Offshore Property Ownership

Legislation regulating offshore companies has changed for the third time within the past six years.After two punishing increases in 2002 and 2004 that saw Municipal Property Tax (IMI) rates for black-listed companies climb to five per cent of property evaluations (some 10-fold normal assessments), the 2007 Budget introduces a more reasonable charge of one per cent starting in 2008. Many company owners are now breathing a sigh of relief, in the hope that they were finally out of the woods.Let us examine this premise to see where, in fact, offshore companies stand when compared to onshore options.Uplifted evaluationsHistorically, Portugal has had substantially understated Rateable Values (VPT) on property. In fact, when the rules changed in 2004, more than one half of properties accounted for less than one per cent of the tax collected. At the other end of the spectrum, the top one per cent of properties (the newest ones) paid over 30 per cent of real estate levies!The Property Tax Reform Act of 2004 changed the method of calculation and a new “objective” five-point formula was introduced based on 1) size, 2) location, 3) type of usage, 4) age, and 5) quality of construction. Any property transfer now triggers a re-evaluation of the rateable value. In the meantime, the Finanças has already made substantial progress in new appraisals with the balance due for completion in the next few years.Needless to say, an ever-growing percentage of properties will pay their rates based on these new uplifted appraisals so that any underlying increase will inevitably magnify the tax owed.Corporate taxA second punitive component against offshores was also introduced in 2002 and still remains in force. Black-listed companies must pay annual corporate tax (IRC) based on “deemed” income equal to 1/15 of the rateable value of the property.Since new VPT purports to be on average at 80-90 per cent of market value, such an IRC assessment will look something like this:VPT = €350€350,000 ÷ 1/15 = €23,333X 25% = €5,833Based on the same assumptions, annual IMI property rates will cost an additional 3,500 euros for a total annual assessment of 9,333 euros. Add mandatory fiscal representation and IRC declaration costs and annual fiscal compliance costs total almost 10,000 euros.Onshore options based on the same assumptions would only have annual assessments of less than 2,000 euros.In summary, even with the reduction of offshore rates from five per cent to one per cent an offshore company will still pay five times the annual taxes as compared to onshore options starting in 2008.Market perceptionsIt should not come as a surprise that offshore has become a four-letter word in recent years. Property buyers are leery of offshore companies, whether black-listed or white-listed, under the justifiable perception that they want to avoid buying someone else’s problem. However, if offshore companies are moved to Portuguese nominee companies, capital gains tax rates drop two and a half-fold (10 per cent as compared to 25 per cent), potentially saving many thousands of euros at the time of sale. Buyers also achieve similar savings in transfer tax and stamp duty, creating a win-win situation.ConclusionIt is important to go back to our starting point: legislation regarding offshore companies has changed three times since 2002. By any standard, such volatility constitutes a precarious basis for making any long-term decision.In addition to substantial tax savings and a positive perception at the point of sale, re-domiciliation of your offshore company to Portugal embraces a stable, mainstream solution sanctioned by law. Rather than taking evasive measures, your strategy will be based on a fully compliant answer that allows you to pay the legal minimum.