Taxation on Real Estate in Portugal 2002

INTRODUCTION

The main reason why properties are not held by individuals in Portugal is to avoid Real Estate Transfer Tax at 10%. To overcome this problem many properties purchased by ex pats are held in a company usually resident in the Channel Islands, Isle of Man or Gibraltar so that what is purchased are shares in a company which in turn owns the property.

LATEST POSITION

Following a decision in the Inland Revenue's favour in the House of Lords in the case of Regina vs. Dimsey and Allen in October 2001, the Revenue are now able to contend that if an individual owns shares in an off shore company and that company owns a property which the individuals used he would be regarded as a shadow director of that company and accordingly was liable to be charged tax on the benefit for occupying that property.

The taxable benefit for off shore companies is the annual value, i.e. what the property would be let for on the open market. This is normally taken as 8% of the capital value. Therefore on a one million pound property that is equivalent of a rent of £80,000 per annum. The effect of an £80,000 per annum benefit in kind is a tax bill in the United Kingdom of £32,000 per annum.

POSSIBLE SOLUTIONS

New Properties

If one is about to buy a property then it is suggested that it should be organised in one of three possible ways to give some defence against the Revenue's claims.

1. Have the offshore company owned by a Trust of which the individual is a beneficiary. He will enjoy the benefit of the property by virtue of him being a beneficiary under the Trust rather than a shadow director.

2. Arrange for the property to be held by the company as a nominee for the individual.

3. If the property is being purchased by way of a mortgage interest payments made by the shareholder may exceed the deemed rent, therefore there would be no benefit in kind.

Depending upon the facts then route 2 is probably the best solution.


Existing Structures

Whilst it is relatively easy to put in place a structure which gives a reasonable measure of certainty in avoiding any benefit in kind it is far more difficult to amend an existing structure. If for example a person has had the use of a property held in an off shore company over many years it is not simply a matter of unwinding the existing structure because that may give rise to a significant capital gain. It may very well be a fire fighting exercise has to take place in order to establish what the individual has paid out over the years for improvements and expenses etc. to the property since the off shore company itself has no sources of income other than the money that has been injected by the individual to meet the property costs. Examination of all these figures might reveal that significant amounts have been spent which would reduce the incidence of a capital gain to a point whereby the gain is volunteered because a one off charge to tax is preferable to an annually recurring charge to tax. Much will depend upon the investigation. There is of course the question of what happens to years prior to the October 2001 favourable decision for the Revenue and much will depend upon the paperwork already in existence to determine whether it is strong enough to resist any Revenue arguments regarding earlier years.

In other words no hard and fast rules can be given to overcome this problem as each case will have to be examined on its merits.

HOW WOULD THEY KNOW? - AN ALTERNATIVE ROUTE?

All too often I suspect tax planning with off shore companies has taken place on the basis that "nobody will ever find out". Whilst I cannot condone such measures, ten years ago it was extremely difficult to outline the potential dangers since the Inland Revenue were seemingly incapable of finding out. However, due to new technology, times have changed. The Revenue are now able to obtain information from a variety of sources by using existing IT technology. Apparently airlines have records of every seat on every flight into and out of the United Kingdom showing passenger details and the same information is available for travellers on the ferries and rail users on the Channel Tunnel. This information is normally available to the security services but has been extended to others because of money laundering. Therefore in worthwhile cases the Revenue can obtain information. With the present spotlight that tax havens have come under in the last 12 months it is conceivable that before very long the true identity of who owns off shore companies might also be open to the Revenue gaze and therefore the defence of "who will know" will be a thing of the past.

CONCLUSION

If you would like to discuss any aspects of this abbreviated paper please either telephone me on +44 (0)1245 266831 or email Gary@spencerfellows.co.uk