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Capital Gains Tax

20 Monday Sep 2021

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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.

Tax authorities simplify IRS payments IRS in instalments

20 Thursday Aug 2020

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With the Tax and Customs Authority (“AT”) asking taxpayers to remain at home by using digital channels, the process for IRS payments in instalments has been simplified. If you have an outstanding debt of up to €5,000 and do not owe other taxes, it is possible to divide the amount to be paid in a maximum of 12 instalments. However, when the amount owed is above €5,000 or more than 12 instalments are required, the tax authorities still ask for a guarantee.

US Expats: Tax basics when living abroad

17 Monday Aug 2020

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Tax planning is an essential part of preparing to move abroad. You will continue to have reporting obligations and possible tax liabilities in the States based on your US nationality, in addition to the new requirements founded on fiscal residency in Portugal. As always, the IRS applies harsh penalties for non-compliance. The following is an overview of some of the basics for expats on federal and state taxes as well as estimated payments, penalties and interest. Fortunately, there is a bilateral tax treaty designed to protect you from double taxation. The accord can be used to mitigate or even eliminate assessment in the States while taking advantage of Portugal’s most favorable tax breaks,

Filing a Federal US Tax Return

All US citizens are required to complete an annual return when they live overseas. Other reporting requirements apply to US nationals as well, including FBAR (Foreign Bank and Financial Accounts) and FATCA (the Foreign Account Tax Compliance Act), that are triggered by meeting thresholds in foreign bank accounts and asset holdings.

Filing a State Tax Return

State income tax can also be a problem. Whether you need to file a state tax return depends on the last state where you lived. Some states have more complex residency rules than others, which means that these states may continue to consider you as a resident if in the state you own a property, possess a driver’s license, have bank accounts or an investment portfolio, are a registered voter, keep a mailing address, or have dependents who live in that state.

If you meet these criteria, you may need to submit a state tax return and pay state taxes even if you were absent during the fiscal year. Four of the more sticky states are California, New Mexico, South Carolina and Virginia. On the other hand, seven states charge no state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming.

Most of the other states only require a state tax return when you were actually present in that state during the tax year. If you were, income tax is only due on earnings within the state. Because of the variability in different state requirements, you should confirm your own individual circumstances.

Closing or moving bank accounts, selling a property or changing your driver’s license to another state be steps that can help to sever the ties in your former state of residence.

Estimated Tax Payments

The IRS requires taxpayers to make quarterly estimated tax payments if the following conditions apply:

  • You anticipate at least $1,000 in federal tax in the current tax year after federal withholding tax and refundable credits; and
  • Federal withholding tax and refundable credits do not reach 90% of your current tax liability or are less than the total tax you owed in the previous year.

If you must make estimated payments, the reporting schedule is as follows:

Payment Period                         Due Date

January 1 – March 31                April 15, 2019

April 1 – May 31                       June 17, 2019

June 1 – August 31                    September 16, 2019

September 1 – December 31      January 15, 2020

You will not have to make the 4th quarter payment if you file by January 31 and pay the outstanding balance with your tax return.

Penalties

Two types of sanctions can be charged against expats who fail to pay their estimated taxes: “failure-to-pay” and “failure-to-file”. Submitting your federal tax return after the extended deadline can lead to a punitive “failure-to-file” penalty: 5% each month on the unpaid balance.

This charge is ten times the “failure-to-pay” fine. However, penalties are not allowed to exceed 25% of your total tax bill. If you are unable to pay all your taxes when due, reporting by the deadline is always preferable.

The “failure-to-pay” penalty is less severe: 0.5% monthly of the unpaid balance. “Failure-to-pay” fines begin to accrue on the day after the assessment is due. If you owe both penalties in one month, the maximum cumulative penalty in any given month is capped at 5%.

On the positive side, taxpayers living abroad get an automatic two-month filing extension.  Nevertheless, keep in mind that a filing extension is not an extension on paying outstanding taxes.

 

EU Blacklist: addressing external fiscal challenges

24 Friday Jul 2020

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The list of non-cooperative jurisdictions for tax purposes is a tool to tackle:

  • Tax fraud or evasion;
  • Illegal non-payment or underpayment of obligations;
  • Use of legal means to minimise tax liabilities and money laundering;
  • Concealment of origins of illegally obtained money.

The EU blacklists countries that encourage abusive tax practices that erode member states’ corporate tax revenues. Member states can act together to press for reform. The aim is not to “name and shame” countries but rather to encourage positive change in fiscal legislation and practices through cooperation. Once a jurisdiction is compliant, it can be removed from the European Union’s blacklist.

“NHR” under pressure in France and Portugal

20 Monday Jul 2020

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Beneficiaries of retirement pensions from French sources (excluding public sector retirees) who settled in Portugal before 01 April 2020 may benefit from the Non-Habitual Resident scheme, an attractive tax-free regime for a period of 10 years. This favourable assessment results from a combined application of the double tax treaty concluded between France and Portugal and the  “Non-Habitual Resident” tax regime (“NHR”), established by the Portuguese legislator in 2009.

  • The Franco-Portuguese tax convention provides that Portugal alone has the right to tax French retirement pensions (excluding public pensions) received by a Portuguese resident.
  • Under the “NHR” rules, Portugal grants a total exemption for ten years from taxation of pensions to taxpayers settling in Portugal.

Other Tax Authorities in the European Union are concerned by this situation which they consider to be the subject of aggressive tax competition on the part of Portugal. These criticisms have led to regime changes recently introduced by the 2020 State Budget.

In France, the Tax Authority has expressed its intention to monitor these taxpayers closely. In particular, it considers that a taxpayer who pays no tax in Portugal cannot be classified as a Portuguese fiscal resident within the context of the bilateral tax treaty and therefore cannot benefit from the protection of this agreement. The French Tax Authority intends to rule out the application of the tax treaty and regain its right to tax retirement pensions from French sources.

  • French pension beneficiaries who have declared tax residency in Portugal must indicate that they do not benefit from the protection of the tax treaty. These French nationals must declare their retirement pension in France in addition to other sources of income;
  • or by sending a rectification proposal leading to a tax adjustment in France.

French courts have not yet ruled on the treatment of such “NHR” taxpayers. There is little doubt that the outcome will be controversial between the position of the French tax administration and that of taxpayers. In all in cases, any letters received from the tax authorities should not be left unanswered. The response to be made and the arguments to be put forward (scope of the agreement tax, existence of taxable income provided that it is not fictitious, the effectiveness of the Portuguese residence) must be adapted to each particular situation.

The 2020 Portuguese State Budget entered into force as of 01 April 1 2020. It reformed the tax system of NHR beneficiaries, by introducing, instead of a total exemption, a flat rate assessment at the rate of 10% for a period of 10 years on pensions from foreign sources. More specifically, the 10% rate applies not only to pension income paid as a result of retirement but also to other types of pensions such as income allocated in the event of early retirement, as well as other benefits granted under compulsory social security pension schemes, including amounts paid by the employer on life insurance contracts as well as contributions to pension funds, retirement savings schemes or any complementary Social Security plan. If retirement is also taxable in the source country, Portugal will grant a tax credit which may be deducted from the tax due abroad.

With regard to other types of income (dividends, rental income, etc.), no amendment was introduced in the State Budget. In practice, these changes also concern taxpayers who already benefit from the scheme. “NHR” taxpayers who are resident in Portugal and who have already applied for but who have not yet received a response can choose the application of the new regime to their 2020 income tax return.

How to pay Portuguese Taxes while abroad

12 Friday Jun 2020

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If you live in a foreign country or are travelling when tax payments become due, there are two ways to meet your tax obligations: 1) Direct Debit or 2) Bank Transfer. If you choose to use Direct Debit (Standing Order), you must first domicile the IBAN of the appropriate account with a bank located in a country of the Single Euro Payment Area (SEPA). The SEPA countries are the member states of the European Union, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, Switzerland and the Vatican City State.

This foreign bank account must also be registered and confirmed by the Portuguese Tax Authority (Autoridade Tributária e Aduaneira). You must record the account on the Portal das Finanças and send the original of the Entitlement Certificate to the Directorate of Taxpayers Registration to the following address:

  •             Direção de Serviços de Registo de Contribuintes (DSRC)
  •             Avenida João XXI, N.º 76 – 6.º
  •             1049-065 Lisboa, Portugal

Direct Debit payments do not incur any costs as opposed to international bank transfers that do. If you are paying via a bank transfer, provide your bank with the information below so that the bank can forward the essential information to the “AT”:

  • TIN: 600 084 779
  • Name of the creditor: Autoridade Tributária e Aduaneira
  • Bank account number: 83 69 27
  • IBAN: PT50 0781 0019 00000008369 27
  • Bank name: Agência de Gestão da Tesouraria e da Dívida Pública – IGCP, E.P.E.
  • Swift code: IGCPPTPL
  • Your tax identification number (“NIF”) contained in the payment document
  • Reference for payment: Each reference corresponds to a specific number for payment, which is set out in the document.

Please note: Each bank transfer requires its own documentation as opposed to Standing Orders that recur on a regular basis. The payment should be made at least 2 working days before the deadline.

Paying your Portuguese Property Tax (IMI)

To pay directly from your Portuguese bank account, follow these steps:

  • Open and log onto your Portuguese bank account;
  • Click on Payments;
  • Click on State – Pay to the State;
  • Enter the 15 digits of the Reference Number from the bottom left side of invoice;
  • Enter the Amount in Euros;
  • Enter 9 digits of the Fiscal Number (“NIB”) from the top left;
  • Click Next;
  • Verify the information and Pay;
  • Print your Receipt.

To pay from a foreign bank account:

Make a transfer from your overseas bank with the following information:

  • Your Portuguese fiscal number (“NIF”)
  • “Referencia para Pagamento” – the reference number on your bill

To the following account:

  • Creditor´s name:               Autoridade Tributaria e Aduaneira
  •       Bank account number:      83 69 27
  •       IBAN:                               PT500 781 00190 000000836927
  •       Bank name:                       Institudo de Gestão da Tesouraria e do Credito Publico
  •       SWIFT Code:                    IGCPPTPL

For further information, contact:

Centro de Atendimento Telefónico (CAT) of the “AT” (Autoridade Tributária e Aduaneira), through the number +351 217 206 707, every working day from 9H00 to 19H00 or contact the electronic service (e-balcão) on the Finanças Portal.

Tax exemptions for non-habitual residents amount to €548 million in 2018

09 Thursday Jan 2020

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The value of tax benefits to non-habitual residents keeps growing according to the “Tribunal de Contas” (National Audit Office). In 2018, there were €548 million in NHR exemptions granted to foreign pensioners. Nevertheless, this apparent tax giveaway would have never existed if the NHR regime had not attracted these foreigners to Portugal in the first place. For example, these pensioners paid almost €80 million to the state in Individual Income Tax (“IRS “) on non-exempt income. In addition, there are IMT, IMI and VAT levies which the Government collects above and beyond the scope of the Non-Habitual Residency scheme.

Tax dispute resolution to follow EU directive

08 Monday Jul 2019

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Settling cross-border tax conflicts within the European Union will follow new guidelines that entered into legislation as of 01 July as announced by the EU Commission. According to a recent  directive, taxpayers confronted with double tax disagreements within the EU that arise from differing interpretations of bilateral tax treaties can initiate a joint agreement procedure, leading countries to either settle the issues or accept a arbitration made by an independent advisory committee. The criteria applies to income or capital earned on or after 01 January 2018.

EU removes three countries from its tax haven blacklist

03 Monday Jun 2019

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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.