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DSG – in the pipeline

Monthly Archives: September 2021

Fiscal Residency  

20 Monday Sep 2021

Posted by Ursula in Posts

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fiscal, portugal, residency, resident

The vast majority of Foreign Residents share a common trait: most, if not all, of their livelihood comes from outside of Portugal. Great confusion and disinformation abound regarding such income from abroad. Before analysing the different requirements surrounding Individual Income Tax (IRS) in Portugal, it is useful to dispel some of the myths and establish a few of the basics regarding Portuguese taxation and the obligations of the Foreign Resident.  So the first question to consider is: Who is required to become resident for tax purposes in Portugal?


Fiscal Residency
It is important to distinguish between a Residency Permit (Residência) and Fiscal Residency.  The former requires a lengthy bureaucratic process at the Estrangeiros Office.  The latter is circumstantial in nature.
An individual is deemed to be tax resident if :
       • physically present in Portugal for more than 183 days in a calendar year;  or
       • physically present in Portugal for less than 183 days but has established a permanent place of residence at 31 December; or
       • if an individual at the end of a tax year owns a dwelling in Portugal that the tax authorities might reasonably assume to be his or her usual residence, the individual generally is considered resident for that tax year;  or
       • if the head of a family is resident in Portugal for tax purposes, other family members may also considered to be resident, even if living abroad.  
However, if the foreign country has a double tax treaty with Portugal, the treaty contains rules to decide in which of the two countries an individual is legally considered resident. Needless to say, if you do have a Residency Permit (Residência), you are deemed to be resident regardless of number of days you are actually present in Portugal.
The Portuguese Tax Authorities
While the tax authorities used to turn a blind eye to foreign residents, the pendulum is now moving in the other direction.  Rather than being invisible, expats have become prime targets.  Many (legally) tax residents of Portugal have never submitted a tax return, thus likely to be eligible to pay tax owed and back interest as well as hefty penalties. The government has made cracking down on tax fraud one of the cornerstones of economic policies and foreign residents are no exception.  If you come forth voluntarily, you are dealt with accordingly.  However, once on the “Black List” of tax-cheaters, it is difficult to shake that status.  By being compliant, you can take an important step towards peace of mind.
Where you pay your taxes
Unfortunately, you don’t get to choose where you pay your taxes.  The Law does.  Just because you may pay (incorrectly) back home doesn’t mean that you will win any favour with Finanças.  Double Taxation Treaties clearly define taxpayer obligations.  And Portugal now has tax treaties with all of the EU countries and many others around the world.  An additional 10 countries are currently completing the ratification process, another 10 are under negotiation and another 30 waiting to start the process. In other words, Portugal is rapidly internationalising its fiscal perspective.
It may come as a surprise that filing a correct tax return in Portugal can actually save you money.  Submitting a tax return is not synonymous with paying tax. The Portuguese tax code has generous allowances and unexpected exclusions on certain forms of income, broad deductions for numerous types of expenses and liberal tax credits for many common expenditures. Many people find their tax burden in Portugal to be significantly lower than in their country of origin.
Year One
In your first year as a Fiscal Resident in Portugal, you will need to make the transition between one tax system to the other.  This does not happen of its own accord.  You need to take overt, concrete steps to make this happen.  Otherwise, you will continue to pay tax in your home jurisdiction yet accumulate fiscal obligations and, eventually, serious penalties in your new country of Residence, Portugal.  We, as citizens, are compelled to be compliant with the Law. We, as taxpayers, are only required to pay the legal minimum.


Capital Gains Tax

20 Monday Sep 2021

Posted by Ursula in Posts

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Tags

CGT, portugal, property, sale, tax

Options when selling Property in an Offshore Company

Many owners of Offshore Companies, both black and white listed, reach a point where, for any number of reasons, they wish to sell up. Yet most are uncertain of the Capital Gains Tax consequences of such a sale, particularly since there are a number of different ways to structure the transaction. While individual proceedings sometimes present unique circumstances, the following example should prove illustrative of most sales. Respective costs and savings ought to be proportional in most cases.

The Situation:   Non-Resident Owners selling a property held in an Offshore Company

1)   An Offshore Company purchases a property in Portugal for €200,000 (inflation-adjusted price).

      At this point, both the Property and the Company are worth €200,000.

2)   A Non-Resident couple buys the shares of the Company for €300,000.

While the Company has a share value of €300,000, the book value of the Property remains €200,000.

3)   The Company moves its headquarters and effective management (redomiciliation) from Gibraltar to Delaware. No change in respective values is registered.

4)   The Owners wish to sell the Property/Company for €550,000.  This can be done in one of three ways:

a)   the Company sells the Property directly to the Buyers; or

b)   the Owners of the Delaware Company sell their shares to the Buyers; or

c)   the Delaware Company is first moved to Portugal, then Owners of the Portuguese Nominee Company sell their shares to the Buyers.

The Tax Consequences for Buyer and Seller:

a) The Company sells its Property:

The Capital Gain on the sale of the Property is the net difference between purchase price (€200,000) and the sales price (€550,000) minus capital improvements in the previous 12 years minus deductible buying and selling costs. The net gain is then taxed at the rate of 25%.

Example – the final result might look something like this:

€550,000 (sale) – €200,000 (purchase) – €15,000 (improvements) – €5,000 (expenses) =

€230,000 (net gain) X 25% (non-resident tax rate on sale of property) = €57,500 (CGT)

The buyer will also pay the following acquisition taxes:

€33,000 (IMT) + €4,400 (Stamp Duty) = €37,400 (acquisition taxes)

Option nº 1

Seller is taxed €57,500 – Buyer is taxed €37,400

Since it is a Delaware Company that is selling the Property, then the taxable Gain will be to the Company. However, it is more than likely that the distribution of these profits to the shareholders will also incur an assessment to Owners in the home jurisdiction on these “dividends”. 

b)   Sale of the Shares of the Delaware Company

The shares of the Delaware Company are sold to the Buyer.  In accordance with the USA-Portugal Tax Treaty (Article 14), this transaction is treated as a Sale of Property Rights since the US Company, as a resident entity under the Treaty, consisting of more then 50% of immovable property located in Portugal. Therefore, the Gain may be taxed in Portugal in an identical fashion as above

Optionº 2

Seller is taxed €57,500 – Buyer pays no tax

with a net CGT due of €57,500. Since the Sellers are non-residents in Portugal, they will also be taxable on the worldwide income in their home jurisdiction. In this instance, the transaction will no longer be seen as a property rights transfer but merely as a sale of shares (movable assets). After application of any Capital Gains allowances, a second CGT assessment will be due on this gain. Given the deemed natures of the perceived transaction, together with the triangulation of the jurisdictions involved, there is no way to eliminate double taxation.

Option nº 3:   Sale of Portuguese Nominee Company

When the Portuguese Company is sold, the Gain is calculated as follows:

First, the Delaware Company must move to Portugal.  As part of this Redomiciliation, an appraisal is performed of the Property, determining that the Company’s sole asset is valued at €530,000. 

Therefore, at the time of the move to Portugal, the Company is worth €530,000 and the now Portuguese Company’s shares reflect this value.

The Shares are then sold as follows:

€550,000 (sales price of shares) – €530,000 (value of shares upon Redomiciliation to Portugal)  =

€20,000 X 10% (tax rates on sale of shares)  =  €2,000 (CGT)

           The buyers will also pay €25 (Stamp Duty on Share Transfer Deed)                                             

Optionº 3:

Seller is taxed  €2,000 – Buyer is taxed  €25

As the Sellers are Non-Resident, they may also be liable for CGT in their home jurisdiction. In this case, the tax paid in Portugal will normally serve as an international tax credit, reducing or eliminating any eventual CGT assessment. Needless to say, while the rate may be different, the basis should be the same.

Conclusion:

As you can see, there is considerable difference both for Buyers and Sellers when redomiciling to Portugal. By selling the Portuguese Nominee Company, rather than the Company selling the Property or the shares of the Delaware Company, both sellers and buyers save appreciably.  In comparison, the costs of Redomiciliation and the subsequent share transfer should prove only a minor inconvenience.

In addition, due to Portuguese fiscal transparency rules, owners of Nominee Companies are free from any possible double taxation in Portugal since liability for potentially chargeable events is transposed out of the Company directly to the Shareholders and is never be assessed to both.

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