52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

TAX LAW

Friday, October 31, 2008

 

REAL ESTATE TAXATION

 

QUESTIONNAIRE

 

Tiago Marreiros Moreira
Vieira de Almeida & Associados
Av. Duarte Pacheco, 26, 1070-110 Lisboa, Portugal
Tel +351 21 311 3400 / Fax +351 21 311 3406
tm@vda.pt

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each jurisdiction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.

Name of Author(s)

Tiago Marreiros Moreira

Corresponding state

Portugal

 

Introductory remarks:

The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).

Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.

In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).

The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.

The questionnaire is split into a section (i) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.

As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 

Overview:

 

CIVIL LAW


TAX LAW

General Questions

Specific Questions

Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.

How is real estate property defined according to the law of the corresponding state?

According to the Portuguese Civil Code (C.C.) real estate property is immovable property. Only land (non-urban property) and buildings (urban property) are considered real estate property.

Is there a public register stating the ownership of a real estate property
(land register)?

Yes, there is a land register.

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

The land register is public and enjoys public faith as everyone can rely on the registrations therein.
The registration with the land register is required to ensure that the acquisition of the ownership title is valid before third parties.

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

The land register is a national registry.
The authority in charge is the Ministry of Justice.

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

Now the form is the public deed, but in a near future (2009) the form will be notarization.

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

Any legal person (physical or not) may acquire title to real estate.
There is no limitation regarding the person or company’s nationality.

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

An asset deal causes a change of ownership registered in the land register whereas a share deal is a change of shareholder only.

For warranty and liability reasons, usually the purchaser prefers an asset deal but for tax and price reasons (no property transfer tax applies in certain share deals and the price may be increased) the share deal may be interesting for the seller and the purchaser. Depending of the capital gains tax regime applicable to the company (as a general rule the sale of shares in companies acquired before 1989 does not attract capital gains taxes) a share deal may be preferable for the seller and be attractive to the purchaser.

 

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

Yes, a statutory mortgage (legal lien) can occur in the real estate transfer tax (Direito de sequela). The real estate tax payment can be deferred as this tax does not have its effects on the owner but on the property.

 

Tax Law

 

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General Questions

Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?

 

 

From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

Real estate property for residential use or small commercial property is more frequently purchased by asset deals.
Larger commercial property or high valued real estate property for leisure purposes are normally transferred indirectly, by share deals.

Buyer: A share deal may allow to avoid the payment of property transfer tax and stamp tax which applies on asset deals (unless 75% or more of a Lda. Is acquired).

Regarding inheritance and donations a stamp tax an exemption applies to gratuitous transfers made to spouses, ancestors and descendants. In the remaining cases a 10% stamp tax generally applies.

 

 

Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

Although there is no general trend to hold real estate separate from the operating business, such separation is often seen for ring fencing purposes and also to facilitate the separate sale of the properties and of the business.

What is the definition of a transfer of real estate?

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

Regarding the real estate tax and the stamp tax there is no definition in the Portuguese law. It has an implicit economical value/principle.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Yes, if 75% of a private limited company by “quotas” (Sociedade por Quotas or Lda.) is acquired.
No if the company is a corporation or SA company.

Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

Real estate capital gains tax

In Portugal there is no specific capital gains tax and therefore capital gains are taxed for personal or corporate income tax purposes.

Corporate income tax

Capital gains obtained by individuals from the sale of residential property affected permanently to own housing may be exempted from personal income tax (capital gains) provided the sale price is reinvested in the acquisition of own housing or in improvement works  of own housing.

The reinvestment of the sale value of certain immovable property assets may also allow the deferral of 50% of the corporate income tax (capital gains) since only 50% of the capital gains will be due in that tax year.
Corporate income tax is also generally not levied and deferred upon a tax neutral reorganization.

Real estate transfer taxes

Real estate transfer taxes are generally not levied and exemptions may be provided in some cases, such as:

  1. construction industry;
  2. real estate funds (the exemption can be total or partial;)
  3. neutral reorganizations (upon request and provided certain conditions are met).

Inheritance and gift tax

An exemption applies to gratuitous transfers to spouses, ancestors and descendants.

Other taxes

VAT – generally the leasing and acquisition operations are exempt but a waiver to such exemption may be allowed in certain cases provided certain requirements and conditions are met.

 

 

Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

As a general rule, for personal income tax and corporate income tax the relevant act for taxation is the public deed.
For real estate transfer tax the relevant moment may be before the public deed takes place as the taxation occurs when an economical acquisition takes place (and not a civil acquisition).

Depreciation and amortization


Depreciation and amortization of real estate.

No depreciation  is available on value of the land (as opposed to the value of the building to which different depreciation rates may apply depending of the type of assets).

 

Tax Overview

Taxes relevant to real estate taxation in the corresponding state

Real estate capital gains tax

In Portugal, there is no real estate capital gains tax

Income tax (corporate and individual income taxes)

CIT

  1. Resident entities (or permanent establishments) whose main activity is of a commercial, industrial or agricultural nature à 25% + max. 1,5% of municipal surcharge
  2. Resident entities whose main activity is not of a commercial industrial or agricultural nature à 20%
  3. Non-resident entities with no permanent establishment à 25%
  4. Collective persons with their head office, place of effective management or permanent establishment in Azores à 17,5%
  5. Collective persons with their head office, place of effective management or permanent establishment in Madeira à 22,5%
  6. Resident entities whose taxable income is assessed by means of the “simplified assessment system” à 20%

PIT - the general rates of PIT may vary from 10,5% in respect of income of up to € 4 544 to 42% in respect of income of higher than € 61 260

Real estate transfer taxes

Portuguese Mainland:

  1. Rustic properties – 5%
  2. Urban properties – 6,5%
  3. Residential buildings or parts thereof – up to 6%
  4. Properties held by offshore blacklisted entities – 8%

Inheritance and gift tax

Replaced by Stamp Duty applicable on gratuitous transfers (an exemption applies to gratuitous transfers to spouses, ancestors and descendants).

Net wealth tax

In Portugal there is no net wealth tax.

Special tax on immovable property

Non-urban property à 8%
Urban property à 0,4% to 0,8%
Urban property evaluated under the Property Tax Code à0,2% to 0,5%
Properties held by offshore blacklisted entitiesàthe applicable rate is doubled

Value added tax (VAT)

Standard:

  1. Mainland à 20%
  2. Madeira and Azores à 14%

Intermediate:

  1. Mainland à 12%
  2. Madeira and Azores à 8%

Reduced:

  1. Mainland à5%
  2. Madeira and Azores à 4%

Other taxes

 

Double Taxation Treaties (DTT)


Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

Generally, according to the Double Tax Treaties (DTT) concluded by Portugal, the right of taxation of real estate as well as income derived from immovable property and capital gains derived from disposal of real estate is allocated to the state where the real estate is situated.

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

N/A

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

Generally, gains derived by the alienation of immovable property may be taxed in the State where the real estate is situated.

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

Portugal uses both methods: the tax credit and the imputation method.
But most of the DTT’s concluded by Portugal apply the tax credit method.

Specific Questions

Introduction/ Instructions:

Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

 

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

 

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".

The 12 cases have been put into the following three sub-sections:

  1. Real estate is part of private wealth of an individual: Cases 1 –4.
  2. Real estate is a business asset of an individual: Cases 5 – 8.
  3. Real estate is an asset of a legal entity: Cases 9 – 10.

 

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.

Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

 

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax

N/A

Income tax

As a general rule, the transfer of ownership is subject to income tax but an exemption may apply if the residential property sold is permanently used for own housing and the sale amount is reinvested in a similar residential property

Real estate transfer tax.

As a general rule, property transfer tax applies (up to a certain amount an exemption applies)

Inheritance and gift tax

Replaced by Stamp Duty which shall be applicable on gratuitous transfers of ownership of real estate unless an exemption applies (an exemption applies to gratuitous transfers to spouses, ancestors and descendants).

Other taxes (VAT, etc.)

 

Ongoing taxation of real estate

Net wealth tax

N/A

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

Income is generally subject to personal income tax. Interest is generally not deductible by individuals.

Other taxes

There is an annual property tax and also an annual municipal charge called Taxa de Conservação de Esgotos that applies to real estate properties in general.

Comments

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate (the property is located in another State)

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax (RECGT)

N/A

Income tax

Pursuant to most of the DTT concluded by Portugal, the right to tax real estate capital gains is allocated to the State where the property is located.

Real estate transfer taxes (RETT)

No RETT is levied.

Inheritance taxes

Stamp tax only applies to gratuitous transfers of assets located in the Portuguese territory.

Gift taxes

Stamp tax only applies to gratuitous transfers of assets located in the Portuguese territory.

Other taxes (VAT, etc.)

As a general rule, no Portuguese VAT shall apply.

Other taxation (other than upon holding or upon disposal)

 

Comments

 

 

Case 2

 

Part A

 

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

 

N/A

Corporate income tax

Corporate income tax shall apply at the standard rate on the capital gains deriving from the sale of shares of a real estate company (possibility of deferral of 50% of the capital gains in case of reinvestment).

Personal income tax shall apply  on the capital gains deriving from the sale of shares of a real estate company. If the real estate company is a Corporation or SA company held for  at least 12 months an exemption may apply.

Real estate transfer taxes.

Yes, if 75% of a private limited company by “quotas” (Sociedade por Quotas or Lda.) is acquired.
No if the company is a corporation or SA company.

Inheritance and gift tax

As a general rule, 10% stamp tax shall apply to the gratuitous transfer of the shares. However, an exemption applies to gratuitous transfers to spouses, ancestors and descendants.

Other taxes (VAT, etc.)

No VAT applies to the sale of shares.

Ongoing taxation of real estate

Net wealth tax, net equity taxes

N/A

Corporate income taxes.

The profits of a real estate company are subject to corporate income taxes at the standard rates.

Other taxes

There is an annual property tax and also an annual municipal charge called Taxa de Conservação de Esgotos that applies to real estate properties in general.

Other taxation (except upon holding or upon disposal)

 

Comments

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

Most DTTs Portugal has concluded characterize the disposal of shares in a real estate company (i) either as the sale of immovable property or (ii) as the sale of movable property. As a general rule, the right to taxation of movable property is allocated to the State of residence of the owner of the shares. On the contrary, the right of taxation of immovable property is allocated to the State where the real estate is located.

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

Case 3 does not have any practical relevance under Portuguese tax laws as there is no significant difference between residential and business properties from a Portuguese tax point of view.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

Case 3 does not have any practical relevance under Portuguese tax laws as there is no significant difference between residential and business properties from a Portuguese tax point of view (only the property transfer tax rates may vary).

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

As a general rule, there is no significant difference between a business asset held by an individual and by a company from a Portuguese tax point of view.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

As a general rule, there is no significant difference between a business asset held by an individual and by a company from a Portuguese tax point of view. Income obtained by individual having business assets may be subject to Social Security contributions.

                                                                                              

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

Reference is made to Case 5. business properties are treated in similar terms as residential properties for Portuguese tax purposes (only the property transfer tax rates may vary).

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

Reference is made to Case 6.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The real estateThe s belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Generally, legal entities are taxed in the same way as real estate companies.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

 

Comments

As a general rule, the sale of the shares by a legal entity is taxed in similar terms as the sale of shares by a company and therefore corporate income tax shall be due at the standard rate. However, the capital gains obtained by Portuguese pure holding companies (or SGPS) from the disposal of shares held for at least one year shall not concur to the taxable income for corporate income tax purposes (the same will apply to any financial costs incurred for the acquisition of such participations).

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Reference is made to Case 9. Business properties are, in principle, treated like residential properties held by a legal entity.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

Reference is made to Case 10. Business properties owned by a real estate company are, in principle, treated like residential properties owned by a real estate company the shares of which are held by a legal entity.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.