Property Taxes

I - IMI (MUNICIPAL RATES)

The IMI tax (municipal rates) are as follows :

• for rustic properties (agricultural land) - 0,8%
• for urban properties - from 0,4 % to 0,8%
• for urban properties revalued under the new IMI Code - from 02% to 0,5%
• Whenever the property is owned by an entity domiciled in a territory subject to a more favourable tax system indicated in the list published by the Ministery of Finances, the rates are of 5% . This is the situation of the called "blacklisted offshore territories". It applies not only to companies, but also to individuals domiciled in such offshore territories.

This issue of the new rates is related to another important issue : the revaluation of all properties. All properties are to be revalued. As a general revaluation is not possible to be achieved immediately, the properties will be revalued subsequent to a transmission of ownership or subsequent to a reported alteration. The Ministery of Finances will order a general revaluation of rustic and/or urban properties of any or all municipalities. The stipulated time frame for the general revaluation to be completed is 10 years.

Rented properties will be subject to a special valuation depending on their rental income. For this purpose, the owners of the rented properties are to file a declaration indicating the last rent received and the identification of the tenant.

Transitory regime:

Until a non rented property is revalued, its current fiscal value (valor patrimonial) will be updated as per the official inflation figures . The limits of such figures vary from the minimum of 1 and the maximum of 44,21.

For example :

a) If your property was inscribed at the Tax Department before 1970 and has a current fiscal value of Eur 10.000, it will be updated by the factor 44,21 = Eur 442,100. The liability for IMI will be from 0,4 % to 0,8 % of Eur 442,100 ( from Eur 1.768,40 to Eur 3.536,90)

b) If your property was inscribed at the tax department in 1999, and has a current fiscal value of 100.000, it will be updated by the factor 1,11 = Eur 111.000. The liability for IMI will be from 0,4 % to 0,8 % ( from Eur 444 to Eur 888 ).

If the property is owned by a "blacklisted offshore entity", the tax will always be 5% of each of the above indicated figures in the given examples. For example a) the IMI would be Eur 22.105 and for example b) Eur 5.550.

When the properties are finally revalued according to the terms of the new IMI Code, it is expected that the fiscal values of the properties will be much closer to market values and the applicable rates will be between 0.2% and 0.5% (for white-listed offshore entities). The rates for black-listed offshore entities will be 5% for revalued properties i.e. at least 10 times higher!

II - IMT TAX (formerly known as SISA)

This is the tax due by the purchaser of a property. There have been no changes on the current percentages (changed last June) :

• for rustic properties - 5% of the purchase price
• for non habitational urban properties - 6,5 % of the purchase price
• for habitational urban properties - from 0% to 6% (exemption below a price of Eur 85.500 and the maximum rate of 6% above a price of Eur 532.701)
• Whenever the property is purchased by a blacklisted offshore company (e.g. based in Gibraltar or the Channel Islands etc), the percentage is always 15% regardless of the nature of the property or of the price .

III - DEATH DUTIES

Death Duties have been abolished and replaced by Stamp Duty. However, when a property is transmitted to the surving spouse or to descendants or ascendants, the beneficiaries are tax exempt

IV - EXISTING OFFSHORE OWNERS

It is clear that the existing offshore owners will be burdened with extremely heavy taxes and will no longer be able to keep the existing company structure. Apart from the heavier municipal rates, there is also Corporate Tax on assumed rental, regardless of whether the property is rented or not. We remind that the taxable assumed income is related to the fiscal value ( Corporate Tax = fiscal value divided by 15 x 25% ). As the fiscal value will inevitably rise (either by the automatic inflation update or by the revaluation when it occurs), the Corporate Tax will also become higher.

Although the general guidelines of this new tax reform were known before the Law was published there was no indication of the date the new rates would become effective. There was a general belief, mostly based on an issue of justice, that they would only be enforced starting January 2004. This being the case, offshore owners would have plenty of time to make decisions : the rates are paid the following year they refer to and they are charged in full to whomever is the registered owner on the 31st of December. Therefore, in order to avoid the 5% rates of 2004, it would only be necessary to transfer the property (or take some other action) on time before 31st December 2004.

Against all expectations, the Law clearly indicates that the new IMI Code becomes effective on the 1st of December 2003. This means that the new rates will be inforced for the year 2003 and will be paid starting 2004. The only way current offshore owners can avoid the 5% rates next year is if the property is not registered under the name of a blacklisted offshore entity by the 31st of December 2003. Regretably, it will be almost impossible to take any action on time at this stage, whatever solution you decide to follow.

We believe that Re-domiciliation to a non backlisted territory is taking approximately 3 months and since mid October the Notary Offices in the Algarve are completely fully booked until the end of the year and are not accepting any more appointments. This crosses out the immediate solutions of redomiciliation and of transfer of ownership to individual names.

The tax reform is quite extensive and the issue is complex. A few solutions have largely been advertised to get out of the offshore structure, but most of them have already been put aside following a more careful consideration of the technical issues and interpretations and side tax effects.

For those who wish to transfer the property to their individual names we can still try to find other Notary Offices in the country which may be available and perhaps achieve this on time before the 31st of December. However, as this would operate through a purchase and sale, the costs are quite high (sisa tax, stamp duty and extremely high capital gains). Also, by doing so, your property will automatically be revalued and you will start paying rates (from 0,2% to 0,5%) of the new fiscal value.