Economic activities for Portuguese property transfer tax purposes: a closer look

Property transfer tax (IMT) is levied on the transfer for consideration of real property rights located in Portuguese territory. The transfer of shares in a company owning real estate located in Portugal may also be subject to IMT, if certain requirements are met.

This article focuses on one of the criteria for an IMT liability derived from the transfer of a real estate company – the non-allocation of real estate assets to economic activities – and the interpretation of the Portuguese tax authority (PTA) on this matter.

For the transfer of shares to be subject to IMT, the following cumulative requirements must be met under Article 2, No. 2, paragraph d of the Municipal Tax on Onerous Transfers of Property Code:

• Property value – the value of the company’s assets, direct or indirectly, is more than 50% derived from real estate located in Portugal, considering the balance sheet value or, if higher, the property taxable value;

• Non-allocation – the real estate assets are not directly allocated to agricultural, industrial, or commercial activities, excluding the purchase and sale of properties; and

• Shareholding – as a result of the transfer, a shareholder ends up holding at least 75% of the share capital.

The PTA has been clarifying its interpretation of the non-allocation requirement through binding rulings issued upon requests by taxpayers, as follows.

Binding ruling No. 23404, dated June 30 2023, refers to a target company with a primary economic activity code (CAE) of real estate purchase and sale, and a secondary CAE of leasing. Upon incorporation (or a subsequent change of its business purpose), a company must identify the CAE corresponding to its business purpose.

In this case, the PTA concluded that – with the purchase and sale of real estate the primary activity, as indicated by the CAE – the transfer would be subject to IMT, even if the company carried out other secondary activities.

Therefore, the PTA adopted a formal approach, based on the primary CAE, regardless of whether the company carried out other economic activities besides the purchase and sale of real estate.

In binding ruling No. 25483, dated December 31 2023, the PTA states that leasing may be considered a commercial activity, as long as it is included in the company’s corporate purpose and conducted as an economic business activity.

However, in the case at hand, although the target company leased a property, it did not have a CAE for this activity. For this reason, the PTA deemed that the property was not allocated to an economic activity, as there was no intention or organisation to exploit the property, and therefore the transfer of shares was subject to IMT.

A particularly interesting case is that of real estate development, where the PTA seems to consider that it can be understood as an allocation of properties to an economic activity, provided there is actual proof of this allocation, as follows from binding ruling No. 25020, dated September 13 2023, relating to the participation exemption regime under corporate income tax rules.

Under this regime, capital gains and losses derived from the onerous transfer of shares and other associated equity instruments are not relevant for determining the taxable profit when, although 50% of the assets are composed of real estate or real rights over real estate in Portugal, they are allocated to agricultural, industrial, or commercial activities, excluding the purchase and sale of real estate.

Real estate development, as an economic activity, involves acquiring, constructing, or rehabilitating properties for subsequent sale or leasing, assuming the risk and responsibility of the business.

In this binding ruling, the PTA concluded that taxation should apply, as the company was not able to demonstrate, including through the accounting documents, that the properties held were effectively allocated to the activity of real estate development and owned for construction for sale.

An analysis of the legal rules and the interpretation adopted by the PTA reveals the inherent complexity of applying IMT to the transfer of shares.

Therefore, determining whether a property is allocated to an economic activity that excludes taxation requires a thorough evaluation from both formal and substantive perspectives, including:

• The company’s corporate purpose and CAE;

• The accounting record of the assets;

• The actual activities conducted; and

• Providing adequate evidence, including of the income obtained related to the economic activity.

While the binding rulings provide some guidance about the PTA’s possible interpretation, a case-by-case analysis is essential and should always be conducted.