In this text we need to be more exhaustive, thorough and technical than usual because the moment seems to require that of us.
2017 was full of legislative changes, but at the heart of it was the execution of something that has been bubbling away for some time at European and indeed global level - money laundering.
We will not waste time with the Directive for Exchange of Information (DAC), the Common Reporting Standard (CRS) or the U.S. led Foreign Account Tax Compliance Act (FATCA ) which are in fact the foundation and source of the successive legislation that Portugal has approved, but we need to understand that the motor behind the amendment of the General Tax Law (LGT) with Law 92/2017 , whether the Anti-Money Laundering Act 83/2017 with its corollary, Law 89/2017, is effectively automatic exchange of information as a tool to prevent money laundering, terrorist financing, and avoid tax evasion.
Law 92/2017 was published at the end of August, and brought an interesting event, but one which was already in application throughout Europe: all payments made in cash of € 3,000(1) or more will be subject to specific rules.
In addition, Article 63 E of the LGT prohibits payment in cash when involving transactions of any nature of amounts equal to or greater than 3,000 Euros. Even the payment of an invoice in the amount of 1000 euros, must be paid by bank transfer or other form that allows identification of the recipient. The ban goes on to the ridiculous by prohibiting the payment of taxes in cash when it exceeds 500 Euros!
You may be further surprised to know that the execution of a cash transaction that exceeds these amounts is punishable with a fine under the terms of the RGIT (modified by the aforementioned Law).
In a previous newsletter I had briefly discussed law 89/2017 and the creation of a Central Register of the Effective Beneficiary.
The consequences to be drawn from such a Register are complex, and much has been said about the potential use of information of who is the beneficial owner and the structure of company.
Having no crystal ball at the moment, it seems to us that such a register will serve primarily as a database to provide for automatic exchange of tax information in compliance with CRS and DAC4. However, information on who is the partner, or the beneficial owner (similar rights), and thus taxing or imputing income to the resident in the Portuguese territory (see Article 15, paragraph 1 CIRS) which may not have previously been related, could be a small step. We have entered the field of tax evasion and its prevention.
But the truth is that certain corporate structures, be they non-resident companies (and this time I will not separate them according to the place of their domicile), or trusts, with this law, it will become transparent who owns certain rights whether corporate, or whether “similar".
This we will have to consider that in the transfer of quotas/ shares of a resident company (or a similar right), this will be a private transaction to be included in a Central Registry. Privacy ceases to be an element in these structures.
If we have this situation to consider on the one hand, we must also consider that the same Law 89/2017 brought some notable changes to the Notarial Code.
Article 47 of the Notarial Code requires that as part of the deed (for example in the case of sale of immovable property), there must be indicated the means of payment. Thus, paragraph 6 of article 47 lists all possible and acceptable forms of payment and the information that must appear concerning such payments. If the price is paid by cheque, they will need to know the number of the cheque and the entity on which it was withdrawn; if by bank transfer, the bank account number.
Of course this aims to finish simulated deals where the transaction of the property went through only as a formality without any actual payment of the price. As an example(2) for the unsuspecting, in the case of a non-resident company that owns a property, if the shareholder (or holder of a similar right), decides to transfer by way of sale, the property to himself, this will be designated as being a simulated transaction, so that with the changes in article 47 of the Notarial Code this becomes unfeasible because there is no payment of price.
The Notary has some rules in the recent legislation and the duty of refusal (not to practice the requested act) has been imposed if the registration of the Beneficiary has not been effected.
From the approved but unpublished budget for 2018(3)
Much has been said about the amendments (and the lack thereof) proposed by the 2018 Budget, and much attention has been paid to the amendment of Category B (Article 31 CIRS), but that debate has glossed over an amendment that has a real and effective impact on the non-resident company: Article 18 of the CIRS and article 4 of the CIRC.
The interest is in an amendment to the definitions imposed by article 18 CIRS, by the introduction of an "innocuous" line which can be easily seen and should be of great interest, especially in regions (such as the Algarve), where many properties are owned by vehicles such as non-resident companies.
The approved proposal of the Budget for 2018 inserts an extra clause "p" to the rules of capital gains generated by the transfer of shareholdings or similar rights of companies not resident in Portugal (with no head office or effective management in Portugal), whose assets consists of more than 50% in real estate (or real rights) in Portugal, and will be considered income obtained in Portugal, and therefore taxed here.
This means that if the resident company is transferred through the sale of its shares (or similar rights) and owns a property in Portugal (which forms more than 50% of its assets), any gain made should be declared in Portugal and taxed accordingly.
This really puts an end to years of tax evasion where the holders of shareholdings transmitted the same, sometimes making large gains, but never declaring those either in their country of tax residency nor in Portugal (being the location of the property).
For those who may think that companies that hold shares in other companies whose assets are made up of more than 50% of real estate in Portugal are not covered by the above, should think again as article 4 of the CIRC contemplated that and responded in the same way.
In reality this idea already had its germination in the non-application of the exemption of article 27 of the EBF, and also in paragraph 4 of article 13 of the CMOCDE.
Being new, and without any basis for comparison, we are left with doubts about the calculation of such capital gains, questioning whether we apply Article 48 of the CIRS or integrate category E(4)?
In an increasingly small and regulated world, we should recall Law 64/2016 so that in schemes that are designed to thwart the above, however conjoined, on receiving the resultant values(5) in bank accounts, the banks will automatically report those funds to the country of the tax domicile of the subject.
The non-declaration of income (since the capital gain generated by the sale of the non-resident company's shareholdings) is now located in Portugal, can then be viewed under the concept of tax fraud (crime punishable under Article 103 (1) (b) or 104 of the RGIT with imprisonment).
(1) This value is increased to €10,000 when paid by non residents.
(2) In such event that the partner arranges the transfer of the asset to himself through donation (the non-resident company donates the property to the beneficial owner), it must be considered the capital gains on any future sale since the acquisition value will be the taxable value as at the date of acceptance of the donation by the beneficiary (art. 45, no. 1 CIRS).
(3) At the moment the budget proposal has already been put to a vote and is approved (with amendments). However, it has not yet been approved by President of the Republic.
(4) The application of the CIRS regarding the calculation of the tax is established for non-resident companies by article 53 of the CIRC.
(5) In this respect, Article 89-A of the LGT may also be applied when unjustified amounts are held in bank accounts.
Portimão,December 16, 2017
Marta Pargana Pereira