Portugal has long been a popular choice for people, particularly from the colder climates of Northern Europe, looking to purchase a holiday home or a retirement home. Traditionally they have done so using offshore companies, mainly to avoid estate taxes. Unfortunately Portugal, along with some other countries, has made this route considerably less attractive by the imposition of swingeing tax penalties on offshore companies. The magnitude of these penalties can be seen from the examples below,

Real Estate Transfer Tax

This tax is paid by the purchaser, at progressive rates of up to 6% (5% for rural property) on property used exclusively for residential purposes, on the higher of the registered value or the purchase price agreed between the parties. This is usually the purchase price.

For offshore companies this rate has been increased to 15%.

Municipal Property Tax

This is a tax, at a rate set annually, levied by the local authority and based on the registered value. The rates are different for urban and rural properties and the total is typically about 1.6%.

For offshore companies the rate has been increased to 5%

Tax on a Deemed Rental Income

Where a property is owned by an offshore company, it is treated as having produced a rental income, which is charged to income tax, of one-fifteenth of the registered value.

There are other taxes, which have to be taken into account and these are,

Income tax

Where a property is rented out, the rent is charged to income tax and on a sale 50% of the chargeable capital gain is subject to Portuguese income tax.

Stamp duty

There is a stamp duty of 0.8% on the transfer of real estate.

Donations tax

Gifts to a spouse, antecedent or descendant are tax- free but other donations attract a tax of 10%

A Solution

Fortunately there are territories, which are not on the Portuguese black list and by purchasing a property in Portugal through a properly structured corporate vehicle incorporated in one of these locations, it is possible to avoid the penalties on offshore companies. These arrangements may bring with them other benefits such as,

The ability to sell the property in the future without the buyer having to pay Real Estate Transfer tax,

Avoidance of Portuguese capital gains tax on re-sale,

Avoidance of donations tax or inheritance tax

Avoidance of the deemed benefit provisions in U.K. law.

As taxes and the manner in which they are applied change frequently specialist advice should always be taken before entering into any arrangements