. Property acquired by tax haven listed entities is subject to Transfer Tax at a rate of 15%. The Transfer Tax is due by the purchaser of the property1. Stamp Duty is also due at the rate of 0.8% levied on the purchase price or on the patrimonial value, whichever is higher. Additionally, the execution of the notarial deed of sale and purchase imposes the payment of Stamp Duty at the fixed amount of €25. Acquisition of Portuguese property also triggers notary and registration fees, assessed upon execution of the deed and registration of the new owner. Notary and registration fees are immaterial, however. Please note, however, that the seller has the option to waive the VAT exemption on the sale of property provided that the purchaser is entitled to deduct the VAT (i.e. this would be the case if the purchaser is going to perform activities subject to VAT – please note that most of the transactions made by financial institutions are VAT exempt). If the seller waives the VAT exemption the transaction will be subject to VAT at the rate of 21%, levied on the purchase price (which for VAT purposes also includes the Transfer Tax). If the property that benefited from the waiving of the VAT exemption is later used for non-taxable VAT activities (including a sale/lease without waiving of the VAT exemption), the VAT initially deducted must be regularised. This restriction binds the taxpayer for a twenty year period and the Tax Authorities are entitled to check all the regularizations made by the taxpayer on a annual basis. If the seller waives the VAT exemption the
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A specific exemption applies to Portuguese real estate companies if certain conditions are met one of which refers to the need of the asset be acquired with the aim of resale and resold within 3 years. Property transferred within the context of group-reorganizations may also be exempt from Transfer Tax. The exemption is recognised on a case by case basis, upon the filing of a specific petition.
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abovementioned 0.8% Stamp Duty is not due. The Transfer Tax, however, will always be due. Finally, the owner of the property is liable to pay an annual Municipal Tax at rates which vary from (i) 0.4% to 0.8% or (ii) 0.2% to 0.5%, depending on the type of evaluation to which property was subject. More precisely, transfers of property that took place after 1st December 2003 will determine the evaluation of the property based on predetermined market criteria and the rates range from 0.2% to 0.5% for these properties. The remaining properties were evaluated applying official devaluation coefficients to the former patrimonial values and the applicable rates range from 0.4% to 0.8%2. Property held by tax haven listed entities is subject to Transfer Tax at a rate of 5%.
Acquisition – Share Deal If instead of an asset deal the acquisition of the property is made by means of a share deal, the 0.8% Stamp Duty, the notary and registry fees and the Transfer Tax are avoided. In this case Stamp Duty in the amount of €5 is due if the agreement is executed within Portuguese territory. Please note, however, that the present tax treatment is not applicable in cases were at least 75% of Portuguese quota company (a company whose share capital is represented by quotas and not by shares) capital is acquired by a single entity.
Lease The lease of property implies the payment of Stamp Duty in the amount corresponding to 10% of one month’s rent and benefits from a VAT exemption. However, the landlord may waive the VAT exemption provided that the tenant is entitled to deduct the VAT paid on the rents (i.e. this would be the case if the tenant is going to perform activities subject to VAT – please note that most of the transactions made by financial institutions are VAT exempt). If the landlord waives the VAT exemption, the lease is subject to VAT at the rate of 21% levied on the rents amount. If the landlord waives the VAT exemption the above mentioned 10% Stamp Duty is not due.
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A specific exemption applies to Portuguese real estate companies if certain conditions are met one of which refers to the need of the asset be acquired with the aim of resale and resold within 3 years.
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Direct Investment – Foreign Investor Lease The mere holding of properties located in Portugal does not imply by itself the existence of a Permanent Establishment (‘PE’) in Portugal for direct tax purposes. As a rule, a non-resident entity will only have a PE in Portugal if it has (i) a “fixed place of business” in the Portuguese territory through which its activities are wholly or partly carried out or, (ii) if it has an agent in Portugal (different from an independent agent) empowered to act and to enter into agreements on behalf of the non-resident entity. In the case of lease of properties it can be anticipated that a non-resident entity would have a PE in Portugal if it had an office (i.e. either owned or rented) and /or a full-time employee in Portugal (ideally with powers to sign lease agreements). Assuming that there is no PE in Portugal, income obtained by a nonresident entity from the lease of properties located in Portugal without a PE will be subject to Portuguese taxation. More precisely, the said income will be subject to Corporate Income Tax (‘CIT’) at the rate of 15% on the gross amount of the lease payments with the right to deduct only (i) maintenance and preservation expenses and (ii) the Municipal Tax. It will not be possible, therefore, to deduct substantial expenses such as depreciation charges and financial expenses. Lease payments collected by a non-resident entity will be subject to a withholding tax of 15% on their gross amount on account of the final CIT. In order to recover any excess withholding tax (i.e. due to tax deductible expenses), and to comply with the remaining tax statement obligations, the non-resident entity must file a CIT Return declaring the lease income less deductible expenses. Any excess withholding tax over the CIT final tax liability will then be reimbursed by the Public Treasury. Among other formalities, non-residents without a PE in Portugal are obliged to appoint an individual or a company resident in Portugal as their representative before the Portuguese Tax Authorities. The non-fulfilment of this obligation is considered a tax infringement.
Capital Gains In general, capital gains obtained by a non-resident entity upon disposal of properties located in Portugal are subject to CIT at a 25% rate. The capital gains correspond to the difference between sale value (transfer price3) less acquisition historic cost (this value being updated by official 3
Should the patrimonial value of the property, as determined by the new evaluation system, be higher than the sale price, for the purposes of “transfer price” the value to be considered is the patrimonial value. However, the same rule applies to the acquisition historic cost (if the patrimonial value of the property, as determined by the new evaluation system, is higher than the acquisition historic cost, the value to be considered is the patrimonial value).
Real Estate Taxation In Portugal.
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devaluation coefficients - monetary correction - if more than two years have passed since the acquisition) less costs incurred in the valorisation of the property in the last five years as well as costs incurred in the acquisition and sale of the property (financial costs not included). The purchaser of properties is not bound to withhold any tax. Consequently, in order to tax the capital gains it is necessary for the nonresident tax legal representative to file a CIT Return.
Indirect Investment4 Lease Lease income is subject to CIT at a maximum rate of 27.5% (it includes the CIT surtax) on a taxable income determined under CIT Code rules and principles. This means that all expenses related to the leasing activity (i.e. depreciation charges - 2% a year on 75% of the global value, unless the value of the land is known in which case the respective value will not be subject to depreciation - and financial expenses) are, in general, taxdeductible. Portuguese PEs and companies are entitled to some tax credits and to carry forward tax losses (six years). The lessee has to withhold 15% on the lease payments on account of the final tax liability. If the company conducts the activity of management of owned property no withholding will be made by the paying entity.
Capital Gains Capital gains made on the sale of properties are subject to CIT at the rate of 27.5% on the difference between transfer price5 and tax basis of the property (i.e. acquisition historic cost less tax deductible depreciation) updated with official devaluation coefficients. The taxpayer may apply for the reinvestment benefit according to which only 50% of the capital gains will be taxed to the extent that the sale proceeds are reinvested in other business assets in a period which runs
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It includes the acquisition of Portuguese properties through a PE or through a Portuguese Company. It also refers to the tax treatment of Portuguese companies.
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Should the patrimonial value of the property, as determined by the new evaluation system, be higher than the sale price, for the purposes of “transfer price” the value to be considered is the patrimonial value. However, the same rule applies to the acquisition historic cost (if the value of the property, as determined by the new evaluation system, is higher than the acquisition historic cost, the value to be considered is the patrimonial value, which is also the value considered for depreciation purposes). In any case, it is possible for the taxpayer to prove that the transaction effective value was lower than the patrimonial value.
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from the year before the transfer is made and the two following years (and provided that some additional requirements are met). No withholding tax has to be applied by the purchaser of the properties.
Taxation of Shareholder As a rule, dividends distributed by a Portuguese company to resident CIT taxpayers are not subject to withholding tax nor to taxation at the level of the shareholder provided that (i) the Portuguese company has its headoffice or effective management in Portugal and is subject and not exempt from CIT, (ii) the Portuguese company is not under the transparency framework and that (iii) the shareholder has a direct holding not lower than 10%, or with an acquisition value not lower than € 20,000,000, held for a minimum period of one year prior to the dividend distribution (exception made when specific anti-avoidance provisions are deemed to exist). Dividends distributed to non-resident entities without a permanent establishment in Portugal will not be subject to taxation in Portugal if paid to EU companies that qualify under the EU Parent / Subsidiary Directive provided that they are paid out of a minimum stake of 20% held for a two year period. In all the other cases, a maximum 20% rate applies. This rate can be reduced to a 5% to 15% rate under the relevant Double Tax Treaty. In a sale of shares scenario, the eventual capital gains may benefit from an exemption depending on the relevant Double Tax Treaty.
Portuguese Real Estate Fund (‘Portuguese REF’) Acquisition and Holding of Portuguese Real Estate Portuguese REF benefit from an exemption of Transfer Tax and Municipal Tax.
Lease Income Lease income is subject to an autonomous taxation at the rate of 20% applicable on the gross amount of the lease payments with right to deduct only maintenance and preservation expenses. The lessee does not make any withholding. The tax must be delivered by the correspondent management company by the end of April of the following year. Any tax withheld by the lessee shall be considered a payment on account of the final tax due. At the level of a Portuguese REF, no financial cost is allowed, nor any depreciation is made.
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In order to allow the deduction of tax deductible costs mentioned above, the respective support documentation is needed.
Capital Gains Capital gains deriving from the disposal of properties are subject to an autonomous taxation at the rate of 25% applicable on half (50%) of the positive balance of capital gains and losses made each year. In final terms, they are subject to a tax rate of 12.5%. In order to assess the taxable capital gains, the applicable rules are the ones in force for individuals: sale value less acquisition historic cost (this value being updated by official devaluation coefficients - monetary correction - if more than two years have passed since the acquisition) less costs incurred in the valorisation of the property in the last five years as well as costs incurred in the acquisition and sale of the property (financial costs not included)6. The tax must be delivered by the correspondent management company by the end of April of the following year. At the level of a Portuguese REF, no financial cost is allowed, nor is any depreciation made. In order to allow the deduction of tax deductible costs mentioned above, the respective support documentation is needed.
Other Income Other income (not qualified as lease income or capital gains) is, as a rule, subject to an autonomous taxation at the rate of 25% applicable on the net value obtained each year. Some reduced rates apply, depending on the type of income and by means of withholding tax. The taxation framework follows the tax framework for individuals, however, under which the financial costs are not tax deductible. Where the withholding tax rule does not apply, the tax must be delivered by the correspondent management company by the end of April of the following year. Income obtained outside the Portuguese territory (not qualified as lease income or capital gains) is subject to an autonomous taxation at the rate of 20% (if dealing with income of debt instruments, distributed dividends or income of units of investment funds) or at the rate of 25% (for the other types of income), applicable on the net value obtained each year. The tax must be delivered by the correspondent management company until the end of April of the following year. The deduction of tax credits emerging from international double taxation is limited to the lower of the following values (i) tax paid outside of the Portuguese territory or (ii) tax that would have been paid by the Portuguese REF should the income have been obtained in Portugal, in both cases never in excess of the tax that is due under the relevant Double Tax Treaty (if in force and potentially 6
6
See footnote 3.
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applicable). The international double taxation credit is assessed on a country by country and on an income by income basis and the income that grants the right to such credit must be considered by its gross value. Capital gains (other than the ones deriving from the disposal of properties) are subject to an autonomous taxation at the rate of 10% applicable on the positive balance of capital gains and losses made each year (in some cases an exemption may apply). The tax must be delivered by the correspondent management company by the end of April of the following year. At the level of a Portuguese REF no financial cost is allowed. In order to allow the deduction of tax deductible costs mentioned above, the respective support documentation is needed.
Taxation of Unitholders Income obtained by Corporate Income Tax (‘CIT’) resident taxpayers on units of a Portuguese REF is not subject to withholding tax. However, the income paid on the units is considered as a taxable gain at the level of the unitholder and subject to taxation at the general CIT tax rate (25%) plus the municipal surtax (2.5%). Tax paid by the fund may be credited against CIT due at the level of the unitholder. Should the fund distribute income attributable to dividends on shareholdings held by it, the unitholders are allowed to deduct 50% of this amount from their taxable income. For that purpose the management company must publish the value of the income paid to the unitholder, the amount of the tax withheld on the income to the fund or directly paid by it and the value of the deduction regarding the dividends. The tax withheld to or paid by the fund must be reimbursed to the relevant unitholder by the correspondent management company together with the payment of the income of the respective units, should the Portuguese CIT be exempt from tax and, due to such exemption, not obliged to file a tax return. In such cases, the management company shall deduct the tax reimbursed to the total amount of tax that it has to deliver to the Portuguese treasury under the rules mentioned above. Any tax credit held by the management company may be reimbursed by the Portuguese treasury or credited against future payments of tax to be made by it.
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Income obtained by non-resident entities without a permanent establishment in Portugal on units of a Portuguese REF is exempt from CIT.
Portuguese Funds of Funds (‘Portuguese FF’) Income of Units of Portuguese Funds Income of units of Portuguese funds is exempt. However, the Portuguese FF shall not be entitled to the reimbursement of the tax withheld to or paid by the relevant fund, as is the case with CIT exempt unitholders of Portuguese REF.
Other Income Other income (not qualified as income of units of Portuguese funds) shall follow the tax framework applicable to regular Portuguese funds.
Taxation of Unitholders Income obtained by CIT resident taxpayers on units of a Portuguese FF is not subject to withholding tax and only 40% of the income paid on the units is considered as a taxable gain at the level of the unitholder and subject to taxation at the general CIT tax rate (25%) plus the municipal surtax (2.5%). The tax withheld to or paid by the fund may not, however, be credited against CIT due at the level of the unitholder, as is the case with unitholders of Portuguese REF. On the other hand, the tax withheld to or paid by the fund will not be reimbursed to the relevant unitholder even if the Portuguese CIT is exempt from tax and, due to such exemption, not obliged to file a tax return, as is the case with unitholders of Portuguese REF. Income obtained by non-resident entities without a permanent establishment in Portugal on units of a Portuguese REF is exempt from CIT. Contacts Patrick Dewerbe
[email protected]
Tânia de Almeida Ferreira
[email protected]
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors. © Linklaters. All Rights reserved 2006 Lisbon Avenida Fontes Pereira de Melo, 14-15º 1050-121 Lisbon, Portugal Tel: (351) 21 864 00 00 Fax: (351) 21 864 00 01
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