Companies owning Property in Portugal
find Malta break from new Portuguese tax laws

For more than 30 years, foreigners buying property in Portugal would have normally done so using an offshore company, usually registered in the Channel Islands, Isle of Man or Gibraltar and it is estimated that at least 80% of foreign owned properties in Portugal have been purchased through offshore structures[1]. It is further estimated that there are about 200,000 British owners who have purchased property in Portugal, apart from the considerable number of persons of other nationalities, most notably Germans and Austrians. Until recently, these property owners in Portugal had little to worry about aside from local taxes but this year most property owners have spent the summer with their lawyers and tax advisors, devising ways and means to avoid the new tax bombshell that the Portuguese authorities have fired at offshore companies owning real estate in Portugal.

New legislation passed by Parliament in Portugal on July 30, 2003[2] and which came into effect on January 1, 2004 has targeted the corporate ownership of Portuguese real estate, in those cases where the company is registered in what the Portuguese consider to be offshore tax havens. A list of 83 ‘undesireable’ countries has been published by the Ministry of Finance of Portugal , including Gibraltar, Jersey, Guernsey, the British Virgin Islands, the Cayman Islands and the Isle of Man. The legislation rules out companies registered in Delaware (USA), Malta or New Zealand so that companies registered in these three jurisdictions are not effected by the new tax legislation.

All other offshore companies which continue to own real estate in Portugal after January 1, 2004 will suffer considerable taxation consequences. The first direct consequence will be that introduced by a new tax (IMI[3]) which will replace the existing Contribuição Autarquica and will effectively impose an annual charge of 5% of the value of the property, which means that in twenty years the owner would have paid the entire value of the property in tax. In addition, the new law assumes automatically that such an offshore-owned property is in effect being rented out (even if it is not) resulting in a further charge of 1/15th of the rateable value.

To avoid the tax, owners can transfer the property from the offshore structure to their personal names; however this would incur a hefty transfer tax of 6% on the value of the house as well as capital gains tax of 25% on the “profit” made by the offshore company from the sale, although in reality no gain would have been made by the beneficial owner. This would then be a very expensive solution.

The cheaper alternative would appear to be the re-domiciliation of these property-owning offshore companies to Malta, since Malta has a double tax treaty with Portugal and therefore has been considered to be an acceptable jurisdiction to the Portuguese authorities. In reality, Portugal could not have listed Malta as being an undesirable jurisdiction since Malta has already signed the accession treaty with the European Union and will become a full member state on May 1, 2004. Maltese companies will therefore become European companies on that date and will be able to trade freely within the European Union.

Recent changes to the law of Malta have introduced the concept of redomiciliation of foreign companies to Malta. In terms of the new amendments to the Companies Act 1995[4] and in terms of a Legal Notice issued under the provisions of the Act,[5], companies that are incorporated outside of Malta may change their domicile to Malta under certain terms and conditions. Foreign companies that wish to register in Malta now need not wind-up their foreign business and re-incorporate in Malta, but can instead move their domicile to Malta while the former company set-up remains in existence. The Maltese Company Registry will issue a Certificate of Continuation to the redomiciled company which actually proves to the Portuguese authorities that the property-owing company remains the same one (therefore avoiding capital gains tax and transfer tax) but is now domiciled in Malta and therefore not subject to the new Portuguese taxation law.

An added advantage is that foreign companies which redomicile to Malta can do so under the structure of the existing legislation for International Holding Companies[6][7] which means that they can benefit from the very attractive tax advantages offered to this type of company by the Maltese Inland Revenue. A major advantage is that whereas these companies pay corporate tax at the established rate of 35% on world-wide profits, the non-resident beneficial owner receives a refund of tax exactly equal to the tax paid by the company, thus reducing the effective tax rate to zero. Moreover, Maltese International Holding Companies are not subject to Capital Gains Tax or withholding tax once the shares of the company (and consequently the ownership of the property) are sold on to others.

Moreover the basic cost for redomiciling an offshore company to Malta is not as expensive as it appears and the basic transfer of the company to Malta can usually be done for under a thousand British pounds (€ 1,400). Maltese law also allows companies that are licensed by the Malta Financial Services Authority to provide nominee shareholding and directorial services to the beneficial owners of an International Trading Company which guarantees complete secrecy and anonymity to the beneficial owner of the company.

The new Portuguese law took effect on the 1st January, 2004. Property owners who have not taken steps to redomicile their company to Malta already, will have to pay the Portuguese tax for the first year. However the tax for subsequent years will be avoided if the offshore company is redomiciled to Malta during 2004. It usually takes about seven days from the receipt of the necessary documents to actually obtain the Certificate of Continuation.

[1] The Sunday Times, London UK – September 28, 2003

[2] Reforma do Patrimonio

[3] Imposto Municipal sobre Imóveis

[4] Laws of Malta, Chapter 386

[5] L.N. 344/2002

[6] Income Tax Act, Laws of Malta, Chapter 123.

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Recent changes to Portuguese tax rules have made it increasingly attractive to redomicile companies holding property in Portugal out of some jurisdictions and into Malta - Preferably before 1/1/2004.

The Continuation of Companies Regulations, enacted in late 2002 have made it possible to redomicile companies into Malta from a number of jurisdictions including EU member states, Jersey, Guernsey, Gibraltar, the British Virgin Islands, the Isle of Man and others.

The Regulations were seldom used initially, until recent amendments to Portuguese property tax rules have made them probably the most prominent novelty in Maltese company law of recent.

Over the past few weeks and months leading up to the end of the year Maltese lawyers and corporate services providers have been inundated with inquiries and requests from their colleagues in the UK, Jersey, Gibraltar, BVI (and the Isle of Man since the enactment of continuation provisions on the 19/12/2003) to redomicile companies holding property in Portugal out of these jurisdictions and into Malta.

The number of company flightings over the past few weeks has swelled into the tens and even hundreds as pressure mounted incessantly on our Firm's Company Law department and the company registries in Malta and in each of the flighting out jurisdictions - to flight all of these companies to Malta asap.

International Trading Company (Index)   Corporate Requirements

See also:

Double taxation treaties

Holding Companies

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