Permutas. Property Swaps

Transcription

1 eurofinesco ebook nº15 Permutas or Property Swaps by Dennis Swing Greene PORTUGAL

2 Ficha Técnica: 6ª Edição: eurofinesco ebook nº15 Permutas or Property Swaps Autor: Dennis Swing Greene Designer: Maria de São José Belchior Horta Distribuição: eurofinesco s.a. Tiragem: 100 exemplares Executado: April 2018 Reservados todos os direitos. Esta publicação não pode ser reproduzida no todo ou em parte, por qualquer processo, sem prévia autorização por escrito do autor. COPYRIGHT ALL RIGHTS RESERVED Violators will be prosecuted to the full extent of the law eurofinesco s.a. HEADQUARTERS Lisbon Branch Rua do Sol, 4 Rua António Maria Cardoso, 15, 4ºD GUIA (Algarve) LISBOA (Chiado) tel: tel: fax: fax: Madeira Branch Internet Rua do Aljube, 61, 2º Dtº info@eurofinesco.com FUNCHAL (Sé) tel: Portugal fax: mobile:

3 Table of Contents Beyond Advising on Property Swaps in Portugal Introduction ) Advantages of a Permuta ) Tax Implications ) Swapping Property Company Shares ) Portuguese Nominee Companies ) Permutas within the EU ) A Short-Term Swap Conclusion other ebooks from eurofinesco

4 FISCAL & EXPATRIATE SERVICES from eurofinesco We are a full service company, helping expatriates to make the most of their life in Portugal since Whether it be meeting obligations in a new land, maximizing opportunities in a smooth transition from the past, or financial and estate planning for the future, eurofinesco is here to guide you, keep you compliant and prepare you to meet your goals. TAX CONSULTANCY FISCAL REPRESENTATION PORTUGUESE NOMINEE COMPANIES CROSS BORDER ESTATE PLANNING SMALL BUSINESS FORMATION DOCUMENTATION 4

5 Beyond Questions on Property Swaps At eurofinesco, we take pride in being a frontrunner in fiscal and expatriate services in Portugal, playing a leading role in interpreting Portuguese fiscal legislation as plain English for the foreign resident community since PORTUGUESE TAXATION IRS - Individual Income Tax Returns IRC - Tax Preparation for Portuguese Nominee Companies as well as Non-Resident Companies Fiscal Residency Transitions to Portugal Fiscal Representation for Non-Resident Individuals Fiscal Representation for Companies INTERNATIONAL TAX ISSUES Bilateral Tax Treaties International Tax Reconciliation Compliance Issues PERSONAL TAX PREPARATION The Portuguese tax system offers surprising opportunities to the foreign resident. When properly prepared, Portugal can prove to be a tax haven within Europe for you. PORTUGUESE IRS INCOME TAX RETURNS eurofinesco specializes in helping foreign nationals S both residents and Non-Residents S by preparing their annual Portuguese IRS Income Tax Returns. NOMINEE COMPANIES FOR PORTUGUESE PROPERTY 5

6 Meeting basic compulsory compliance commitments; Liaison between Finanças and Company Owners. Resourcing information to Owners; FISCAL REPRESENTATION Protecting your Valuable Investment Meeting Compliance Requirements Resourcing Key Information Liaison with Finanças Personalised Service Payment Facility Plain English DOCUMENTATION We can assist you by cutting through the bureaucracy: Residências Portuguese Wills Driving Licences Rates Exemptions Fiscal Numbers Medical Cards SMALL BUSINESS FORMATION We can help expatriates launch new businesses in Portugal: Choosing the right structure Accountancy Services Social Security & VAT 6

7 Introduction Until the Credit Bubble burst in 2008, home buyers were easily lead into the delusion that banks could be their friends. Cheap money and perfunctory credit checks offered by mortgage brokers seemed like the road to prosperity. Today, as the western world struggles to recover from hangover from that economic stupor, financial institutions are more likely perceived as part of the problem, not the solution. The reality is that the banks coffers are now empty. What little lending takes place goes to high-yielding personal and credit card loans, not low interest, long-term mortgages. Without mortgage money available, the property market has fallen stagnant. While owners may be anxious to become buyers or sellers again, until the first domino falls, everyone remains stuck in place. Few doubt that we live in a globalised world. The good old days of self-sufficiency - and all of its limitations - are long gone and, despite whatever nostalgia we may occasionally feel, there is no turning back. However, interdependence does not necessarily imply loss of self-reliance. Counting on ourselves and doing what is appropriate for ourselves will always be a constant to achieve success, no matter what the endeavour. If easy money from institutions no longer works, relying on our own initiative to achieve goals will likely prove to be the most effective answer. 7

8 With this background, we suggest a fresh look at the ancient practice of barter - in this case, property exchanges - as an alternative to conventional buying and selling of villas and apartments as a means of sidestepping current difficulties. Interestingly, these swaps have surprising tax implications under Portuguese legislation that can make it appealing to turn theory into reality. Permutas In Portuguese, this barter exchange is called a permuta. Rather than buying a property for money, two property owners swap their respective homes, normally making up any difference in value with cash. Just like a normal sale, a permuta is accomplished by public deed with equal recognition under the law to other forms of conveyance. Once a swap is defined, the only differential to be made up is between the net values of the properties. The issue is no longer A + B, but rather A - B, turning a large problem into a considerably smaller one. Direct property exchange offers a way around the institutional mortgage trap. If no banks or middlemen need be involved, the transaction can be simpler, cheaper and potentially more beneficial to both parties. Exchange does not have to stop with the bricks and mortar. Furnishing and fittings may also be appropriate for swapping, depending on requirements. The important thing is that it is now a matter between consenting individuals without third party interference. 8

9 1. Advantages of a Permuta In Portugal, barter exchange for property can present attractive advantages as well as offer favourable tax implications. In addition, a direct deal can meet particular needs of both buyers and sellers not necessarily available in a conventional sale. 1) No Waiting Many property sales are delayed or fall though altogether waiting for a house to sell. With an exchange, the deal proceeds simultaneously. While there are still bureaucratic formalities to sort, they are little different from a conventional sale. However, it is important that correct procedures be followed. It is always vital to do a proper title search to be sure that you get getting what you expect, without any skeletons in the closets. Consult eurofinesco Short S30: Elements of a Title Search 2) Avoiding the Banks By using the equity built up in your home, you can be free to make your own decisions and choose what is best for you. By exchanging what you own outright, you sidestep the need for a mortgage where a bank will dictate conditions. In addition, the final price, once above the legal minimum, is determined solely by the those making the exchange. It is for them to prioritise factors and arrive at the conclusion that best meets their mutual interests. 9

10 3) Let I.T. work for you In the not so distant past, trades and bartering used to require long voyages from place to place. Now, through globalisation and the internet, you can effectively advertise and communicate with potential barterers instantly anywhere in the world. These means of communication provide the opportunity for you to make transactions regardless of location. By using existing Internet Portals, Social Networks and high volume Property Websites, cutting-edge technology is working to find a match to meet mutual interests. 4) Ample Supply and Demand In a stagnant property market, recycling long-standing concepts like barter into innovative solutions is only common sense. There are plenty of potential owners anxious to find the home of their dreams in Portugal. Some will be apartment dwellers looking to upgrade to a villa, others want to downsize into a more manageable property. It is a market where neither supply nor demand are lacking. It is the conventional mortgage method that has collapsed, not people s ambition for change and betterment. A swap can prove to be the perfect solution to break through the stagnation logjam. 10

11 2. Tax Implications Lower or No Assessments a) Determining Values As with any property transaction in Portugal, the legal minimum transactable price is the rateable value ( VPT ). This is the basis for annual IMI Property Rates. If one of the properties is pre- 2004, there may still be a lower evaluation from the former system. Your permuta will trigger a re-appraisal of the VPT which will be used to calculate any tax due. This may occur at the point of sale or several months later. Beyond these restrictions, the buyer and the seller are free to negociate the final value of the exchange. b) Low or no IMT As stated, the final transaction value is based on A - B, not A + B so IMT (Property Transfer Tax) will only be on the difference. Example: Let s swap two homes: one worth 225,000, the other 275,000. Rather than taxing the sum ( 225, ,000 = 500,000), the assessment is on the difference - only 50,000. Since Property Transfer Tax ( IMT ) is progressive and not linear, the tax savings will be even greater. If A = B, there is no IMT. c) Low or no Stamp Duty Stamp Duty on the deed is assessed at the rate of 0.8%, also on the difference of the two values, with the one with the larger amount paying the tax. If the amounts are equal, there is no tax to pay. 11

12 d) Partial or full CGT Exemption As in any property transfer, the Capital Gain is calculated on the difference between the original price in the deed of acquisition adjusted for inflation and the net sales price, reduced by necessary expenditures and capital improvements over the previous 12 years. Rollover Relief is achieved when there is a full re-investment of the proceeds of the sale of the principal residence (as registered with Finanças). In the case of a permuta, the sales price will be of equal value to both: either a) the higher property value or b) the lower property value plus the cash difference. The swap simultaneously accomplishes both the sale of the former principal residence and the purchase of the new one. In other words, since both are of equal value ( A = B ), there is a full reinvestment of the proceeds and therefore full exemption from Capital Gains Tax is achieved by both parties. If one of the parties receives a cash balance to compensate any divergence in underlying property values, this difference will be seen as a gain and will be taxable on a pro rata basis. If a loan is needed to finance the deal or there is a mortgage to repay, the amount outstanding or borrowed will not count towards the reinvestment, unbalancing the equation and creating a capital gains tax liability. Conversely, any loan repaid upon the sale will reduce the amount actually received for the property. Needless to say, with many potential variables in play, careful consideration must be applied to any eventual Capital Gains Tax liabilities to avoid nasty surprises. As always in such matters, prior professional advice is strongly advised. 12

13 3. Swapping Shares of Property Companies Property Companies - both onshore and offshore - have been popular for years as a means to hold real property. In a nutshell, a property company turns immoveable property into moveable property, substantially altering how transactions are taxed. Because the shares change hands and not the underlying properties owned by the respective company, there should be no IMT (Property Transfer Tax) except under special circumstances, nor should there be levied the customary 0.8% Stamp Duty on the property deed. Capital Gains on share swaps is calculated in the same way as direct property exchanges - only on the net difference between the respective values of the two sets of shares ( A - B ) - as long as there are no latent capital gains liabilities to sort as detailed in the IRS Tax Code. The gain is then taxed at a flat 10%. This is an autonomous assessment and avoids the top-slicing effect common with many forms of supplementary income. Needless to say, if the share values are identical, there will be no gain and no CGT. For Portuguese Nominee Companies, this is an excellent solution and offers a similar array of benefits as we have seen for individuals. Offshore Companies Unfortunately, this procedure can pose a serious problem for many Offshore Companies. Historically, upon formation, it was common practice to set share capital of most Offshore Companies at nominal values to keep local jurisdiction Stamp Duty to a minimum. Had the asset worth been reflected at the time in the share value, 13

14 thousands of Euros more tax would have been added to the cost of the transaction, turning the solution expensive and commercially unattractive. Years later, if an Offshore Company were to exchange shares under Portuguese law, they would be caught up in the conditions limiting capital gains exemptions. If they exchange shares outside of Portugal, they will be operating under another set of rules and loose the Portuguese tax breaks that we are presenting. Redomiciliation One solution is first to move your Offshore Company to Portugal prior to the exchange. This is called Redomiciliation. When an Offshore (non-resident) company moves to Portugal, there is no taxation on the transfer. This is because it is the Company Headquarters that is transferred, not the property, thereby avoiding any direct conveyance of the Company s assets. As part of Company registration in Portugal, share capital needs to be recorded and should now show the current rather than the historical value of the Company. The Company s share capital should reflect the market value of the underlying property. This means that there is usually a significant uplift in the basis for eventual Capital Gains Tax assessment and many historical CGT problems can be neutralised. Besides making an exchange viable, Redomiciliation can resolve many other problems intrinsic to Offshore Companies ownership. As many have come to realise, most of these Offshore structures have outlived their usefulness. Company owners should look to embrace fully compliant solutions in their legitimate quest to mitigate tax liabilities. 14

15 4. Portuguese Nominee Companies A Portuguese Nominee Company may well prove to be an appropriate vehicle for acquiring property in Portugal. This form of home ownership offers many of the advantages that property buyers once sought in Offshore Property Companies but achieves these objectives in a compliant, mainstream fashion. This type of non-trading company can provide stability and attractive benefits, meeting many potential needs. A Fully Compliant Structure In fact, Nominee Companies ( Sociedades Civis ) have existed in Portuguese statute law since the 19 th century and have been embraced in subsequent legislative reforms over the past 150 years. Therefore, they are fully compliant and are not subject to any of the punitive laws that have made Offshore Property Companies a pariah: no tax on deemed income, no punitive property tax ( IMI ). In fact, the simplicity of this form of company makes this structure easy and inexpensive to operate. Reduced CGT Rates Capital Gains Tax on the sale of a Nominee Company is only 10%, as compared to 25% that is assessed to non-resident companies. Non-resident individuals also pay 25% while residents usually now pay a similar amount if they are ineligible for rollover relief. (Non-Residents should check tax liabilities as defined in the relevant Double Tax Treaty. Beyond all EU members, most Offshore jurisdictions also have signed Information Sharing Agreements with Portugal.). 15

16 Potential Transfer Tax Exemption The sale of the shares is normally exempt from IMT. Buyers may potentially save tens of thousands of euros, thus making Nominee Company acquisition highly desirable for both buyers and sellers. Expenses Never Expire Unlike direct ownership where capital improvements no longer can be offset against Capital Gains after five years, any capital invested into your Nominee Company is always reflected in the Company s share value or as shareholders loans. This is particularly important when major remodelling is contemplated. Ease of Transfer When the Company is eventually sold, only a simple Share Sale Deed is required. The property remains securely within the company and there is nothing to trigger bureaucratic problems and other extra expense often associated with property transfers. No Taxation on Redomiciliation When an Offshore or a non-resident company moves to Portugal, there is no Capital Gains Tax or Property Transfer Tax upon redomiciliation. This is because it is the Company Headquarters that moves, not the property, thereby avoiding any transfer of the Company s assets. Uplifted Basis for CGT When done correctly, redomiciling companies can revalue their shares to reflect the underlying market value of the company s property. This means that there is usually a significant uplift in the basis for eventual CGT assessment and many historical problems can be neutralised. A sizable problem can be transformed into a very manageable inconvenience. 16

17 5. Permutas within the EU On Swaps of real properties ( permutas ), when realised between two Portuguese properties, assessment on the transaction is based on the difference in values, often resulting in substantial tax savings. Therefore, the question arises: What happens when a property exchange is on an intra-community basis within the EU? Let us analyse the question step-by-step based on the example of a swap of Portuguese and British properties: 1) The Portuguese IMT tax code states the this tax is territorial in nature and only applies on property transfers within Portuguese territory. Therefore, Portuguese IMT will not apply to the English property transfer. In the case of the United Kingdom, Stamp Duty will apply only to any transfer of title of the UK property. Therefore, we have two different forms of assessment that would not lend themselves to a possible elimination of double taxation. 2) The Double Taxation Convention between Portugal and the UK applies only to assessment of Income and Capital Gains, not other forms of taxation. 3) In matters of international fiscal law, the principle of Situs is almost universally applied with sovereign jurisdictions reserving the right to assess matters relating to real property within their borders. 17

18 4) Capital Gains Tax on each transaction will start out as an internal matter, with each owner being assessed on the respective gain from the sale of their property. In the event that one of the sellers is a resident of the other country, then that state may also assess the gain after applying the appropriate international tax credit to eliminate double taxation in accordance with the Double Taxation Convention. In summary, we conclude that the EU permuta (swap) will be treated in an identical fashion to an ordinary cash sale for tax purposes. Conclusion Unfortunately, a cross-border approach within the EU loses out on the significant tax advantages found in property swaps within Portugal. 18

19 6. A Short-Term Swap Even if your interest in an exchange may not be permanent, you may find the rewards to be interesting on a temporary basis to resolve certain underlying problems that you may face with your property. Let s look at the following example of a short-term swap: John and Mary bought their home in the hills of the Algarve in Old farmhouses were inexpensive in those days as were labour and materials. After a few plans, a couple of years and almost no receipts, they had their dream home. Twenty years later, their modest investment was worth almost a million euros, most of which was capital gain. As they were getting on in years, they wanted to begin planning for a downsize to a simple bungalow with a small garden. But the prospect of paying almost 200,000 in CGT left them with sleepless nights. Then came the idea of a Short-Term Swap: 1) First, they make an agreement with friends to swap properties that are of similar value; 2) Next, near the end of the fiscal year, they swap homes - on paper only - at the identical value of 1,000,000. Because the swap involves properties of equal worth, there is no IMT and no Stamp Duty - only due on any difference in values. Because both are trading their primary residence, they are still eligible for Rollover Relief on Capital Gains. The permuta means that they both achieve an immediate reinvestment of the proceeds, so the transaction is exempt 19

20 from Capital Gains Tax. Because both own their homes outright with no outstanding debt, the transaction is clean and simple, with no adjustments nor institutional interference. 3) Finally, early in the following year, they swap back, also for equal values of 1,000,000. Once again, no IMT, no Stamp Duty, no Capital Gains Tax. Now both owners have as the base of acquisition of their respective properties the new 1,000,00 value rather than their respective historical purchase prices. Total costs of the double transaction: Disbursements for registrations, notary charges and legal fees: ± 1,500 X 2 per property plus an ad valorum success fee. Conclusion With no outstanding capital gain tax liability on the property, they can now sell for 1,000,000, buy their little bungalow and invest the balance to supplement their retirement income. A happy ending! 20

21 Conclusion Opportunities in Portugal Permutas are just one more example of the many of the unexpected benefits buried in the Portuguese Tax System. You may be surprised to learn that filing a correct tax return in Portugal can actually save you money. Submitting a tax return is not necessarily synonymous with paying tax. The Portuguese tax code has ample allowances and exclusions on many forms of income, plus generous tax credits for a variety of common expenses. Many people find their tax burden in Portugal to be significantly lower than in their country of origin. Note the following examples: Pensions Each pensioner starts with a pension allowance of 4,104. This means that a retired couple, after personal allowances, receives the first ± 50,000 of pension earnings tax free. Many pensions paid within EU and beyond are entitled to substantial exclusion. If the criteia are met, a retiree with a contributory pension of 100,000 could pay as little as 500 in tax. Disabilities Benefits For those with 60% or greater disabilities, 50% of salary and 30% of pensions are tax exempt within certain limits. 21

22 Rental Income Non-Residents can conduct their letting to holidaymakers as a business, thereby limiting Portuguese taxation to under 9% and normally eliminating further assessment in the home jurisdiction. Residents usually pay even less. Dividends Dividends paid by Portuguese companies as well as those from any country within the European Union are entitled to a 50% exclusion and are taxed on only half of their value. Roll-Over Relief If you sell your principal residence and fully reinvest the proceeds in a new home, the capital gain is exempt. This is be extended to new home reinvestment anywhere in the European Union. Nominee Companies If you purchase property for investment purposes, using a Portuguese Nominee Company can lower your eventual Capital Gains Tax liability by 2½ fold, sidestep typical taxes on property transfer as well as avoid many of the complexities of Portuguese bureaucracy. Non-Habitual Residence Status Qualifying individuals achieve a flat-rate tax of 20% on salary and self-employment income in Portugal. Foreign-sourced income may be fully exempt under certain circumstances. Royalties For resident taxpayers, the first 10,000 of Royalties are entitled to a 50% exclusion. Under the Simplified Regime, the balance is then reported, allowing for a further 5% exemption. 22

23 Inheritance Tax Portugal abolished Inheritance Tax in Transfers to immediate relatives (spouse, children, grandchildren, parents and grandparents) are tax exempt. All others pay only 10% Stamp Duty. Sidestepping Forced Heirship Rules Portugal is a Civil Code jurisdiction that applies the principle of forced heirship where partial inheritance of the estate ( a legítima ) is the legal right of the spouse and children simultaneously. In many cases, this may not necessarily be the preferred order of the testator. However, Portuguese succession rules only apply within Portugal ( territoriality ). You can use a foreign succession instrument, such as a Trust, to accomplish your goals that may fall at odds with domestic criteria. Conclusion These and other benefits are legal entitlements under current legislation. It is your right as a citizen and taxpayer to take maximum advantage of these tax breaks. Who knows? Portugal may prove to be a legal tax haven for you within Europe. 23

24 ebooks from eurofinesco 1) Offshore Companies: Moving Onshore 2) Self-Employed in Portugal 3) Requirements of the Common Reporting Standard 4) Setting Up Fiscal Residence 5) Capital Gains Tax on Portuguese Property 6) Portuguese Tax Code Summaries 7) VPT Unveiled 8) Tax-Efficient Investing in Portuguese Property 9) Income from Portuguese Property 10) Taxation on Portuguese Property 11) S.C.I. : Sociedade Civil Imobiliária 12) Property Companies: White-List or Portugal 13) Nominee Companies for Portuguese Property 14) Fiscal Representation in Portugal 15) Permutas or Property Swaps 16) Estate Planning & Nominee Companies 17) I.H.T. Residence Rules & Determining Domicile 18) Moving to Portugal before, during & after 19) Taxation of Pensions in Portugal 20) I.R.S. Tax Credits 21) CGT Mitigation: 14 Arrows in the Quiver 22) Residence Rules: in the EU, Portugal and the UK Extracts from Relocating to Portugal - Useful Information 23) Acquiring Portuguese Citizenship 24) Visas and Legal Framework 25) Your Rights to Health Care 26) Access to Education 27) Recognition of Qualifications 28) Social Security Entitlements 29) Golden Residence Visa 30) Leaving Portugal - Moving Back 31) Non-Habitual Residence Status and the Alternatives 32) Trusts, Foundations and Fiduciary Structures 24