Types of property ownership

In Portugal there are a few types of ownership possibilities. The most common to own properties are;

1. The property is owned in personal name(s). This is the most common option in Portugal as the property is owned in individual name(s) as a freehold. The property is then easily transferrable to a new owner.
2. Owned by a white listed offshore company (Malta + Delaware)
3. Owned by a black listed offshore company
4. Owned by a Portuguese company, normally an LDA (limited company)

 

With option 1, the IMT purchase taxes are applicable.

Options 2 and 3 are basically anonymous ownerships whereby there is a transfer of shares. The shares own the company, and in turn, the company owns the property. The advantage is of not requiring a payment of the IMT tax and the disadvantage is that an offshore requires a yearly maintenance fee.

Option 4 is become becoming increasingly more common, also has no IMT costs when there are 2 shareholders purchasing the company. This sort of ownership is mostly used for commercial properties (B&B, hotels, etc.), but it is also becoming a more common form of ownership for villas.

• Offshore companies

The following may help to clarify why many owners of property in the Algarve continue to purchase their property through a corporate structure. A common method of purchasing Portuguese property was to purchase through an Offshore Company, often set up in Gibraltar or the Channel Islands, jurisdictions which the Portuguese authorities came to define as Tax Haven Offshore Companies.

Purchasing an Offshore company offered a lower rate of SISA tax (now known as IMT) and allowed the owners to avoid paying many of the taxes due, including capital gains and inheritance taxes.

The property itself is an asset of the company and purchasers of the property buy the shares of the company. This takes place in the jurisdiction where the company is domiciled and there are benefits in buying and owning property in this manner.

When purchasing an offshore company, the usual searches on the property must be carried out, and most local lawyers are familiar with this type of corporate transaction. A Share Purchase Agreement is drawn up, the deposit paid and a completion date set in the usual manner. The immediate benefits of such a transaction are its simplicity and the documentation is in English.
Since only shares are sold, the company remains the owner of the property and the purchaser becomes the new shareholder, thus saving significantly on tax. This is an accepted practice in Portugal.

In 2003, those Offshore Centres outside of Portugal were classified into ‘Black List’ and ‘White List’ jurisdictions. Black List jurisdictions were usually those offering beneficial tax regimes out of line with White List countries, the intention being to encourage them to fall into line with White List jurisdictions.

Many property-owning companies wished to continue their ownership, but not in black-listed jurisdictions, and remained of the opinion that the benefits of corporate ownership outweighed the disadvantages.

White-listed jurisdictions, offering the possibility for companies to migrate to, were Malta and Delaware. Malta, being a full member of the EU, attracted many companies to re-domicile there. Many companies also transferred to Delaware.

At this point the Portuguese authorities introduced punitive taxes on property bought through Tax Haven Offshore Companies so that it was no longer financially beneficial to purchase in this way. It was meant to discourage the practice, but for those who already own property via this method, it means much higher tax bills.

IMT for purchasing a Tax Haven Offshore Company was increased to 15%, and the annual property tax in Portugal (the IMI) has been increased to 5% per annum. Both of these increases are based on the revalued price of the property. An example on the increase costs on a typical 4 bed Algarve villa, prior to the increase, the previous IMI yearly costs would have been around €750 per annum with the former rate of 2%; now the IMI would be in the region of €3,000 before the price of the property has even been revalued.

In addition to these taxes, the Portuguese tax authorities suspected that Tax Haven Offshore Company owners of property failed to declare rental income. In order to ensure that this no longer occurred, an fixed annual tax charge of 25% has been introduced, payable on a deemed rental income of 1/15th of the rateable value of the property, on all Tax Haven Offshore Company owned properties (as they are all deemed to be rented, whether or not they actually are). It is up to the Tax Haven Offshore Company to prove that the property is not being rented and is therefore not liable to this levy.

The cost of utilities connected to the Tax Haven Offshore Company properties, maintenance bills and municipal tax can be deducted against the 1/15th figure, provided that the bills are properly documented and in the name of the limited company. Tax is then payable by the company at the flat rate of 25% on the balance.

The company can be re-domiciled to another country with a more favourable taxing regime (such as Malta or the USA, which are not considered Tax Haven Offshore Companies in Portugal) thus avoiding these taxes Alternatively, the property can be transferred back into the owner’s personal name. Advice should be taken in either case.

Currently, buyers and sellers are confident owning their properties in white-listed jurisdictions. It is normal to see properties for sale in Portugal described as owned in Malta or Delaware and completely acceptable for them to continue to be owned in such a manner with its real advantages.

You should consider this carefully when you find a property that you like that is owned by a company based in these countries.