Bermuda, Aruba, and Barbados have been on the EU’s embargoed list since March because of loopholes associated with money laundering schemes. Under the EU’s fair tax criteria, companies must have “economic substance”, not be just a “letterbox” entity set up to take advantage of low tax practices. The current EU blacklist has 12 countries. De-listed jurisdictions are placed on a halfway ‘grey list’ under close scrutiny but are no longer be subject to sanctions.
Suffering under the aftermath of the “Panama Papers” scandal, the Central American nation is trying to recover greater transparency on the international stage. Although Lisbon would like to shorten its tax haven blacklist, Panama’s departure is far from certain. Pressure from the Panamanian Government extends on several fronts, from the promise of greater information sharing on the one hand to diplomatic retaliation on the other against those who continue to consider it as “non-cooperative”. For the time being, Portugal is adopting a “wait-and-see” strategy.
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
For many years, Offshore Property Companies have been a popular solution, although sometimes practices could be a bit “grey” in nature. Due to repeated problems with tax evasion, Portuguese legislation eventually changed, penalising these structures. Offshore Companies began to suffer an array of punitive measures that turned them untenable. Other than direct ownership, property buyers are faced with a choice between Non-Resident Companies, registered in a foreign jurisdiction not on Portugal’s “black-list”, or Resident Companies, domiciled in Portugal.
However, the legislative landscape continues in flux. EU initiatives are instigating further change. Yesterday’s solution can become tomorrow’s problem, leading many owners to consider redomiciling their Delaware companies to Portugal.
The European Commission has confirmed plans to draw up a pan-EU list of non-cooperative tax jurisdictions. The intention is to create a common EU list of non-cooperative tax jurisdictions by the end of 2017. The list will replace the current patchwork of national “black lists,” which are intended to punish those non-EU countries that refuse to comply with international tax good governance standards. The EU list will also help to prevent aggressive tax planners from abusing mismatches between the different national systems of member states.