Many owners of Offshore Companies, both black and white listed, reach a point where, for any number of reasons, they wish to sell up. Yet most are uncertain of the Capital Gains Tax consequences of such a sale, particularly since there are a number of different ways to structure the transaction. While individual proceedings sometimes present unique circumstances, the following example should prove illustrative of most sales. Respective costs and savings ought to be proportional in most cases.
The Situation: Non-Resident Owners selling a property held in an Offshore Company
1) An Offshore Company purchases a property in Portugal for €200,000 (inflation-adjusted price).
At this point, both the Property and the Company are worth €200,000.
2) A Non-Resident couple buys the shares of the Company for €300,000.
While the Company has a share value of €300,000, the book value of the Property remains €200,000.
3) The Company moves its headquarters and effective management (redomiciliation) from Gibraltar to Delaware. No change in respective values is registered.
4) The Owners wish to sell the Property/Company for €550,000. This can be done in one of three ways:
- a) the Company sells the Property directly to the Buyers; or
- b) the Owners of the Delaware Company sell their shares to the Buyers; or
- c) the Delaware Company is first moved to Portugal, then Owners of the Portuguese Nominee Company sell their shares to the Buyers.
The Tax Consequences for Buyer and Seller:
- a) The Company sells its Property:
The Capital Gain on the sale of the Property is the net difference between purchase price (€200,000) and the sales price (€550,000) minus capital improvements in the previous 12 years minus deductible buying and selling costs. The net gain is then taxed at the rate of 25%.
Example – the final result might look something like this:
€550,000 (sale) – €200,000 (purchase) – €15,000 (improvements) – €5,000 (expenses) =
€230,000 (net gain) X 25% (non-resident tax rate on sale of property) = €57,500 (CGT)
The buyer will also pay the following acquisition taxes:
€33,000 (IMT) + €4,400 (Stamp Duty) = €37,400 (acquisition taxes)
Option nº 1
Seller is taxed €57,500 – Buyer is taxed €37,400
Since it is a Delaware Company that is selling the Property, then the taxable Gain will be to the Company. However, it is more than likely that the distribution of these profits to the shareholders will also incur an assessment to Owners in the home jurisdiction on these “dividends”.
- b) Sale of the Shares of the Delaware Company
The shares of the Delaware Company are sold to the Buyer. In accordance with the USA-Portugal Tax Treaty (Article 14), this transaction is treated as a Sale of Property Rights since the US Company, as a resident entity under the Treaty, consisting of more then 50% of immovable property located in Portugal. Therefore, the Gain may be taxed in Portugal in an identical fashion as above
Seller is taxed €57,500 – Buyer pays no tax
Since the Sellers are non-residents in Portugal, they will also be taxable on the worldwide income in their home jurisdiction. In this instance, the transaction will no longer be seen as a property rights transfer but merely as a sale of shares (movable assets). After application of any Capital Gains allowances, a second CGT assessment will be due on this gain. Given the deemed natures of the perceived transaction, together with the triangulation of the jurisdictions involved, there is no way to eliminate double taxation.
Option nº 3: Sale of Portuguese Nominee Company
When the Portuguese Company is sold, the Gain is calculated as follows:
First, the Delaware Company must move to Portugal. As part of this Redomiciliation, an appraisal is performed of the Property, determining that the Company’s sole asset is valued at €530,000.
Therefore, at the time of the move to Portugal, the Company is worth €530,000 and the now Portuguese Company’s shares reflect this value.
The Shares are then sold as follows:
€550,000 (sales price of shares) – €530,000 (value of shares upon Redomiciliation to Portugal) =
€20,000 X 10% (tax rates on sale of shares) = €2,000 (CGT)
The buyers will also pay €25 (Stamp Duty on Share Transfer Deed)
Seller is taxed €2,000 – Buyer is taxed €25
As the Sellers are Non-Resident, they may also be liable for CGT in their home jurisdiction. In this case, the tax paid in Portugal will normally serve as an international tax credit, reducing or eliminating any eventual CGT assessment. Needless to say, while the rate may be different, the basis should be the same.
As you can see, there is considerable difference both for Buyers and Sellers when redomiciling to Portugal. By selling the Portuguese Nominee Company, rather than the Company selling the Property or the shares of the Delaware Company, both sellers and buyers save appreciably. In comparison, the costs of Redomiciliation and the subsequent share transfer should prove only a minor inconvenience.
In addition, due to Portuguese fiscal transparency rules, owners of Nominee Companies are free from any possible double taxation in Portugal since liability for potentially chargeable events is transposed out of the Company directly to the Shareholders and is never be assessed to both.
Dennis Swing Greene
Dennis Swing Greene is Chairman and International Fiscal Consultant