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Newsletter | Articles
  The 2007 Portuguese Budget
This feature article, written by Paulo Réfega, a Portuguese lawyer and ILS’s manager in Portugal, reveals some good news for property investors as well as a potentially damaging possibility.
Besides the usual measures that are of greater interest to the native tax payers, there are some measures which are of interest to ILS’s international clients.
- Interest owed by non-resident entities is subject to a flat rate of tax of 20 per cent. Up until now, this interest was amalgamated in the remaining income and subject to tax at rates varying between 10.5 and 42 per cent.
- Dividends paid to a Swiss company by a Portuguese subsidiary are not subject to tax in Portugal as long as the Swiss company has participation of at least 25 per cent in the capital of the Portuguese company and that participation has been held for at least two years.
- The minimum percentage of participation in the capital of Portuguese companies by companies of another EU country is reduced from 20 per cent to 15 per cent for the purposes of exemption of tax on dividends distributed.
- No withholding tax on the distribution of income to members of Risk Capital Funds as long as these members are non-resident and are not based in a tax haven.
- The tax burden imposed on companies based in tax havens that own property in Portugal is reduced. Therefore, the rate of IMI (yearly Municipal Tax) is lowered from 5 to 1 per cent, whilst IMT (transfer tax) is lowered from 15 to 8 per cent. These rates are only slightly higher than the rates paid by an individual or by a company based in a “white listed” jurisdiction
This is quite good news. Portugal seems to have recognised that it shot itself in the foot when it enacted the property laws that penalised offshore companies back in 2003. Indeed, demand for property, mainly in the Algarve has decreased dramatically and quite a lot of investors went to other countries, which coincidentally were opening up their property markets. The timing of the property laws could not have been worse and besides that investors felt they were being treated like criminals if they were using offshore companies.
The decrease in taxes will hopefully help to revive the property market. It is also an indication that Portugal no longer considers the use of offshore companies to be the preserve of criminals and members of international Mafias.
However, this being Portugal, the Budget also has bad news. The Government has given permission to legislate on the duty to report “aggressive tax planning” to the tax authorities. According to this, the Government can issue a law making all consultants bound to report any aggressive tax planning done by their clients. This includes banks and financial institutions, lawyers, economists, auditors, etc.
For now this is a mere authorisation for the Government to legislate and hopefully nothing will happen. Even if the Government uses this authorisation, the law will have to be worked upon and clarified. For instance, what would be considered “aggressive tax planning”? Insulting the tax authorities? Burning down a branch of the Finance Department? We will have to wait and see.
For more information contact Paulo Refega.
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