i Investment vehicles in real estate
The most commonly used vehicle to invest in real estate in Portugal is the company limited by shares or joint stock company (SA), which is an unregulated flexible vehicle that does not attract significant incorporation costs or ongoing management and compliance costs.
Depending on the actual features of the investment, such as the investor's origin or the dimension and composition of the investment's portfolio, the use of more than one SA as a special purpose vehicle held by a local holding company may be appropriate.
Regulated vehicles such as real estate investment funds (FII) may also constitute attractive investment vehicles, though are not so commonly used owing to their highly regulated regime, including special requirements and limits regarding, for example, risk spreading and leverage, and significant management and compliance costs.
ii Property taxes
The direct acquisition of real estate is subject to the property transfer tax (IMT) and to stamp duty. The constitution, transfer or termination of minor in rem rights such as the usufruct or surface rights are also liable for IMT and stamp duty.
As a rule, the transfer of real estate is VAT exempt. However, under certain conditions the seller (together with the buyer) may waive the VAT exemption on the transfer of urban non-residential real estate, in which case no stamp duty is due.
The holders of the ownership, usufruct or surface right over real estate are liable for the payment of an annual municipal real estate tax (IMI). An additional tax to IMI (AIMI) is also due for residential property and land for construction.
Rental income and capital gains derived from the transfer for a consideration of real estate located in Portugal are generally liable for income taxes, both if obtained by individuals and companies or other entities, whether resident or non-resident for tax purposes in Portugal.
II ASSET DEALS VERSUS SHARE DEALS
i Legal framework
The transfer of rights over real estate can be direct, namely through direct acquisition of an asset (asset deal), or indirect through the transfer of shares of the company or other vehicle owning the property (share deal).
The purchase and sale of real estate is done by means of a public deed, executed and signed before a notary public, or by a private document certified by a person or entity legally qualified for such procedure, for example, a notary public, a lawyer or a registry officer.
Apart from compliance with the tax obligations resulting from the acquisition of the real estate, several documents may be required for the transfer of property ownership, which depending upon the circumstances may include the property's energy performance certificate, the residential technical document or the use permit issued by the municipality.
Although the transfer of in rem rights over real estate occurs upon the execution of the underlying agreement, the transfer must be registered to ensure a public disclosure of the legal condition of the assets and guarantee the lawfulness of property transactions.
Share deals are usually formalised through private agreements that do not need to be notarised. Under these agreements, the parties agree on the terms and conditions for the transfer of shares, which generally include specific provisions on the real estate owned by the seller (e.g., representations and warranties, and conditions precedent).
The legal requirements for the transfer of shares depend on the type of investment vehicle.
The ownership right is ruled by the Portuguese Civil Code and is the highest in rem right over real estate in Portugal. According to the legal definition, the owner of a property fully and exclusively enjoys the rights of use, fruition and disposal of real estate, within the legal limits.
A property may be owned individually by a single person or jointly by two or more persons, designated as co-owners, under a co-ownership regime. Under this regime, the co-owners simultaneously hold the ownership right over the same asset, exercising their rights and obligations in proportion to their respective quotas.
Under Portuguese law, it is also possible to divide a building into several independent units, under the horizontal property regime. Under this regime, the units are subject to separate ownership and may belong to different owners. The common areas of a building divided under the horizontal property regime are co-owned by all owners of the units. The division under the horizontal property regime may also apply to separate buildings or complexes under certain conditions.
There are other lawfully established in rem property rights, such as the surface right. This right, which does not include ownership of the land, consists of the legal right of building or keeping, permanently or temporarily, a construction on a land owned by a third party, or to plant in it. At the end of the term of a temporary surface right, the building erected on the land will revert to the landowner.
Any facts that create, recognise, acquire or modify any rights over real estate are subject to mandatory registration before the land registry office, which also records the description of the properties. The effects of such facts against third parties depend on this registration. Moreover, according to the principle of priority of registration, a right registered in first place prevails over any subsequent registered conflicting rights or acts.
ii Corporate forms and corporate tax framework
When setting up a business in Portugal, foreign investors generally incorporate or acquire a limited liability company. The two main types of companies with limited liability in Portugal are SAs, public limited liability companies, and private limited liability companies (LDAs). Both have legal personality separate and distinct from that of their shareholders, who are not personally liable for the company's debts.
The SA is the preferred vehicle for real estate investments since the transfer of the shares of an SA triggers no indirect taxes, whereas the acquisition of 75 per cent or more of the share capital of a LDA company that owns real estate triggers property transfer tax.
Portuguese law also provides the possibility to invest through partnerships, namely the general partnership, the limited partnership and the limited partnership with share capital. These are all incorporated entities, with separate legal personalities from their partners.
As a rule all companies engaged in a business undertaking are taxable entities, liable for corporate income tax (CIT) under general rules, regardless of the legal form that they adopt, whether the LDA, the SA or partnerships.
Nonetheless, in certain cases companies are tax transparent for CIT purposes. This is, for instance, the case with companies 'of simple management of assets' that are either controlled by a family-owned group or are owned by not more than five shareholders.2
iii Direct investment in real estate
Indirect taxes on purchase
The acquisition for a consideration of real estate is subject to IMT, levied either on the property's transfer value or the property's fiscal value registered with the tax authorities (VPT), whichever is higher. IMT is payable by the purchaser.
A 5 per cent IMT rate applies to the acquisition of rural land. The highest rate applicable to the acquisition of urban property is 6.5 per cent (6 per cent for residential property). A 10 per cent rate applies regardless of the nature of the property if the purchaser is an entity (not an individual) with a residence or head office in a country, territory or region subject to a more favourable tax regime, included in a list approved by an order of the minister of finance (blacklisted jurisdictions).3
IMT is also due upon the formation, transfer or cancellation of minor in rem rights over real estate, such as usufruct and surface rights, at the same taxation rates as applicable to the transfer of ownership but subject to special rules to determine the tax base.
Investors should take care when designing the acquisition and drafting the supporting contractual documentation, as under certain conditions IMT is also levied upon the signature of a promissory purchase and sale agreement, upon the transfer of the contractual position of the promissory purchaser in such an agreement, or upon the granting or transfer of a proxy granting irrevocable powers to sell real estate.
The two main IMT exemptions in general available to investors are as follows.
The acquisition of real estate for resale purposes by a company whose corporate purpose is the acquisition and sale of real estate, and the resale of real estate acquired for that purpose, may benefit from an IMT exemption.
To benefit from this exemption, the purchaser should declare that the acquisition is made with the aim of resale and should resell the real estate, without being the object of substantial changes or different allocation, within three years following the acquisition, to a buyer that is not acquiring it again with the aim of resale.
This exemption may apply up front (and not by means of a subsequent refund) if the purchaser demonstrates that it usually carries on the activity by means of a statement issued by the Portuguese tax authorities attesting that in the preceding calendar year the purchaser resold at least one property previously acquired with the aim of resale, or that it acquired a real estate asset with the aim of resale.
Urban rehabilitation exemption
An IMT exemption may apply to the acquisition of real estate for urban rehabilitation purposes, for properties that were constructed more than 30 years ago or that are located in an official urban rehabilitation area.
The beginning of rehabilitation work should occur within three years following acquisition, and the works undertaken should qualify as urban rehabilitation work under the terms of the General Regime of Urban Rehabilitation or the Extraordinary Regime of Urban Rehabilitation. Moreover, the grade of preservation of the property needs to increase two levels and a minimum rating of 'good' needs to be obtained. Legal requirements on energy efficiency and thermal quality should be observed.
This exemption operates by means of refund and not up front. For this purpose, owners of the property must apply for the recognition of the urban rehabilitation work (and, consequently, of the underlying exemption) upon submission of the rehabilitation work prior notice or the petition for licensing of the urban rehabilitation work.
The relevant municipality is bound to communicate the recognition to the tax office of the relevant property within 20 days following the assessment of the grade of preservation of the property after the works or the issuing of the energy efficiency certificate, whatever occurs later.
An IMT exemption may apply on the first transfer of the property following the rehabilation works, if it is allocated to be let for permanent residency, or, under certain conditions, aimed at permanent residency purposes.
The acquisition of the ownership or other minor in rem rights over real estate is also liable for stamp duty, at a rate of 0.8 per cent. The tax base is identical to that of IMT: the property's transfer value or the property's VPT, whichever is highest.
As a rule, the transfer of Portuguese real estate is VAT exempt, meaning that no VAT is charged upon the sale thereof. However, under certain conditions the seller (together with buyer) can waive the VAT exemption.
The main requirements that should be met so that the VAT exemption may be waived may be highlighted as follows:
- The real estate must be an urban property or an independent part thereof that does not have a residential use, namely only commercial and industrial buildings and plots of land for construction are eligible.
- Both the seller and the buyer have to be VAT taxable persons that carry out activities for which they are entitled to deduct input VAT or, where they simultaneously undertake activities in respect of which VAT is deductible and those in respect of which VAT is non-deductible, the former activities represent at least 80 per cent of their business turnover in the preceding year. This 80 per cent criterion does not apply to VAT taxable persons who primarily carry out activities relating to the construction and reconstruction or acquisition of real estate for resale or rental purposes.
- The real estate must be used for activities in respect of which input VAT is deductible, namely, transactions liable and not exempt from VAT.
- The real estate should be under any of the following situations:
- It is the first transfer after construction, and input VAT on construction has been or may still be, totally or partially, deducted.
- It is the first transfer after extensive renovation or transformation (i.e., the increase of the VPT of the property of more than 30 per cent), and input VAT incurred on the renovation or transformation may still be, totally or partially, deducted.
- It is the first transfer following a transaction where the VAT exemption was waived and the 20-year adjustment period of the initial deduction of the input VAT has not yet expired.
Indirect taxes during the investment
The holders of the ownership, usufruct or surface right over real estate are liable for the payment, on an annual basis, of IMI.
IMI is due on the VPT of the property, at rates that vary from 0.3 per cent to 0.45 per cent for urban properties, and at 0.8 per cent for rural properties, as decided on an annual basis by the municipality. IMI is assessed and due by reference to the owner as of 31 December of the relevant year, being collected and paid in the subsequent year.
Under certain conditions and upon proper notification to the tax authorities, real estate held with the aim of resale and accounted for as inventory and stock is only liable for IMI from the third year from the acquisition, except if the property is acquired from an entity that already benefited from this tax deferral regime. This deferral regime may also apply to property not acquired with the aim of resale but accounted for as inventory or stock.
Subject to the same terms and conditions as referred to above regarding the IMT urban rehabilitation exemption, real estate subject to urban rehabilitation is also capable of benefiting from an IMI exemption for three years, counted from (and including) the year of conclusion of the works. This exemption may be extended upon request for an additional five years in respect of property allocated to be let for permanent residency purposes or aimed at being for permanent residency purposes.
The holders of the ownership, usufruct or surface right over urban real estate are also liable for the annual payment of an additional tax to the IMI: the AIMI tax.
AIMI is due on urban property with the exception of those licensed or classified as commercial, industrial, services or other property, meaning that it applies on residential property and plots of land for construction.
AIMI is due on the VPT of non-excluded properties as of 1 January each year. The rate generally applicable to companies or assimilated entities is 0.4 per cent, except for those domiciled in blacklisted jurisdictions to which a 7.5 per cent rate applies.
No AIMI applies over properties that in the previous year benefited from an IMI exemption or from an IMI deferral from taxation (see above).
Direct taxes during the investment and on exit
When dealing with CIT over income arising during the holding and upon disposal of the real estate investments, one should distinguish between non-residents without a permanent establishment (PE) in Portugal and those operating in Portugal through a PE or a local subsidiary.
Non-residents without a PE
The concept of PE set out in Portuguese domestic CIT law and in the double tax treaties concluded by Portugal is in line with the definition contained in Article 5 of the OECD Model Tax Convention.
Therefore, non-residents directly investing in the acquisition of Portuguese real estate will not be deemed as having a PE if they do not engage in a related active business activity, but rather limit their investment to the holding of the property and the collection of rents arising from the respective lease without any services provided in relation to it.
The income obtained during the holding of the investment and on sale is liable for Portuguese CIT, pursuant both to the provisions of the double tax treaties concluded by Portugal and domestic tax law.
Income derived from the lease of the property is liable for CIT at a rate of 25 per cent. Taxable income corresponds to the gross income deducted of all related costs and expenses, with some exceptions. In particular, deduction of financial costs and depreciation is not allowed.
Where the lessee is a Portuguese entity bound to maintain accounting records, the gross rental income is subject to withholding tax at a 25 per cent rate, which constitutes an advance payment of the final CIT due. To compute the year's final CIT liability, the non-resident investor shall file an annual CIT return.
Capital gains obtained upon disposal of the real estate property are also liable for CIT in Portugal at a rate of 25 per cent.
The taxable gain corresponds to the positive difference between the transfer value and the acquisition value of the property. The acquisition value should be added by expenses incurred on property improvements in the 12 years prior to the transfer.
To the extent that the property is transferred more than 24 months after the acquisition date, the acquisition value is adjusted by a monetary correction coefficient.
If the property's VPT is higher than the declared transfer value, the VPT shall be the relevant value for capital gains purposes, unless the transferor provides evidence that the transfer value was actually lower than the VPT, within a special procedure that grants the tax authorities access to the bank accounts of the seller and its board members.
Under domestic tax law, capital gains obtained by a non-resident entity upon transfer of the shares in another non-resident company the value of which, in any moment during the 365 days prior to the transfer, derives directly or indirectly for more than 50 per cent from real estate in Portugal, is liable for Portuguese CIT, except when the property is used in a business undertaking different from the purchase and sale of real estate.
Depending upon the circumstances, actual taxation over these capital gains may be overridden pursuant to the provisions of a double tax treaty concluded between Portugal and state of residence of the transferor.
If CIT taxation is actually due, a rate of 25 per cent applies on the positive difference between the shares' transfer value and the shares' acquisition value (updated by a devaluation coefficient if the shares have been held for more than 24 months).
Non-residents with a PE
Under domestic law, Portuguese PEs of non-residents are liable for CIT on their income, defined as the income obtained through the PE and other income derived in Portugal from activities identical or similar to those undertaken through the PE. Under double tax treaties concluded by Portugal, this domestic rule is, however, overridden and the taxable income of the PE corresponds exclusively to that obtained through the PE itself.
The CIT taxable profit of a PE is generally computed in accordance with rules similar to those applicable to resident companies (see below). In practice, a PE will normally imply the registration of a branch, which has no separate legal existence from that of the head office. Although the PE is treated in principle as a fiscal separate entity, some exceptions apply.
Under Portuguese domestic law, no CIT is levied on the profits remitted by the PE to the head-office.
The standard CIT rate is 21 per cent. A state surcharge is also levied on the year's taxable profit (i.e., before deduction of tax losses from prior years) exceeding €1.5 million at the following progressive rates:
- 3 per cent for taxable profit in excess of €1.5 million;
- 5 per cent for taxable profit in excess of €7.5 million; and
- 9 per cent for taxable profits in excess of €35 million.
Most municipalities also levy a local surcharge, also over the year's taxable profit, at rates up to 1.5 per cent.
The carry-forward period for tax losses is five years for losses incurred in tax periods starting on or after 1 January 2017, except for micro, small and medium enterprises, to which a 12-year carry-forward period applies.
However, the deduction of tax losses from prior years is capped at 70 per cent of the taxable profit of each tax period.
The right to carry-forward tax losses may in certain cases be jeopardised when the ownership of more than 50 per cent of the share capital or voting rights changes.
The annual CIT tax base for resident entities engaged in a business undertaking results from the accounting profit or loss of the year added by certain positive and negative changes in equity not reflected in the profit-and-loss account, which is subject to certain adjustments required by the CIT law.
According to the general rule, all expenses and losses documented and incurred within the business activity shall be accepted as deductible for CIT purposes.
The terms and conditions of transactions (such as intra-group funding) between related parties should follow those that independent entities in a comparable transaction would establish (arm's length), pursuant to the domestic transfer pricing rules that follow the OECD guidelines.
According to the Portuguese interest barrier rule, net financial costs are deductible only up to the higher of the following amounts: €1 million or 30 per cent of earnings before interest, tax, depreciation and amortisation (EBITDA) (for these purposes EBITDA corresponds to the taxable profit or loss subject and not exempt, together with net financial costs, depreciation and amortisation accepted as deductible costs). Net financial costs that cannot be deducted in a given tax period may be carried forward during five years. Likewise, if the net financial costs, which are deductible in a given year, do not reach 30 per cent of the EBITDA, the unused deduction allowance may be carried forward for five years.
While real estate accounted for as stock or inventory is not subject to depreciation, the annual cost of depreciation of real estate accounted for as investment properties under the cost model, or, as tangible fixed assets, is accepted as a deductible cost for CIT purposes.
Land is not subject to depreciation and when the respective value is not known, 25 per cent of the acquisition value shall be allocated to the land.
As regards buildings, depreciation rates range from 2 per cent (residential and commercial properties) to 5 per cent (industrial properties, restaurants, hotels, etc.). Depreciation of equipment (if any) needs to be assessed on a case-by-case basis, depending on the underlying type of property, at rates that vary from 5 to 50 per cent. Major repairs and improvement works (defined as those that increase the value or duration of the assets to which such works refer to) may be depreciated during the expected lifetime period.
The disposal of real estate accounted for as investment property or as tangible fixed assets gives rise to capital gains or capital losses, which are included in the CIT taxable income of the company.4 Capital gains or losses arise from the difference between the transfer value – net of inherent costs – and the acquisition value deducted of depreciation and impairment losses accepted for tax purposes. A monetary correction coefficient applies over the net acquisition cost of real estate held for more than two years.
Whenever the property's VPT is higher than the declared transfer value, the former will be the relevant value for CIT purposes both at the level of the seller and the buyer. The seller may, however, demonstrate before the tax authorities that the transfer value was actually lower than the VPT of the property, although it would be required to grant the tax authorities access to its bank accounts and to the bank accounts of its directors.
Resident companies investing in real estate may be tax transparent for CIT purposes, for example, companies 'of simple management of assets' that are either controlled by a family-owned group or are owned by not more than five shareholders. These are companies that limit their activity to the administration of assets or securities held as an investment or for enjoyment, or to the purchase of buildings for the housing of their shareholders, as well as companies that also carry on other activities but whose revenue from those assets, securities or properties reaches an average over the previous three years of more than 50 per cent of the total revenues.
Pursuant to the tax transparency regime, the company's taxable income is computed under general rules, but the taxable profits (not tax losses) are allocated and taxed at the level of the holders of the capital.
In the case of non-resident shareholders, these are deemed to have a PE in Portugal, for the sole purpose of allocating the taxable income of the Portuguese tax transparent company.
iv Acquisition of shares in a real estate company
Indirect taxes on purchase
The acquisition of 75 per cent or more of the capital of a LDA, a general partnership or of a limited partnership is subject to IMT whenever these companies own real estate.
Regardless of the type of real estate owned (e.g., rural or urban), IMT is levied at a rate of 6.5 per cent over the highest between the property's book value and the property's VPT, proportionally to the stake acquired. IMT is payable by the purchaser.
No such levy is due upon acquisition of the shares in an SA owning real estate, which constitutes a relevant difference in favour of this type of vehicle when compared to the LDA.
The acquisition of shares in a Portuguese company is VAT exempt and does not trigger the payment of any other indirect taxes.
Withholding tax on dividends
Under Portuguese domestic tax rules, dividends due by a Portuguese resident company to a non-resident parent company are liable for withholding tax at the domestic rate of 25 per cent.
If the recipient of the dividends is entitled to the benefits of a double tax treaty concluded between Portugal and its state of residence, the withholding tax rate may reduce typically to 15 or 10 per cent.5
Under the Portuguese participation exemption regime, dividends paid by a Portuguese resident subsidiary to a non-resident parent company may benefit from a withholding tax exemption if the following conditions are met:
- the Portuguese subsidiary paying the dividends is subject and not exempt from Portuguese CIT and is not taxed as a CIT transparent entity; and
- the parent company:6
- is resident in another EU Member State, in an EEA Member State bound for tax cooperation similar to that established within the EU, or in a country that has concluded a double tax treaty with Portugal providing for exchange of information;7
- is subject and not exempt from one of the taxes referred to in Article 2 of the Parent-Subsidiary Directive,8 or to a tax similar to Portuguese CIT and as long as in this last case the entity is subject to a nominal tax rate not lower than 12.6 per cent;9 or
- holds, directly or indirectly, a stake of at least 10 per cent in the capital or voting rights of the Portuguese subsidiary, for an uninterrupted period of at least one year prior to dividends' distribution date.
If the one-year minimum holding period has not yet elapsed when dividends are paid or made available (the relevant event for withholding tax purposes), withholding tax applies and as soon as that period is complete, the parent company may apply for a refund of the tax withheld.
However, the participation exemption does not apply if there is an arrangement or a series of arrangements that have been put into place with their main purpose or one of their main purposes being to obtain a tax advantage that thwarts the goal of avoiding double taxation, and that are not genuine having regard to all relevant facts and circumstances. For this purpose, an arrangement may comprise more than one step, being an arrangement or a series of arrangements regarded as not genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.
The participation exemption also does not apply if the Portuguese subsidiary does not comply with the corporate obligation of maintaining a registry on the ultimate beneficial owner (UBO), or if the registry is complied with but the UBO is a tax resident of a blacklisted jurisdiction and the Portuguese company is not capable of demonstrating that the structure was put in place for sound business reasons (i.e., where the company cannot prove that the structure does not relate to an arrangement or a series of arrangements with their main purpose or one of their main purposes being to obtain a tax advantage that thwarts the goal of avoiding double taxation, and that are not genuine having regard to all relevant facts and circumstances).
Taxation of capital gains
Capital gains derived by non-resident entities from the transfer of the shares in a Portuguese resident company whose assets mainly consist of real estate located in Portuguese territory are liable for Portuguese CIT under domestic tax law.
Unlike for resident investors, no taxation relief is available regarding these capital gains for non-resident investors even where the property is used in a business undertaking different from the purchase and sale of real estate. There is a unresolved question as to whether this is a breach of EU law. It could constitute discrimination against non-resident investors. Depending upon the circumstances, the actual taxation may be overridden pursuant to the provisions of a double tax treaty concluded between Portugal and the state of residence of the transferor.
If CIT taxation is actually due, a rate of 25 per cent applies on the positive difference between the shares' transfer value and the shares' acquisition value (adjusted by a devaluation coefficient if shares were held for more than 24 months).
v Funding of the investment
Equity contributions made by shareholders to a Portuguese subsidiary, as well as the reimbursement of the respective amount, are not liable for direct or indirect taxation in Portugal, both if made to subscribe share capital or by means of supplementary capital contributions.10
The granting of credit by any means, including by way of assignment of credits whenever such assignment involves any kind of transfer of funds or financing to the assignee, is subject to stamp duty on the use of credit.
Within the context of cross-border transactions, taxation is levied whenever it involves Portuguese-resident companies acting as borrowers, and as a rule, third-party loans and intra-group financing are subject to stamp duty.
As a rule, stamp duty is a one-off tax, imposed on the use of credit, being due and payable by the relevant borrower or beneficiary of the funds at the moment when the funds are raised and applicable over the notional amount of the credit, at the following rates:11
- for credit granted for a term lower than one year, 0.04 per cent per month or a fraction thereof;
- for credit granted for a term equal to or over a year and up to five years, 0.5 per cent; and
- for credit granted for a term equal to or over five years, 0.6 per cent.
In addition to the use of credit, for third-party financing, stamp duty may also apply to interest (at 4 per cent over respective amount), fees, charges or other commissions (3 per cent or 4 per cent over respective amount). As a rule, where the transaction is not entered into nor intermediated by a credit institution, financial company, assimilated entity or by any other financial institution, no stamp duty is due on interest, fees, charges or commissions.
Stamp duty is, under the law, to be borne by the entity using the credit, or paying the interest, fees, charges or other commissions. Exemptions are available for intra-group funding, notably to credit granted pursuant to subordinated shareholders' loans. This exemption is applicable to credit with a term higher than one year having the characteristics of contratos de suprimentos, granted by a parent to a subsidiary, provided that a minimum 10 per cent stake has been held for an uninterrupted one-year period prior to the granting of credit or since the incorporation of the borrower as long as the stake is held for at least one year. Moreover, credit granted under this exemption cannot be repaid before one year has elapsed since its granting.
Funding raised through the issuing of bonds is not liable for stamp duty, though taxation may arise if security is granted in relation thereto. The granting of security is also subject to stamp duty whenever granted in the Portuguese territory, for the benefit of a Portuguese resident entity, or if the security is presented in the Portuguese territory to produce legal effects. The granting of security is, however, excluded from taxation if materially accessory to a taxable stamp duty event and granted simultaneously with it.
When due under the rules identified above, the stamp duty tax base is the value of the underlying security (i.e., maximum secured amount, which is normally higher than the amount of the loan), being the effective tax rate dependent on the applicable term, as follows:
- for security with a term lower than one year, 0.04 per cent per month or fraction thereof;
- for security with a term of one to five years, 0.5 per cent; and
- for security with a term of five years and over, or without any specific term, 0.6 per cent.
Stamp duty is, under the law, to be borne by the entity required to grant the guarantee.
Withholding tax on interest
Under domestic tax rules, interest due from a Portuguese resident company to a non-resident company is liable for withholding tax, at a rate of 25 per cent.
However, if the recipient of the interest is entitled to the benefits of a double tax treaty concluded between Portugal and its state of residence, the withholding tax rate may reduce to the treaty rate, typically to 15 or 10 per cent.12
Under domestic rules transposing the EU Interest and Royalties Directive,13 interest due from a Portuguese resident company may benefit from a withholding tax exemption, if the beneficial owner of the interest payment is a company of another EU Member State.14
For these purposes, the following conditions should be met:15
- both companies are subject to one of the income taxes listed in Article 3 of the Interest and Royalties Directive without benefiting from an exemption;
- both companies are in one of the corporate forms listed in the Annex to the Interest and Royalties Directive;
- both companies are deemed tax residents of an EU Member State, without being deemed tax resident in a third country under a double tax treaty; and
- the companies are considered associated entities, which is deemed verified whenever:
- a company holds a direct minimum stake of 25 per cent in the other company; or
- a third company holds a direct minimum stake of 25 per cent in both the beneficiary company and the payer company; and
- in all situations a minimum two-year uninterrupted holding period is met.
If this minimum holding period has not yet elapsed upon the interest maturity or payment date (relevant event for withholding tax purposes), withholding tax applies, and as soon as such period is completed, the interest's recipient may apply for the refund of the tax withheld.
Where, by reason of a special relationship between the payer and the beneficial owner of the interest, or between one of them and some other person, the amount of the interest exceeds the amount that would have been agreed by the payer and the beneficial owner in the absence of such a relationship, the Directive does not apply to the excess interest. Moreover, the Directive does not apply where the majority of the share capital or of the voting rights of the beneficial owner is held, directly or indirectly, by residents of third countries, except if it is demonstrated that the chain of corporate participations does not have as one of its main objectives the reduction of the withholding tax rate.
Under a special regime commonly used,16 non-residents may also benefit from an exemption from withholding tax on interest derived from listed bonds, namely bonds integrated in a centralised system for securities managed by an entity resident for tax purposes in Portugal (i.e., Interbolsa), or by an international clearing system managing entity established in another EU Member State (i.e., Euroclear and Clearstream Luxembourg) or in an EEA Member State, provided it is bound by an administrative cooperation procedure in tax matters similar to the one established within the European Union or integrated in other centralised systems.17
III REGULATED REAL ESTATE INVESTMENT VEHICLES
i Regulatory framework
In Portugal, regulated real estate investment vehicles are subject to the legal framework set forth in Law No. 16/2015 of 24 February 2015, which transposed into the Portuguese legal order Directive 2011/61/EU of 8 June 2011, and Directive 2013/14/EU of 21 May 2013. Real estate investment vehicles are also subject to CMVM Regulation No. 2/2015, promulgated by the Portuguese Securities Market Commission (CMVM). These regulated vehicles take the form of undertakings for collective investments (UCI), either of a contractual or corporate nature.
ii Overview of the different regulated investment vehicles
In general terms, real estate investment vehicles fall into two categories:
- the real estate investment fund (FII) – a regular investment fund either established under a contractual (REIF) or corporate form (REIC); and
- the real estate special investment fund – similar to a FII, but with a more flexible legal regime as to the eligible assets, investment policy and indebtedness.
Both FIIs and FEIIs may be open-ended or closed-end. In the case of REICs, open-ended funds are designated as SICAVI and closed-end funds as SICAFI. Despite the structural differences, the legal regime of a SICAFI is that of a closed-end REIF, while a SICAVI follows the legal regime of an open-ended REIF.
The most significant differences between the open-ended and closed-end FII are found in respect of the investment policy (which is stricter in open-ended vehicles than in closed-end vehicles and, concerning the latter, in public subscription vehicles than in private subscription vehicles); indebtedness (a higher threshold applies to closed-end FIIs); duration (open-ended FIIs are not subject to a fixed duration term); and the investors' rights (which are severely limited in open-ended FIIs, in comparison to closed-end FIIs, where, for instance, structural matters foreseen in the management regulation are subject to investors' resolution).
REICs can be self-managed or managed by a third party, whereas REIFs must always appoint an external management company. Furthermore, a minimum threshold regarding the share capital only applies to REICs and not REIFs.
iii Tax payable on acquisition of real estate assets
No special rules currently apply regarding taxes on acquisition of the real estate assets, including IMT, stamp duty and VAT, by REIF or REIC.18
iv Tax regime for the investment vehicle
Corporate income tax
Portuguese FIIs19 are subject to general CIT, but with some specific rules. The taxable income is based on the profit of the year computed under the specific accounting rules applicable to this type of entity but most of the income that FIIs normally obtain is CIT exempt.
Exempt income includes investment income (e.g., dividends), rental income derived from the lease of real estate, capital gains, and fees and commissions, except if the income derives from blacklisted jurisdictions.
Costs related to exempt income (including underlying taxes) are not tax deductible, including financial costs related to the acquisition of the assets or the costs relating to the taxes borne upon acquisition of the assets or during investment.
The standard 21 per cent CIT rate applies to the non-exempt taxable income obtained by FIIs but income paid or due to FIIS is not subject to withholding tax. FIIs are exempt from state and municipal surtaxes.
FIIs are liable for stamp duty, due each quarter, at a rate of 0.0125 per cent over the net global value of the fund. The net global value of the fund is given by the average of the values reported to the regulator by the management company on the last day of each quarter.
v Tax regime for foreign investors
Income derived by non-resident investors from participation units in FIIs, whether upon distributions, redemption or transfer, is liable for income tax in Portugal at the rate of 10 per cent, with the following exceptions:
- for residents in blacklisted jurisdictions, dividends are taxed at 35 per cent and capital gains at 28 per cent;
- income paid or made available in jumbo accounts20 is taxed at 35 per cent; and
- non-resident entities with more than 25 per cent of their participation units or shares held by residents, except residents in the European Union, EEA Member States or in countries with a double tax treaty with Portugal providing for exchange of information, are taxed at 28 per cent (individuals) or 25 per cent (entities).
IV REAL ESTATE INVESTMENT TRUSTS AND SIMILAR STRUCTURES
i Legal framework
A legal structure similar to the real estate investment trusts (REITs) already available in other international markets was not available in Portuguese law until early 2019 and this has been greatly anticipated by national and international investors. The Portuguese government enacted Decree Law No. 19/2019 of 28 January 2019 (Decree Law 19/2019), which approved the legal framework on real estate investment and management companies (SIGI).
Unlike UCIs, SIGIs are not subject to supervision by the CMVM under specific regulations. However, once the SIGI becomes a listed company, it falls under the supervision of the CMVM and is subject to market transparency requirements.
ii Requirements to access the regime
To acquire SIGI status, the company's corporate purpose must be the acquisition or holding of the following:
- real estate assets, or surface or equivalent rights over them, for leasing purposes or other means of income generation;
- stakes in other SIGI or in companies incorporated in the European Union or in the EEA with similar activities and features;
- stakes in UCIs with an income distribution policy identical to that of the SIGI; and
- stakes in real estate investment funds for residential letting or in companies for residential letting,21 with an income distribution policy identical to that of the SIGI.
The SIGI must be incorporated as an SA, with a minimum subscribed and fully paid-up share capital of €5 million. SIGIs may be incorporated with or without a public subscription offer of shares, or through the conversion from a previously existing public limited liability company or UCI into a SIGI.
Within one year, all of the SIGI's shares must be admitted for trading in a regulated market or in a multilateral trading facility in Portugal, or any other country in the European Union or EEA.
At least 20 per cent of the shares representing SIGI's share capital must be held by investors holding shares that correspond to less than 2 per cent of the SIGI's voting rights, as from the moment such shares are admitted to trading.
As from the second year after incorporation, the SIGI must comply with the following requirements:
- the value of rights over real estate and admitted shares or participation units must represent at least 80 per cent of the total assets' value; and
- the value of rights over real estate subject to lease or other forms of commercial exploitation must represent 75 per cent of the total assets' value.
SIGI must hold the assets for a minimum of three years. Within nine months after the end of each financial year, SIGI must distribute, as dividends, at least:
- 90 per cent of profits resulting from dividends and distributions from shares or participation units; and
- 75 per cent of other remaining distributable profits.
Within three years as from the sale of assets allocated to the SIGI's main activity, it must reinvest at least 75 per cent of the corresponding net proceeds in other assets with the same purpose.
iii Tax regime
Decree Law No. 19/2019 does not include specific provisions regarding the tax regime applicable to the SIGI and its shareholders, and only contains a reference in the preamble to the taxation regime applicable to the other companies operating under Portuguese law under the status of real estate investment companies.
Decree Law No. 19/2019 expressly qualifies the SIGI as having the status of real estate investment companies and, therefore, the income tax regime referred to in Section III regarding UCIs shall also apply to the SIGI and its shareholders.
According to most practitioners and commentators, the SIGI shall also be liable for stamp duty, over the net value of its assets, under rules similar to those applicable to UCIs. However, the applicability of the same stamp duty rules to SIGIs raises some technical issues and may be debatable; clarification from the legislator would be welcome.
V INTERNATIONAL AND CROSS-BORDER TAX ASPECTS
i Tax treaties
Portugal has currently a network of 79 double tax treaties, which generally follow the OECD Model Tax Convention.
Most of the double tax treaties concluded by Portugal already grant22 to the state where the real estate is located (the source state) the right to tax capital gains derived by non-resident investors from the transfer of shares in companies whose value mainly derives from real estate located in the source state.
The number of double tax treaties including such a provision will increase as soon as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) produces its effects over the double tax treaties signed by Portugal, though it is noteworthy that the treaties signed with Luxembourg and the Netherlands, important investment centres, will be exceptions.23
Portugal was one of the 70 initial signatories of the MLI on 7 June 2017 and the MLI is in the process of approval by parliament, which will be followed by ratification by the President. This process is expected to be concluded soon.
ii Cross-border considerations
Under Portuguese law, there are in general no restrictions on the ownership of real estate and the acquisition of shares in Portuguese companies by non-residents or foreign investors.
However, non-resident investors may be required to comply with certain formalities, such as obtaining a Portuguese taxpayer number or appointing a local tax representative in case of non-EU domiciled investors.
There are no foreign exchange controls in Portugal.
iii Locally domiciled vehicles investing abroad
Apart from a number of other points of interest to foreign investors, from a tax perspective the main advantages that make Portugal an attractive platform for real estate investments abroad are twofold:
- A full CIT exemption on dividends and capital gains on the disposal of shares is available for Portuguese resident companies, under the participation exemption regime. The repatriation of profits out of Portuguese companies may also benefit from a withholding tax exemption.
- There is a CIT exemption for most of the income derived by Portuguese UCIs (either under the form of real estate investment funds or real estate investment companies) and REITs (SIGIs), and a 10 per cent tax rate on income obtained by non-resident investors in the vehicles.
VI YEAR IN REVIEW
With regard to new case law, the Court of Justice of the European Union (CJEU) gave judgment on the Portuguese case Imofloresmira.24
The CJEU decided against the Portuguese tax authorities that claimed that the Portuguese company Imofloresmira should be retroactively precluded from deducting VAT incurred on inputs related to a supply of letting transaction, on the grounds that the properties were unoccupied for over two years. The tax authorities considered that the properties should be regarded as no longer being used for the purposes of VAT taxable transactions, even though, during that period, the company always intended to let those properties and undertook the necessary steps to that end.
The CJEU considered that under the VAT Directive the right to the VAT deduction arises at the time when the input VAT becomes chargeable, and the Portuguese tax authorities could not withdraw with retroactive effects the status of taxable person, except in fraudulent or abusive cases. Contrary to the position advocated by the Portuguese state, the CJEU further ruled that in the absence of an objective and important uncertainty as to the scope of the right to deduct and its role in the VAT system, the effects of the decision should not be limited in time.
The great importance of this decision lies not only on its relevant impact for the future, but also on the opportunity opened to taxpayers to seek recovery from the Portuguese state of the VAT amounts paid in the past as result of similar VAT adjustments.
With regard to new legislation, there is the long awaited new REIT regime, introduced by Decree Law No. 19/2019 and discussed above, although so far investors have been delaying setting up this new vehicle. Investors will certainly welcome some clarification from the legislator regarding some aspects of the REIT taxation regime, for instance as far as stamp duty is concerned.
It is expected that the Portuguese real estate market will remain very active in the coming year and the contribution of the new Portuguese REIT regime is eagerly awaited.
As in other sectors, the most relevant adjustments that investors will have to face regarding taxation will likely continue to arise from the international environment, in particular from the ongoing implementation of measures to counter aggressive international tax planning under the OECD and G20 Base Erosion and Profit Shifting Project.
Sound investment structures will be of the essence in dealing with the increasing potential of litigation with tax authorities in cross-border transactions.
This trend will certainly be underpinned by the entry into force of the new general tax anti-abuse rule, which derives from the transposition of the EU Anti Tax Avoidance Directive25 into domestic law, as well as by the future effect of the MLI over the double tax treaties concluded by Portugal.
1 Diogo Ortigão Ramos is a partner at Cuatrecasas and head of the tax practice in Portugal. Gonçalo Bastos Lopes is also a partner at Cuatrecasas. The authors would like to acknowledge the contribution of their colleague Paulo Costa Martins on the regulatory framework of regulated investment vehicles.
2 See below on the direct taxes applicable during the investment regarding resident companies.
3 Ministerial Order 150/2004, of 13 February, as amended by Ministerial Order 292/2011, of 8 January.
4 There is no separate taxation of capital gains or losses in Portugal.
5 The applicability of the double tax treaty is dependent on satisfying certain administrative requirements. To benefit up front from withholding tax relief, the income's recipient shall provide the Portuguese paying entity with an official form (Form 21-RFI) either completed and certified by the foreign tax authorities or accompanied by a certificate issued by the foreign tax authorities attesting its tax residency and its subject to tax status in its state of residence.
6 The applicability of the participation exemption regime is dependent on adequate evidence before the Portuguese subsidiary that the necessary requirements are met. To support compliance with the requirements related to the parent company, the parent company shall provide the Portuguese subsidiary with a declaration issued by the foreign tax authorities attesting its tax residency and 'subject to tax' status in its state of residence.
7 For this purpose, resident status of the parent company shall result from the domestic provisions of the respective state, and it shall not be considered as resident in any other state pursuant to the provisions of a double tax treaty concluded by that state.
8 Council Directive 2011/96/EU of 30 November, on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.
9 Not inferior to 60 per cent of the standard CIT rate that is currently 21 per cent.
10 In the case of LDA companies the prestações suplementares, and in the case of SA companies the prestações acessórias sob a forma de prestações suplementares, which are non-remunerated contributions in cash made by shareholders that can only be reimbursed if the company's equity does not become inferior to the sum of share capital and legal reserve.
11 Where the term for the use of credit is not determined or cannot be determined, which is typically the case in overdrafts and current accounts, stamp duty is payable on a monthly basis, at the rate of 0.04 per cent imposed on the monthly average of the inter-company balance (calculated by the sum of the daily balances divided by 30).
12 The applicability of a double tax treaty is dependent on the accomplishment of documentary obligations. In fact, to benefit up front from withholding tax relief, the income recipient shall provide the Portuguese paying entity with an official form (Form 21-RFI) either completed and certified by the foreign tax authorities or accompanied by a certificate issued by the foreign tax authorities attesting its tax residency and its tax status in its state of residence.
13 Council Directive 2003/49/EC of 3 June, on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
14 For these purposes, the recipient of the interest is deemed its beneficial owner, if it receives the interest in its own name and account and not as an intermediary.
15 The applicability of the Interest and Royalties Directive is also dependent on the accomplishment of some documentary obligations. In fact, the recipient of the interest shall provide the Portuguese paying entity with an official form (MOD 01-DJR) either completed and certified by the foreign tax authorities or accompanied by a certificate issued by the foreign tax authorities attesting its tax residency and subject to tax status in its country of residence.
16 This regime is set forth in Decree-Law 193/2005, of 7 November 2005, as amended.
17 In the last case, the competent government member must authorise the application of the special tax regime.
18 It is however debatable whether a FII might benefit from the IMT exemption, and the IMI and AIMI tax deferral, regarding real estate acquired with the aim of resale. Moreover, MT is also levied upon acquisition of 75 per cent or more of the participation units in a private issue closed-end FII. IMT is levied at a rate of 6.5 per cent on either the property's value under the mandatory evaluation report prepared for the management company or the property's VPT (whichever is higher), proportionally to the stake acquired. IMT is due from the purchaser.
19 Although allowed under Portuguese law, in practice the use of incorporated UCIs (either SICAVI or SICAFI) has been unsuccessful in the Portuguese market so far. Issues like the potential application of withholding tax relief in cross-border distributions have therefore not yet been tested. For the sake of simplification, we refer in the text to UCIs of a contractual nature (FII) though the same rules apply to UCIs taking the form of a company.
20 Accounts opened in the name of one or more account holders acting on behalf of one or more unidentified third parties, in which the relevant beneficial owner of the income is not identified.
21 FIIAH and SIIAH, respectively.
22 Article 13 of the relevant treaty (capital gains).
23 The double tax treaties with Luxembourg and the Netherlands grant the residence state (i.e., Luxembourg and the Netherlands) exclusive taxation rights over the capital gains, and that will remain unchanged once the MLI has effect.
24 Decision of CJEU of 28 February 2018 on Case C-672/16.
25 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, which was transposed into domestic law by Law 32/2019 of 3 May.