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.
In practice, no legal act may be performed in Portugal, including the opening of a simple bank account, without all the intervening parties producing a taxpayer identification number. Obtaining this number is therefore the first step to be taken by someone intending to invest, carry on a business, buy an asset that is subject to registration (e.g. a car) or just establish a presence in this country.
How to obtain the number
The bureaucratic process for obtaining a taxpayer number differs according to whether the applicant is an individual or a corporate body. In either case, the number will be obtained in no time, provided the paperwork is in order.
An individual’s tax identification number may be obtained by the individual from any tax office or from a “Citizen’s Shop” (Loja do Cidadão) upon presentation of an original passport (or national identity card if an EU citizen); or it may be obtained by an individual’s representative, who will need a legalised copy of the represented person’s passport (or national identity card if an EU citizen), plus a legalised power of attorney.
In respect of incorporated business entities, the tax identification number in Portugal is simultaneously the corporation tax reference number, the VAT registration number and the company registration number. The number is granted upon incorporating a new company or registering a permanent establishment of a foreign entity; and in all other cases it can be obtained either in person or by mail from the National Company Registry office (Registo Nacional de Pessoas Colectivas or RNPC), or online, through the “Company Portal” (Portal da Empresa). One needs to submit legal evidence that the company exists (e.g. a certificate of good standing) and that one is empowered to apply for the number in its name (e.g. legalised board minutes granting such power). Otherwise, the number may be obtained by a representative, under power of attorney.
Documents are acceptable in Portuguese, Spanish, French or English; but documents in other languages must be accompanied by a translation into Portuguese, which must be certified by either a Portuguese consulate, or by a notary public and the apostille of the Hague Convention if in a country that is a signatory of said convention, or else by a Portuguese lawyer. In the event copies of documents are submitted in lieu of the originals, such copies must also be legalised in one of the said manners.
The appointment of a resident tax representative is mandatory for an individual or a business entity that is not a resident of either an EU member country or of an EEA country that has agreed to EU-type tax co-operation with Portugal, and intends to own property in, or derive income from, Portugal. Only through their tax representative are such individuals legally entitled to dispute the tax authorities’ decisions made in their respect. The tax representative may, or may not, have management powers in connection with the represented person’s property or business. The representative who does have such powers shall share any liabilities of the represented individual or entity in connection with Portuguese tax, so the representative will not usually accept any such powers.
Belion Partners’ services
Belion Partners assist clients with legalising documents, obtaining Portuguese tax identification numbers and appointing a Portuguese tax representative. Please check our fiduciary services in case you require any such service.