Offshore, onshore - does it really matter?
Is corporate ownership for you?
Buying and owning a property in your own name or via a corporate entity is a question you may be faced with if you are looking at purchasing high priced properties, generally speaking €1,000,000 and over, in or around the Quinta do Lago or Vale do Lobo areas of the Algarve. There are pros and cons for both options. Below we deal with buying property via a corporate entity or offshore ownership as it is also called.
What is corporate/offshore ownership?
Corporate/offshore ownership is where the property owners own shares within a company which, in turn, is the registered owner of the property.
When the property is sold, the shares are sold through a share purchase agreement. The company remains the owner of the property and the buyers become the new shareholders.
Despite rumours to the contrary, anyone holding a property through a corporate structure is normally an honest professional, who uses these corporate structures for the ease, flexibility and speed that they lend to personal asset management, as well as to avoid some of the costs and benefit from certain tax deductions.
What are the benefits?
Owning a property through an offshore company is often an advantage when you’re selling, as the sale can be carried out much more easily, quickly and cheaply and it may even help to increase the asking price. When selling a property held offshore the process simply involves transferring ownership of the company shares to the buyer. The transfer can be conducted in English through a share purchase agreement. This also avoids the lengthy and protracted procedures which are necessary to register a title in Portugal, resulting in lower legal fees.
When the property is sold the transfer tax, notary and registration fees are not applicable - this only applies to white listed corporations only.
Capital gains tax is not paid in Portugal on the profit of a sold property through corporate ownership. The capital gains made will be subject to where the corporation is domiciled. However, it is likely that there is a “locked in” capital gains tax liability because the property is a company asset which is likely to have increased in value. If the company is ever called upon to sell that asset out of the company to a third party they are likely to face this liability (which in practice is payable by the underlying owners of the shares). There is a settled market here in the Algarve, and the intention is (and always has been) that properties in corporate ownership remain in corporate ownership. In other words the “locked in” capital gains tax liability should never materialise.
Owners of offshore property can benefit from a degree of anonymity although this benefit is now substantially reduced due to new legislation implemented in 2017. This legislation approved the Regime of the Effective Beneficiary's Central Register, in an effort to support the prevention of the use of the financial system for the purpose of money laundering or financing of terrorism.
Under Portuguese law when the owner of a property dies there is forced heirship to one’s spouse and children. Thus individuals cannot choose whom they wish to receive their estate upon death. Through a corporate structure inheritance laws are applicable where the corporation is domiciled.
White or black?
It is important to understand the difference between companies domiciled in a white list jurisdiction (e.g. Malta, Delaware) and those in a black list jurisdiction (e.g. Cayman Islands). In a nutshell, white list offshores do not suffer from penal taxes, black list offshores do.
A simple example of this is IMI, yearly property tax. A white list offshore property in Loulé will currently pay 0.4% of its rateable value in IMI. The same property in a black list jurisdiction will pay 15%. This is a penal tax which is designed to discourage ownership within black listed jurisdictions.
The two most widely used white jurisdictions are USA (Delaware) and Malta. Neither are considered fiscally privileged by the Portuguese government. They have flexible and well established legal systems, uncomplicated corporate compliance requirements and have re-domiciliation legislation in place. Both jurisdictions are relatively inexpensive, but because the statutory compliance requirements are greater in Malta than Delaware, the administration of a Maltese company is slightly more expensive than Delaware.
There is a cost involved to set up the company and also annual fees (although these are potentially less than the possible savings). The cost varies according to who establishes the company and where it’s incorporated, but there’s usually a set-up fee of between €1,050 and €3,240 plus an annual charge of €800 to €2,450 for administration fees and taxes.
Mortgages for an offshore property are difficult to obtain.
Just like Marmite, offshore property ownership is not for everyone, but some people love it. In some cases owning an offshore property can give large fiscal benefits, but it is not for everyone. Always seek expert legal advice before purchasing an offshore property, and ensure that the offshore company is the correct choice for your personal circumstances.
Below is an example of costs involved in buying, owning and selling a white listed offshore property valued at €1,000,000 as a non resident of Portugal:
|Privately owned property||White listed offshore property|
|Property purchase costs||8.2%||1.4%|
|Legal fees at purchase & sale||2.5%||None in Portugal|
|Annual running costs of company||None||€800 - €2,450|
|Annual property tax - IMI||0.2% - 0.5%||0.2% - 0.5%|
|Annual fiscal representation||€240||€425|