SEF, Portugal's foreigners and border agency, which processes the Golden Visa applications, has just announced another change to the application procedure. From now on, copies of all of the required documents must be filed online on their portal and approved, and the Government application fee must be paid, before the initial interview and biometrics-collection session may be booked.
Once the copy documents are approved, the applicant will be given online access to SEF's schedule of available time slots and may then make the necessary appointment. The original documents must be submitted at the interview, but their validity is to be calculated as at the time of the online filing date.
Jersey (Channel Islands), the Isle of Man and Uruguay, which were white-listed by the Portuguese Government during 2017, were blacklisted again under the 2018 State Budget approved by Parliament.
SEF, Portugal’s Foreigners and Borders Service, the Government agency that processes the applications for the residency-by-investment permit known as the “Golden Visa”, has adopted new procedures, the main impact of which will be felt in the initial application of a real estate investor.
The Good News: Faster Processing of the Applications
The good news is that the new rule book, which was released internally on January 9th 2017, is expected to streamline the processing of applications and thereby reduce the processing time frame to within the maximum limits allowed for under applicable law, namely 90 days for the initial application and 60 for the renewal applications. Such limits have been systematically disrespected since the beginning of 2015, in the aftermath of the corruption scandal that involved the head of SEF in November of the previous year, and due to several ensuing changes, many of which aimed at preventing new occurrences of similar cases.
The Bad News: No Longer Possible to Buy a Property and File the Application During a Single Trip
The bad news is that, under the new rules, Golden Visa applications may only be filed together with all the required paperwork, including the documentary evidence that the minimum required investment has been made. Now, whilst this does not raise any special difficulty in the case of an investment in financial assets, it may do so in case the applicant chooses to invest in real estate. This is because it ceases to be possible to deal with the initial application during a single short trip to Portugal, as it used to be the case. In fact, given the need for the physical presence of the main applicant to initiate the procedure, it is simply not feasible to view properties, choose and purchase one, and have the required purchase and registration paperwork ready for submission in less than at least 5 weeks.
Solutions: Take 2 Trips, Buy Without Viewing or Invest in Financial Assets
The obvious solution is for the main applicant (or a trusted relative or friend) to initially travel to Portugal for viewing properties and make a choice. The property can then be purchased by the applicant’s lawyer on his/her behalf, and once all the paperwork is in order the main applicant can then travel to Portugal to initiate the application procedure. His family members may accompany him and attend the biometrics-taking session at SEF, or else they may do this once the application gets approved and before the residence permit cards can be issued.
A second solution is for the property to be chosen without a prior viewing, in which case the investor may want to previously order an independent valuation by an accredited surveyor.
Further solutions involve setting up a Portuguese company and Belion Partners will be happy to discuss them with you.
Up until November 2014 Golden Visa applications took on average 2 months to be processed, whether initial or renewal applications. Then an embezzlement scandal at SEF, the border agency, broke up and this was followed by a full audit of their procedures and then by a full rewriting of their procedures manual. This naturally disrupted the normal functioning of the institution. In the Summer of 2015, the law governing the Golden Visa programme underwent some changes, including the opening up of additional investment options, but it took a couple of months for the new regulatory framework to be approved, which resulted in a temporary suspension of the processing of applications. Finally, SEF workers' union, unhappy with all these disruptions to their service, conducted some zeal strikes during this same Summer.
The accumulation of such circumstances resulted in severe delays and in a considerable backlog in the processing of Golden Visa new and renewal applications. So, although the law provides for a maximum of 3 months for the processing of initial applications and of 2 months for renewals, these time frames have not been complied with for some time now.
In order to quickly clear the backlog and phase out the current delays, the Portuguese Government has now announced the formation of a special task force, whose aim is to help SEF with the processing of pending applications and get the ship back to a normal speed, as provided for under the law. It is therefore hoped that this will now not take long to happen.
This is a piece of good news to Golden Visa applicants and holders.
SEF, the Portuguese border agency, has clarified that the minimum stays in Portugal required from Golden Visa holders are as follows:
The way the statutes had been written led most people to interpret them as requiring a 14-day stay per year during years 2 to 5. However, the wording was ambiguous and the SEF's interpretation is a welcome clarification.
There are various government and municipal incentives in Portugal aimed at the rehabilitation of urban areas, buildings and even apartments that are either located in designated neighbourhoods or else have been built more than 30 years ago and are in need of rehabilitation work. Such rehabilitation is encouraged in Portugal by a legal framework which, among other measures, provides for the following:
This paper briefly describes these official incentives, particularly from the point of view of prospective real estate investors in Portugal. This is a description of a general nature and cannot preclude specialised technical advice in connection with specific situations.
Buildings and apartments that are eligible to benefit from the rehabilitation incentives programmes are essentially those located in neighbourhoods specifically designated by the relevant municipality or else that have been built more than 30 years ago and are in need of rehabilitation work.
Regardless of whether or not the same property use is kept, the benefits are granted on the condition that the rehabilitation work results in a property preservation condition that is at least “two levels” above that existing before the work, as certified by the local municipality before and upon the conclusion of the rehabilitation work.
In order to qualify, the rehabilitation work has to comply with the following main requirements:
Each municipality has its own rehabilitation specific programmes and special procedures, but in general it can be said that they have all enthusiastically embraced the urban renovation opportunities afforded by the national programme. The municipality of Lisbon, for example, designated almost all of the city’s neighbourhoods as urban rehabilitation areas eligible to benefit from the tax incentives.
Under a law passed in 2012, rehabilitation works benefit from a simplified and quick planning permission procedure based on a system of prior communication by the developer to a single body appointed by the municipality to oversee rehabilitation works. Under this system, the developer’s technical expert (qualified architect and/or engineer) assumes responsibility for the conformity of the planned works to existing regulations, and planning permission is automatically granted within 20 days of the communication, unless the municipality decides to oppose the plan within this time frame, which it can only do on certain specific grounds. Likewise, upon conclusion of the works, the property usability and, if applicable, its division into separately-owned apartments, will be speedily licensed by the municipality on the basis of a communication by the expert who took responsibility for the works.
Old Tenancy Rights
With a view to encourage rehabilitation works in rented properties, a law was passed in 2012 that provides for some fundamental changes to the rights of long term tenants, notably the following:
The most relevant tax incentives to property rehabilitation are shown in the following table.
* - Materials that exceed 20% of the total contract value will not benefit from the reduced VAT rate.
** - The taxpayer may choose to renounce this special rate and to include the income/gains in his/her overall taxable income.
There are several programmes aimed at financing rehabilitation works. As an example, Caixa Geral de Depósitos, a State-owned bank, offers the following.
Term – up to 15 years.
Amount – up to 90% of the value of the rehabilitation works, excluding planning costs, subject to a minimum project value of €40,000 and a minimum loan amount of €20,000.
Interest rate – either a variable rate indexed to the 6-month Euribor rate or a fixed 2, 3, 5, 10, 15, 20, 25 and 30-year rate, in either case with an added spread of at least 3.5 percentage points. This spread may be reduced for customers who subscribe to certain other products offered by the bank.
The real estate investment route to a Portugal Golden Visa may involve high hidden costs, in terms of both taxes and property overpricing. In this article we reveal what such costs may amount to and compare this route to the securities investment route in terms of all associated costs.
The real estate investment route – caveat emptor!
The real estate investment route to a Portugal Golden Visa is the most popular, because the minimum investment amount required per family is only €500,000.
However, be careful. Many investors choose to use the services of emigration agents, emigration consultants or real estate agents in or from their country or region of origin. What they don’t know is that many such agents have commission agreements with Portuguese real estate agents, under which they get paid commission which often reaches 20% of the property purchase price and such commission is in addition to that of the Portuguese real estate agent. Now, to be clear, normal estate agents’ commission rates in Portugal only very rarely exceed a maximum of 6%, most commonly varying between 3% and 5%.
Such commissions (i.e. the foreign agent’s plus the Portuguese real estate agent’s), often totalling 30% of the property purchase price, are added by the property seller to the intended sale price, because, being billed by the estate agent, they are tax deductible by the seller.
In addition to this rather scandalous situation, many sellers of properties in the sub-€500,000 price range are putting their asking price up, so that it reaches the €500,000 mark, in the hope of selling them to a Golden Visa applicant. This will typically be the case of someone wanting to sell a property that is worth, say, €450,000. Try and find properties in Portugal that are likely to be appealing to Golden Visa applicants and are priced between €450,000 and €499,000. They are very difficult to find, of course.
So the sad truth is that many Golden Visa applicants are buying properties that may be overpriced by 30 or 40%, and will consequently have a bad surprise when they decide to resell their property or swap it for a better one.
In addition to this overpricing situation, the investor must take into account the taxes payable on the property purchase (and on property income, if the property is for rental). The following one-off property transfer taxes are payable by the buyer on the purchase price or on the tax office valuation of the property, whichever the greater:
In sum, if you are making a €500,000 or so investment in Portuguese real estate you may well be paying some 40% over the market price, and then adding 8.8% in taxes to this ridiculously high purchase price.
The securities investment route
If you opt for investing in Portuguese securities as your route to a Golden Visa, you must invest a minimum of €1 million. This is not a bad route, since there are several good opportunities of making a reasonably good and relatively safe investment under current market conditions.
Portuguese bonds bought in the secondary market at a discount are a good example. Take a Portugal Telecom (PT) 5, 6 or 7-year bond maturing in 5 years, for instance. PT is a very solid company and one of Portugal’s biggest. You can buy such bonds in the secondary market at 94% of their face value and they yield an interest of 4.6% per year, which you may receive net (free of tax) if your bank books the transaction offshore. If you bought at 94%, the effective yield is 4.89%. Then at maturity you receive the face value of your investment, making an additional 6%. And there are no taxes on the purchase, on the income or on the sale – it’s all net.
So under this conservative approach you stand to make 30.45% net over a 5 year period with a risk tending to zero. And this can, naturally, be considerably higher if you are prepared to take higher risks.
To match this performance with a real estate investment you have to buy at a good price and expect market prices to increase over the next 5 years (which seems probable). It is feasible, of course, but the risks are very high if your purchase is overpriced.
Conclusion – your options
The first decision you have to make is on your choice of route. As things stand, investing in securities is probably a safer investment, but the investment amount must be considerably higher. If you choose the real estate route, we would advise as follows:
In any case, you are welcome to use Belion Partners’ Preliminary Property Search service totally free of charge. This will allow you to determine the type, size and location of properties, if any, that meet your requirements and your budget.
Searching for the ideal investment targets can be very time consuming and oftentimes frustrating. And the same can be said about putting a value on, and negotiating the price and purchasing terms of, your targets. That is why an increasing number of investors resort to hiring the services of independent search and buying agents.
Buyer’s agent vs. seller’s agent
A search and buying agent acts for you – you are the customer. Therefore there are no conflicts of interest. All potential targets are taken into consideration, regardless of who the seller is; and the best possible price can be achieved, because the agent not only is not under pressure from the seller, but also will usually be able to obtain discounts from both the seller and the seller’s agent or broker.
On the other hand, if you limit your search to the targets that are listed by the sellers’ agents or brokers and then negotiate your purchase directly with them, you will be not only limiting your choice, but also reducing your chances of achieving the ideal price, especially if you are not familiar with the market’s specificities and culture.
Cost – what cost?
The good news is that search and buying agency fees will as a rule be more than offset by the choice of targets and the price discount that the agent manages to obtain from the seller. So in practice the price of a search and buying service will, so to speak, be negative or, at least, a zero cost option.
Under a search agency agreement, your chances of finding investment targets that match your exact requirements are dramatically increased, because your agent will not only search advertised targets, but also have access to off-market, privately available targets. Besides, if your time is important to you, you can reduce your involvement to the very minimum, because your agent will not only provide a full search service, but will also contact the sellers or their agents so as to obtain additional information and make the viewing appointments for you, at your convenience.
Having used a search agency service, under a buying agency service agreement your chances of buying an investment target that matches your exact requirements for the best possible price are dramatically increased, because your agent: (a) is totally independent from sellers and their agents and is therefore in a position to provide unbiased advice and guidance; (b) is generally able to anticipate potential problems with a particular target and use that to either lower the asking price or else advise you against a purchase; (c) can recommend able professionals to conduct specific surveys or other due diligence that may be advisable; (d) being totally independent, through a deep knowledge of the market and acquired negotiating skills, will generally be able to obtain a discount far in excess of the agency fee.
Belion Partners’ services
Belion Partners has teamed up with professionals that have a deep knowledge of the Portuguese real estate and SME markets, and are therefore in a position to offer top quality property and SME search and buying agency services.
Belion Partners will gladly provide a preliminary analysis of your requirements, free of charge and on a noncommittal basis, so as to determine whether these can be realistically met under current market conditions. Click here to submit your property requirements or contact us if you intend to buy a business.
Depending on the particular circumstances of the investor intending to establish a business presence in Portugal, such investor may choose to either set up a domestic Portuguese company or to establish a branch of a non Portuguese entity. In this article we highlight some advantages of the latter, especially in terms of taxation.
Sociedade por quotas (Lda)
By far the most common type of business entity, the sociedade por quotas or Lda is a private limited liability company having the share capital divided into “quotas” of at least 1 euro each. There is no minimum capital requirement, but it must have a minimum of 2 quota holders. The transfer of quotas is subject to registration with the Commercial Registry and, if to a third party, to prior consent by the company. An Lda may at any time elect to “upgrade” to an SA, a more compliance-demanding format, corresponding roughly to an UK Plc. Should an Lda have a sole quota holder for more than one year, it must “downgrade” to a Unipessoal Lda.
The branch of a non resident business entity is a permanent establishment that carries on a business activity in Portugal, its registration being mandatory should any such activity be carried on (or intended to be carried on) for more than one year. It is a local extension of the represented business entity, without separate legal personality, the management of the branch being performed under delegation of powers by the owning entity. It is in practice treated as a domestic Lda company as regards taxation and compliance; but, unlike other jurisdictions, there is no requirement to file the “parent’s” accounts in Portugal; and, unlike a domestic company, the distribution of profits by the branch to the “parent” is not subject to any Portuguese taxes.
More details may be found on the Belion Partners’ website under “Company Services” and “Portuguese Company Law”.
As mentioned, the tax treatment of the branch of a foregn entity is essentially the same as that of a domestic company.
However, whereas withholding tax generally applies at 25% to the distribution of dividends by Portugal-resident entities to non-resident entities, unless reduced or eliminated under a double taxation treaty or an EU Directive, no tax applies to the remittance of a Portuguese branch’s profits to its parent.
Also, unless eliminated under a double taxation treaty, the capital gains made on the disposal of a Portuguese company by a foreign owner will be taxed at 28%. But if the Portuguese branch is owned by a special purpose corporate vehicle (SPV) used for the sole purpose of having the said branch, then it may be possible to structure the sale of the SPV in lieu of the branch in a tax free fashion.
Even if a Portuguese subsidiary owner is entitled to benefit from a double taxation treaty or an EU Directive, enjoying such benefit is in practice complicated by the Portuguese taxman’s requirement that a certificate by the tax authorities of the country of origin of the owner be submitted, confirming the foreign owner’s entitlement to the benefits. In practice, such certificates are often difficult to obtain.
In general, in order to do business in Portugal it will be more efficient from a bureaucratic and a taxation point of view to use a branch of a foreign entity instead of a domestic company. However, individual circumstances must be taken in account and specific advice should be sought by a foreign investor considering establishing a business presence in Portugal. This can be done by contacting Belion Partners.