Portuguese real estate transfer tax: the devil is in the detail

There is an important concern to consider in M&A transactions and due diligence reports where a share deal involves companies that hold real estate assets, or that hold shares in companies with real estate assets, located in Portugal.

Scope

Apart from the other taxes on such transactions that need to be covered, pursuant to Article 2(2)(d) of the Portuguese Transfer Tax Code, the acquisition of shareholdings in, among others, public and private limited liability Portuguese companies will be subject to real estate transfer tax (RETT) if all the following requirements are met:

  • The asset value of the company results, directly or indirectly, in more than 50% of its real estate assets being located in Portugal, taking into account the balance sheet value, or the property tax value of the assets, if higher;

  • Such real estate assets are not allocated to a business activity, excluding the acquisition and sale of properties; and

  • As a result of the acquisition (or another corporate event), one of the shareholders retains at least 75% of the share capital of the company.

But how should the provision that seeks to tax the indirect acquisition of real estate through the acquisition of shares in companies that hold real estate be understood?

Interpretations

In the absence of express guidance regarding RETT on how the 50%-plus threshold of real estate held directly or indirectly in relation to the value of the company’s assets should be calculated, a possible interpretation is to look into the balance sheet of the company whose shares are being acquired. If the real estate and the shares in subsidiaries held by the company are 50% or less of the total assets of the company, then the requirement is not met (and there is no need to look into the following paragraphs of the provision).

It is relevant to highlight that Article 51-C of the Corporate Income Tax Code denies the application of a participation exemption for capital gains arising from the sale of shareholdings when, directly or indirectly, more than 50% of the balance sheet value of the company whose shares are being disposed is composed of real estate assets located in Portugal that are not allocated to a business activity, excluding the acquisition and sale of properties. Thus, the wording adopted by the Transfer Tax Code article under analysis is very similar to the above article of the Corporate Income Tax Code.

The tax authorities’ position

The Portuguese tax authorities (PTA) issued a tax ruling in 2019 regarding the application of a participation exemption that provides some clarity. According to the PTA, the 50% threshold should only take into account real estate assets that are allocated to a purchase and sale activity, and real estate that is not allocated to other business activities. Furthermore, with regard to the calculation of the balance sheet value, it is stated that the value of the assets is determined based on accounting and not by reference to consolidated financial statements, through the arithmetic sum of the entity’s assets and those of the entities held by it, directly or indirectly, considering the proportional shareholding participations.

In this sense, a comparison should be made between the total value of the assets held by the company (and by its subsidiaries) and the total value (tax or accounting, whichever is greater) of the real estate located in Portugal.

Despite the above, it is still possible to interpret Article 2(2)(d) of the Transfer Tax Code differently. Notably, if the provision should be interpreted in different steps, although cumulative, meaning that if the real estate assets are more than 50% of the total assets of the company, one has to determine subsequently which of those assets are not allocated to a business activity and those that were acquired for resale purposes, RETT being due only on such assets.

On a different interpretation path, although the first step is met (more than 50% of the total assets), it should be jointly read with the second step, meaning that no RETT shall be due in a scenario where the real estate assets are more than 50% of the total assets, but the part of those assets that is not allocated to a business activity and/or those that were acquired for resale purposes corresponds to less than 50.01%.

This last interpretation is in line with the scope of the provision that is designed to tax the indirect acquisition of real estate outside the scope of a business activity (except if the business activity is the acquisition and sale of properties).

This is definitely a potential issue to watch out for in a Portuguese share deal transaction and its due diligence.