Assessment of tax regimes for real estate investment in Portugal
Real estate investment in Portugal represents an important weight in the Portuguese economy. Despite the impact of COVID-19 on global mobility, the geographical location, social, political and economic stability, as well as the tax incentive regimes in place, have supported a continued interest of foreign investors in Portuguese real estate projects.
Portugal has always been involved in cross-border real estate transactions and the choice of these structures has become more and more diversified, with investors opting for structures that are advantageous in legal, regulatory and fiscal terms.
The most common business structures implemented by investors to hold real estate assets in Portugal are still standard business vehicles (special purpose vehicles incorporated as limited liability companies) but a new trend is emerging in relation to concerns real estate investment companies (REIC / SIIMO), real estate investment funds (REIF / FII) and venture capital funds (VCF / FCR).
The Portuguese tax framework and the applicable tax regime will depend not only on the type of entity chosen (REIC / REIF / VCF), but also (1) on the legal status of the investor (natural persons versus legal persons) and (2) on the tax residence of the investor (resident in Portugal versus non-resident in Portugal).
Taxation of the profits of REIC and REIF companies
From a tax point of view, both REIC and REIF are subject to corporation tax (IS) at the standard rate of 21%, provided that they are incorporated and operate in accordance with Portuguese law. In addition, REIC and REIF benefit from an exemption from municipal and state surcharges.
REIC and REIF benefit from a special tax regime provided for by the Portuguese Code of Tax Benefits (Estatuto dos Benefícios Fiscais) which provides that the following types of income must be excluded from taxable income for the purposes of CIT:
(i) Investment income, rental income and capital gains (except if they originate from blacklisted jurisdictions – in accordance with Ministerial Decree 150/2004 of February 13 (as amended));
(ii) Expenses related to the type of income detailed in paragraph (i) above; and
(iii) Income and expenses related to management fees and other commissions accruing to the REIC / REIF.
This special tax regime does not grant full CIT exemption to REIC / REIF, but rather provides that REIC / REIF are generally subject to CIT, the aforementioned exclusions being exceptions to the standard tax rule.
Despite the above, the qualification of income is not a straightforward matter as there is no specific clarification as to whether service income (related to real estate) can also be considered as income. rental income (in this regard, the Secretary of State for Fiscal Affairs has recently issued guidelines – Ordinance No. 107/2020-XXII, of March 9).
Although there are some arguments for considering that all activities related to real estate should fall under the exclusion of CIT, there is a risk that the Portuguese tax authorities and tax courts will take a different point of view, a special attention should therefore be paid to projects where the real estate assets are used for a commercial activity and not simply rented out.
For stamp duty purposes, both REIC and REIF are subject to stamp duty on their aggregate net asset value at the rate of 0.0125% (per quarter).
Taxation of profits of VAW companies
Another alternative to using REIC or REIF has been to use VCF as an investment vehicle for real estate projects.
From a tax point of view, a special tax regime provided for in the Portuguese Code of Fiscal Advantages is applicable to the VCF, which determines that the profits of companies are fully exempt from CIT provided that the VCF is constituted and operates in accordance with Portuguese legislation. Unlike the regime applicable to REICs and REIFs, this exemption applies to all types of income.
Depending on whether the distribution is made by REIF / REIC or by VCF and depending on the type of investor, the distribution of dividends and capital gains triggers the following taxes in Portugal.
- Distributions of profits made by REIF / REIC to non-resident investors, as well as capital gains from the redemption / sale of units or shares of the fund are subject to a definitive withholding tax at the rate of 10%;
- On the other hand, the distributions of profits made by VCF to non-resident investors, as well as the capital gains on the redemption / sale of VCF units are totally exempt from withholding tax.
The above taxation applies to both legal and natural persons.
The preferential regimes described above are not available in the event that the foreign investor is (i) owned directly or indirectly, more than 25%, by Portuguese resident entities or is (ii) resident in a jurisdiction listed on the blacklist (in the latter case, a% tax rate will apply).
- Distributions made by REIF / REIC to resident investors are subject to withholding tax at the rate of 25% for legal persons or 28% for individuals. The withholding tax is generally a definitive tax for natural persons and a down payment on the definitive corporation tax due by legal persons.
- As for individuals, the tax regime of the VCF is also more advantageous compared to the REIF / REIC. In this case, it allows a reduced withholding tax of 10%, both on distributions and on capital gains on the sale or redemption of VCF units.
Given the particularities of the tax regime of each of these entities, VCFs have been used more and more in real estate structures, in particular for other specific purposes (for example golden visa investors).
Consultant, Vieira de Almeida & Associés
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