Precipitation and lack of consideration drives investors away from Portugal

According to the 2021 OE, at the proposal of the Greens, which was approved with the abstention of PSD, CDS-PP, Enough and Liberal Initiative and the favorable vote of the remaining parties with parliamentary seat and support from the Government, the Portuguese entities that are dominated or controlled, directly or indirectly, by entities that have domicile […]

According to the 2021 OE, at the proposal of the Greens, which was approved with the abstention of PSD, CDS-PP, Enough and Liberal Initiative and the favorable vote of the remaining parties with parliamentary seat and support from the Government, the Portuguese entities that are dominated or controlled, directly or indirectly, by entities that have a tax domicile in a country, territory or region subject to a more favorable tax regime, included in the list approved by ordinance of the Minister of Finance (list of tax havens), when they hold properties Portugal (namely real estate for sale, income or exploitation, a headquarters, a warehouse, a factory or, in the case of companies in the energy sector, wind or solar or water parks, among others), now have the following tax regime aggravated:

· The Municipal Property Tax rate (“IMI”) is increased to 7,5% (currently 0,8% in rustic buildings and between 0,3% to 0,45% in urban buildings, depending on the municipality);

· The Municipal Tax rate on Transmissions for Property (“IMT”) is increased to a single rate of 10% (currently varies between progressive rates on residential properties, 5% on rustic properties and 6,5% on other properties) ; and

· All applicable IMT reductions and exemptions or IMI suspensions are eliminated, namely in the purchase of properties for resale, purchase of land for construction and sale of properties or those provided for in the urban rehabilitation regime.

 

What may be at stake?

A significant part of institutional investors (pension funds, insurance companies, among others) that invest in the Portuguese private capital market, which have been one of the drivers of raising capital for our economy, have traditionally had their investment platforms based on the Cayman Islands, British Virgin Islands, Jersey and Guernsey (which belong to the Channel Islands), among other jurisdictions, which are included in the list of tax havens. The use of these jurisdictions is due to regulatory issues, since they have contractual regimes that allow the gathering of a multitude of investors around expeditious legal instruments and that provide investors with legal certainty and certainty, and not for tax reasons.

 

Additionally, the simple fact that the United Arab Emirates, Kuwait, Qatar or Oman (among others) are on the list of tax havens, means that any sovereign fund or investor from these jurisdictions will see any investment in economically unfeasible (and dangerous). Portugal.

 

The same is true of investment from Hong Kong, which is the jurisdiction used by most Chinese investors to invest outside China, and which is also on the list of tax havens.

 

It should be noted that in the notes justifying the proposal made by the Greens it is stated that: “The mechanism of tax havens is characterized (…) by the lack of transparency and the absence of information exchange”. Now, a large part of the jurisdictions currently included in the list of tax havens, including all those mentioned above, have entered into Conventions to avoid international Double Taxation (“CDT”) or Information Exchange Agreements in tax matters (“ATI” ), which is why they should be exempt from the application of the increased rates of IMI and IMT, under penalty of Portugal being inconsistent with the bilateral agreements it signs with those jurisdictions.

 

Nor is the Verification justification made by the Greens that Portuguese companies, which are controlled or dominated, directly or indirectly, by entities resident in tax havens, and which hold real estate here, are not “having their profits subject to taxes on income nor its taxed revenues ”in Portugal. These entities are subject to the exact same (high) levels of taxation as any other entity that owns real estate and develops a business activity.

 

The question then arises as to what truly justifies these changes, will it be an ideological issue, in which it is intended to isolate Portugal and reduce and discourage investment in the private capital market, or will it be a matter of precipitation and lack of consideration by the Parties that approved it? these changes and the government that supported them? At least, let us hope that it is the latter, so it would have been advisable, then, that the new rules should have followed the model provided for in the Special Regime for Taxation of Income from Debt Representative Securities. We must remember that the regime that applies to the purchase of Portuguese public debt and securities provides that the tax benefits included therein can be attributed to entities resident in a jurisdiction included in the list of tax havens, provided that in a jurisdiction that has concluded an ADT or ATI with Portugal. A similar wording and exception should have been provided for in the new IMI and IMT aggravation rules.

 

A Portugal stopped for almost 17 years…

The OECD and the EU have long been vigilant and combating the use of buildings whose main purpose is the unjustified avoidance of tax payments, which is often associated with the use of structures and mechanisms located in jurisdictions that lack transparency and where there is an absence of information exchange mechanisms in tax matters.

 

In this sense, since 2017 the EU has a list of jurisdictions considered to be uncooperative in tax matters (list of tax havens), which currently contains 12 jurisdictions. This list is carefully reviewed more than once a year by the EU, the last revision being in October 2020.

 

As mentioned above, Portugal also has a list of tax havens, which currently contains 83 jurisdictions, and this list has remained virtually unchanged since 2004!

 

In the past 17 years, the world has changed, the OECD and the EU have been constantly concerned with updating themselves, but Portugal has stopped in time and is proudly left with a list of jurisdictions that it continues to consider as uncooperative, which is out of step with the economic reality. and market, as well as being outdated in view of the bilateral agreements meanwhile entered into by Portugal with a significant part of these jurisdictions, which has so far removed and discouraged foreign investment in Portugal.

 

In this sense, it is urgent for the Government to review our list of tax havens, similarly to what our Spanish neighbors are currently doing, in order to be more aligned with the existing list at EU level.

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