Mr. G, a Mexican high net-worth individual, plans to invest in a number of new recreational and tourist facilities in Portugal. Part of the investment will be made with local Portuguese investors, while the other part will be wholly-owned by Mr. G himself. It may take several years to develop the various sites after the acquisition of land and property, and so the business operations are expected to begin after the site development has been completed. He wants to know if he can structure his investment in such a way that:
- The assets, which are wholly or partly owned by him in Portugal, are protected well against a number of different business, economic or political risks.
- The return of his investment after the start of the business operations will be tax effective.
He could do this by splitting up the business operations and the real property. This could be done by establishing separate companies for the business operations and for the real property. The real property companies would then rent out the property to the operational companies.
Rental income is subject to corporate tax in Portugal at a rate of 28%, whether the real property company is resident in Portugal or not. If the real property companies are established in “black-listed” offshore jurisdictions, additional taxes will be due. The operational companies will accumulate losses during the development phase. If the real property companies are resident in Portugal, then both the real property companies and operational companies could be held by a Portuguese holding company. The entire group could therefore claim group relief under Portuguese law. This means that the profits of the real property companies can be offset against the initial losses of the operational companies, which would minimize exposure to Portuguese tax.
However, if the Portuguese holding company is owned by a foreign holding company, dividends will not be subject to:
- Withholding tax
- Corporate income tax upon receipt by the holding company (or are qualifying for a credit for Portuguese underlying taxes)
- Withholding tax on dividends paid by the holding company
- This would then result in an effective tax planning solution, which would be further increased if the international holding company is owned by either an IBC or a tax-exempt company, which is located in an offshore jurisdiction. For example, if the Portuguese company is owned by a UK holding company.
It is worth noting that a holding company in a country such as Cyprus would not work if Cyprus was blacklisted under Portuguese law.