By: DENNIS SWING GREENE
International Fiscal Consultant for euroFINESCO
eurofinesco@portugalresident.com
WHEN MAKING a multiple-unit purchase of holiday let property in Portugal, tax planning is a must in a truly profitable investment strategy.
On the one hand, the combination of high loan-to-value ratios and healthy rental guarantees can make such leveraged investments low risk and largely self-funding. In addition, appreciation potential in well-located vacation resorts is likely to remain strong in the coming years. However, without proper planning, the spectre of taxation could wipe out a significant portion of profits. Rents will be subject to income tax, and purchase and sale of real estate faces Property Transfer Tax, Stamp Duty as well as Capital Gains Tax (CGT).
Portugal has an array of assessments at each phase of investment and non-residents will have to face the taxman again in their home jurisdiction, often at even higher rates.
Using companies
When non-residents invest in Portugal, they have to reckon with compliance obligations in two jurisdictions, both in Portugal and at home. While tax treaties protect against double taxation, the investor usually pays the higher of the two assessments.
Using Portuguese corporate structures, rather than investing directly as an individual, can help avoid the complication of dual jurisdiction involvement while opening up the best case rather than being stuck with the worst case scenario.
Planning the exit strategy
In order to avoid undesirable results, planning means beginning with the end. Let’s examine the exit strategy. In individually owned properties, non-residents will eventually pay 25 per cent CGT assessment in Portugal on the full net gain when eventually sold.
After a foreign tax credit, they may subsequently face a further levy in the home jurisdiction.
By using a Portuguese Nominee Company to hold each property, the CGT assessment on any future share transfers is only a flat 10 per cent. In addition, once the company owns the property, there is no Transfer Tax or Stamp Duty on the transfer of the shares. This creates a win-win situation for buyer and seller with quite substantial savings for both at minimal cost.
It’s not just the seller who saves. The new buyer achieves substantial tax relief for a win-win situation.
Shareholding can easily be changed at any point with a surprising degree of confidentiality so that careful planning could mitigate tax obligations upon eventual repatriation of funds.
Minimising rental income tax
If the various non-trading Nominee Companies with their respective properties are held via a commercial Property Administration Company, this Portuguese “Limitada” can manage the property lets under the “Simplified Regime” with only a five per cent net tax liability.
In the future, this Company could also provide a flexible yet tax efficient tool for ongoing property investments that could help to defer, reduce or even eventually avoid altogether numerous forms of taxation both in Portugal and abroad.
These factors add up to an overall increase in after-tax profits that potentially could accumulate with additional units. For the multiple-unit investor, a cost-benefit analysis of the strategy is unquestionably worth serious consideration.
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