The average annual income per owner of homes placed in Portugal on the Local Lodging network, Airbnb, is higher than in Italy or Spain. Only Japan surpasses the national average, according to a study by the International Monetary Fund (IMF), which sees room for increasing taxes on this type of “digital” business.
Prime Minister António Costa declared: “We do not have an excess of Local Lodging. We have a lack of affordable housing.” The Government presented its “New Generation of Housing Policies” (NGPH), which includes various measures to stimulate urban rental and rehabilitation. Beyond contributions from the state, the goal is to create incentives for private individuals to place their properties with an affordable lease.”
The growth of Airbnb in Lisbon can be seen through the tourist taxes delivered to the City Council. In 2017, the total value of this levy charged in Lisbon in local lodging accommodations available on Airbnb came to €3.8 million. The number of guests staying in the Airbnb platform jumped from 1.6 million to 2.6 million last year.
The Finnish Government proposes that the bilateral tax treaty with Portugal, dating from 1970, should be terminated by the end of the year, waiting for a new agreement in 2019. At issue is the dissatisfaction with Portuguese Non-Habitual Residency regime which has led many Finnish pensioners to “flee” to Portugal seeking exemption from taxation. Finnish Finance Minister Petteri Orpo stated that “the tax treaty is not fair”. In 2016, Portugal and Finland agreed to update the treaty but, 18 months later, no changes have occurred.
The walls continue to close in on Offshore property holding companies in Portugal. Once a popular solution for home ownership, these structures are based in low-tax jurisdictions that allow shareholders to take advantage of certain “loopholes” to avoid paying Capital Gains tax when selling. Over the past 15 years, successive changes in legislation in Portugal have gradually tarnished the glow of these elusive structures. At first, black-listed jurisdictions began to be taxed a moderate 2% punitive assessment on their immoveable assets. By this year, these punishing levies have reached 15% per annum, costing owners tens of thousands of Euros annually.
Two recent changes in legislation have brought additional pain to popular “white-listed” jurisdictions such as Delaware and Malta. Transparency measures now allow authorities to look through companies directly to identify the underlying beneficial owners. In a parallel “look thru” move, the sale of a non-resident company’s shares can now be assessed as a transfer of the rights of the underlying Portuguese property.
Beneficial Ownership Central Register
Portugal has implemented the EU directive, approving the Legal Regime of the Beneficial Ownership Central Register (BOCR). These new regulations require reporting a structure’s beneficial owners. The statutes are far-reaching and include companies holding Portuguese property in jurisdictions such as Malta and Delaware. This EU-wide directive further enhances the Common Reporting Standards introduced last year and is part of the new era of information sharing.
Capital Gains from Immoveable Property
The most recent attack comes in the 2018 Portuguese State Budget which introduces an enhanced definition of Capital Gains on Immoveable Property. When shareholders’ sell their shares in a non-resident company which derives more than 50% of its value from real estate located in Portugal, Finanças now has been given the right to tax the transfer as an immoveable property conveyance rather than the mere sale of shares. In other words, the Tax Authorities “look thru” the corporate entity to assess individual shareholders directly on the sale of the property, regardless of whether they are resident or not. Both Malta and the US already have similar “anti-abuse” language in their bilateral tax treaties with Portugal.
Historically, many offshore jurisdictions levy Stamp Duty on the registered share value of Limited Liability Companies, typically at the rate of 1%. To avoid this potential extra cost, LLC’s have often assigned only a symbolic share value. For example, it is not uncommon for Delaware Companies to be nominally worth just US$1 or less. Under the new rules, rather than CGT being assessable in another jurisdiction, assessment takes place in Portugal, based on nearly 100% of the sales price.
EU black list
White-listed jurisdictions recently were granted a temporary reprieve from being placed on the EU’s new blacklist. The revelations in the Paradise and Panama Papers about international tax schemes, exposing some of the intricate methods that the world’s wealthy use to avoid tax through offshore havens, raised hopes that Brussels would begin to rein in on abusive practices. For the time being, it is apparent that the EU could only muster the courage to target countries with little economic or political weight.
Nevertheless, the handwriting is on the wall. Efforts to constrain or eliminate dubious practices in offshore havens will only multiply in the future. The longer beneficial owners wait to achieve compliance, the more complicated and expensive solutions will become.
Portuguese Nominee Companies
Most of the problems associated with Offshore Companies, whether white or black-listed, can be readily resolved at relatively modest expense by transforming the structure into a Portuguese Nominee Company. This procedure, known as “Redomiciliation”, creates a fully compliant structure offering the beleaguered Company Owner a host of advantages:
- A fully compliant solution • Tax-efficient Redomiciliation
- Potential tax-free uplift in share value • Reduced closing costs
- Avoiding punitive “IMI” rates • Capital improvements that never expire
- Possible IMT exemption • Professional support unravelling bureaucracy
- Ease of transfer • Modest on-going domiciliary fees
Amongst Tax Authorities around the EU, a new approach has emerged that can undermine the application in Portugal of the Non-Habitual Residency Regime to pensioners wishing a 10-year tax holiday on their retirement benefits. The new interpretation goes as follows:
Tax-exempt persons in their country of residence (ie. Portugal) are not considered to be resident for tax purposes in that state according to the intended meaning of the applicable tax treaty. Therefore, they cannot benefit from the provisions of these agreements.
The underlying principle is simple: these bilateral conventions exist to protect against double assessment, not doubling up on tax exemptions.
Since Portugal requires that the terms of the respective tax treaty be met in order to benefit from the Non-Habitual Residency Regime, exemption should not be granted if double relief would result. On the part of source country, potential double exemption would lead the local fiscal authorities not to recognise the non-resident status of the individual. The taxpayer would continue to be assessed as before as resident for tax purposes.
What are the alternatives?
In order to overcome the unwanted consequences of this new interpretation, several options exist. Even if the tax exclusion is partial, taxation effectively takes place. As a result, the terms of the double tax treaty can prevail. In other words, if the pension is taxable – regardless of actual amount levied – the intended purposes of the treaty are seen to be satisfied.
If one of the pensions in question is an occupational pension, most foreign residents should qualify for a partial exclusion (see [b] below), thereby averting full assessment. Alternatively, if there are other sources of income, such as a Sole Trader activity in the Simplified Regime, that are fully or partially taxed, the problem should also be solved.
“Should be solved”, but not necessarily so
While taxpayers may be able to present bonafide proof that taxation has taken place, the Fiscal Authorities are still on the “warpath” and are under orders to use their powers to throw up road blocks whenever and where ever possible for Non-Habitual Residents. Many individuals will not feel comfortable advancing in a strategy that draws them into the “crosshairs” of the taxman.
Tax Abatements on Pensions in Portugal
To select from the alternatives, it is important to understand the forms of tax breaks permitted to pensioners Portugal. Several types of tax abatements may be implemented:
- Tax Allowance (“Dedução específica”): the Portuguese Pension Allowance is €4,104 and has remained unchanged since 2012. This flat deduction applies to all pensions regardless of the gross amount received.
- Partial Tax Exclusion (“Desagravamento fiscal”): A Partial Tax Exclusion may apply to occupational pensions to rectify potential underlying double taxation issues when specified conditions are met. The criteria for eligibility are defined in the “IRS” tax code.
- Tax Relief (“Benefício fiscal”): The “Non-Habitual Residency” regime offers newly-arrived expatriates in Portugal a 10-year tax holiday on pensions. This status is designed to attract pensioners to retire in Portugal, rather than compensate them for tax issues as in [b].
Taxpayers who wish to avoid possible scrutiny of fiscal authorities in their home jurisdiction due to NHR should limit themselves to [a] the Tax Allowance and [b] a Partial Tax Exclusion where admissible but skip altogether [c] the gratuitous Tax Relief as exemplified by the Non-Habitual Residency regime. In most cases, they will find that the final assessment due in Portugal surprisingly reasonable, achieving their fundamental tax mitigation goals while sidestepping the potential negative consequences now increasingly associated with Non-Habitual Residence.
The revamped Social Security contributory plan for Sole Traders has been passed into law. Under the new regime, the deductions applicable to the Self-Employed will be based on the average income of the previous trimester, rather than the preceding year. The first declaration under the new rules will take place in January 2019, based on the earnings of the last quarter of 2018. According to the diploma, until the changes take effect, the contribution base established in October 2017 will continue to apply. Keep in mind that the following rules will only start as of January 2019, not in 2018.
Under the new regime, Social Security contributions decrease from 29.6% to 21.4%. Based on 70% of the product, Freelancers in services will have a net rate of 15%. With a corresponding coefficient of 20%, Sole Traders in production, sales or tourism will have an effective contribution of 4.28%. In all cases, the computations derive from the average income of the previous three months. Furthermore, Independent Workers will have the flexibility to adjust further their payments up or down by as much as 25%, to take into consideration on-going earnings fluctuations.
Self-employed individuals must declare their income to Social Security each quarter. The new regime creates a minimum monthly contribution of €20 to guarantee stability and continuity over the course of one’s contributory career to assure future pension entitlements as well as other social benefits associated with occurrences of unemployment or illness.
The new scheme provides that sick pay may be awarded from the 11th day onwards, rather than after the 31st day as before. Eligibility for unemployment compensation will require 360 days of contributions instead of the current 720 days.
In the case of self-employed individuals with standard accounting (“contabilidade organizada”) rather than the Simplified Regime, the relevant income corresponds to 1/12 of the taxable profit calculated in the previous year, with a minimum limit of 1.5 X IAS (±€643), to extend over a minimum period of 12 months. Nevertheless, these taxpayers may opt for the quarterly scheme.
Local Lodging exemption
Starting in 2019, a Sole Trader whose only income results from a Local Lodging activity will be exempt from Social Security contributions. Under the current system, individuals who have opened an “AL” business must begin making payments to Social Security when their first year waiver is over unless they are already contribute or receive benefits from another Social Security system. The same practice applies to those with earnings from renewable energy production.
Withholding, limits and exemptions
Contracting entities should withhold 10% in situations where the Freelancer’s economic dependence (read: income from a sole contractor) exceeds 80%, or 7% when less. Exemption from contributions will continue for self-employed workers who accumulate pension income, as well as those who have contributed the minimum monthly deduction of €20 for a period of at least one year.
On the other hand, Sole Traders who accumulate salaried work will be exempt when average monthly income (relative to the previous quarter) does not exceed the value of 4 X IAS (Social Support Index) or ±€1,715.
Before there was no such limit, that is, those accumulated income from dependent work derived from self employment could be automatically exempt from contributions on their Sole Trader earnings.