Increased taxation of Portuguese real estate assets: another breach of EU law?
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Increased taxation of Portuguese real estate assets: another breach of EU law?

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Cristiana Marques Aparício and Fernando Lança Martins of Cuatrecasas question whether new guidelines on non-resident real estate investment in Portugal are restrictive and discriminatory, and therefore contravene the EU’s free movement of capital principle

Increased real estate tax rates

Portugal’s State Budget Law for 2021 increased the real estate transfer tax (IMT) rate to 10% (instead of the standard progressive rates up to 7.5%) and the real estate ownership tax (IMI) rate to 7.5% (instead of standard rates up to 0.45%) on the acquisition and ownership of real estate assets in Portugal by entities controlled, directly or indirectly, by entities resident in blacklisted jurisdictions.

An entity is considered to be controlled by an entity resident in a blacklisted jurisdiction if there is a dominance relationship between them, as defined by the Portuguese Companies Code (PTCoC). A dominance relationship is deemed to exist if the dominant entity can exert, directly or indirectly, a dominant influence over the controlled entity.

An entity is presumed to exert a dominant influence over another if the former, directly or indirectly:

  • Holds over 50% of the share capital of a subsidiary;

  • Holds over 50% of the voting rights in a subsidiary; or

  • Has the power to appoint over 50% of the members of the management or supervisory board of a subsidiary.

After a few years of silence, at the beginning of 2024, the Portuguese tax authorities (PTA) have finally issued their first set of rulings with guidelines on this regime, according to which:

  • This tax regime targets blacklisted jurisdictions included in Ministerial Order 150/2004, of February 13 (linked document in Portuguese), which differ from, and are significantly more than, those in the EU list of non-cooperative jurisdictions for tax purposes;

  • The criteria to ascertain dominance are relative presumptions, which can be rebutted if, considering all facts and circumstances, the presumably dominant entity is, in fact, unable to exert a controlling influence over the presumably dominated entity;

  • The presumptions set in the PTCoC are not exhaustive, and other circumstances may trigger control; and

  • The term ‘dominant entity’ is to be interpreted broadly, covering individuals and investment funds, even though the criteria to ascertain dominance set in the PTCoC apply to companies.

(In)compatibility with the Treaty on the Functioning of the European Union?

This tax regime renders inbound real estate investment more burdensome, solely based on the residence of the entity controlling the acquirer or owner of the assets. According to the case law of the Court of Justice of the European Union, by restricting and discriminating non-resident real estate investment, this regime may fall under the scope of the free movement of capital, as provided for in the Treaty on the Functioning of the European Union.

The free movement of capital principle sets out that all restrictions on transactions between member states, and between member states and third countries, are prohibited. A restriction is exceptionally admitted if justified by overriding general interest; i.e., the rule of reason.

Based on the preparatory legislative works, the PTA may try to justify this regime through the need to prevent tax avoidance allegedly deriving from structures controlled by blacklisted entities, notably the deferral or absence of taxation of income attributed to such entities.

This regime, however, falls short of its merits by failing to pass the proportionality test, meaning that any restriction on the free movement of capital must be suitable, necessary, and reasonable.

First, it relies on an irrebuttable presumption of tax avoidance deriving from the dominance or control by blacklisted entities. The increased tax rates apply even if the shareholding structure does not aim at, or enable, tax avoidance.

Increasing the IMT and IMI rates is also hardly suitable to prevent the deferral or avoidance of income tax, as was apparently intended by the legislative works.

Additionally, this regime seems unreasonable vis-à-vis its announced goals because the increased tax rates are 33% and 1,567% higher than the maximum standard tax rates. It may also be unnecessary, as it may ultimately apply to taxpayers controlled by entities established in jurisdictions that, despite being blacklisted by Portugal, have already entered into agreements for the exchange of information relating to tax matters with Portugal.

All things considered, this regime raises serious concerns from an EU law perspective. Nevertheless, the PTA are expected to continue enforcing the increased tax rates and targeting investments that fall within the scope of the free movement of capital.

Therefore, taxpayers should check their Portuguese real estate investment structures and challenge the legality of any tax assessments grounded on this regime in court to recover any tax paid in excess and ultimately force the PTA to comply with EU law.

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