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.
---------------------------
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.
