Avoidance of multiple inheritance taxation within Europe

by

António Marcos

1. Portuguese Inheritance and Gift Tax.

1.1An overview

The Portuguese taxation of all movable and immovable property death transfers and gift inter vivos is levied by the Code of the Municipal Tax on Transfers of Real Estate and of the Tax on Sucessions and Gifts (Código do Imposto Municipal de Sisa e do Imposto Sobre Sucessões e Doações, “CIMSISD”) originally introduced by Drecree Law 41 969, of 24 November 1958 (Código da Sisa e do Imposto sobre Sucessões e Doações)[1], wich became effective on 1st January 1959 and amended for the present denomination of Decree Law 308/91 of 17 August 1991, that encompasses two different taxes:

One charged at municipal level on real estate – related transfers for consideration, called Sisa[2].

The other, a state tax on gratuitous transfer of property, called Imposto Sobre Sucessões e Doações (“ISD”).

ISD is levied at progressive rates[3] in respect of real and effective immovable and movable property gratuitously transfers (i.e. inheritances, bequests and gifts inter vivos). This tax is not charged on the state of the deceased as a whole neither on the donor, but on each individual recipient with respect to the amount effectively received by inheritance or gift (the taxable base).

ISD only can be assessed and notified to the taxpayer within a maximum period of 8 calendar years after the transfer was made[4] and collected within the same period [5].

The tax office at the municipality or quarter of which the deceased or donor was a resident at the time of his death or of the deed or contract of donation is the competent for ISD assessment[6].

There are cases of transfers of immovable property which can determine a simultaneous incidence of both ISD and Sisa[7]. In that cases, ISD will be levied on any excess value of the underlying property. If the value of the obligation pay is equal or greater than the total value of the underlying property, no ISD would be levied.

Finaly we must say that the revenue collected under ISD is quite modest with very high administrative and compliance tax costs[8].

1.2 Criteria for tax liability

Portugal only uses the criteria of the location of the property for taxation of inheritance and gifts, i.e. the territoriality criteria[9].

A gratuitous transfer is subject to ISD only if the property transferred is physically situated or is deemed situated[10] in Portuguese territory regardless of the nationality of transferor and recipient.

1.2.1 Persons liable

The persons (individual or corporate) liable for the ISD are the recipients of property and rights thereon[11] (i.e. heirs and legatees of an inheritance or bequest and the donees of a gift inter vivos). The entities liable for ISD in case of advanced (or substitute) inheritance and gift tax (Imposto Sobre Sucessões e Doações por avença) are the holder or the recipient of income from securities subject to substitute ISD[12].

Liability arises, with respect to an inheritance or bequest, upon the death of the transferor or, in case of an inter vivos gift, when the transfer is made or the deed evidencing the gift is executed.

If an heir or legatee renounces or waives his portion of the inheritance or bequest, the recipient of the underlying property is liable to tax at the rate applicable to the heir or legatee, or to the beneficiary, if that rate is higher than that to which the recipient himself would otherwise be liable[13].

1.3 Tax avoidance

As an anti-avoidance measure, in death transmissions of a deceased resident in Portugal, when no inventory of the deceased’s assets was made by a court, it is deemed that the deceased’s estate includes household furnishings, money, jewellery, and other personal belongings, in a minimum value calculated as follows[14].

Portion of estate (value in Esc.) / Rate (%)
Until 500.000 / 3
500.001 – 2.500.000 / 6
2.500.001– 5.000.000 / 9
5.000.001 – 10.000.000 / 12
over 10.000.000 / 15

It´s also deemed: that the values deposit or keeped in the name of several persons belong in equal parts to all of them; that belong to the inheritance the balance of bank accounts in the name of any heir or legatee which could be mobilized by the deceased; that qualify as gifts certain movables easily transferred which the heir or legatee states to have payed for them to the deceased or to the spouse in the year that precede death[15].

1.4 Valuations and exclusions

The methods of appraisal for the value of different types of property are as follows:

Under a general rule, immovable property is valued on the basis of its updated cadastral value for Municipal Immovable Property Tax (Contribuição Autárquica) purposes, of the judicial inventory or the apportionment deed, whichever is higher[16]. Movable property is valued on the basis of the declaration filed with the tax office, of the judicial inventory or apportionment deed, whichever is higher.

Therefore there are special rules for valuation[17]:

property expropriated in the public interest is valued at the amount of the indemnity (compensation) paid or agreed upon;

foreign currency quoted in Portugal is valued on the basis of the Portuguese Central Bank’s quotation: and unquoted domestic or foreign currency is valued on the basis of the value assigned by the National Mint and, in the absence of this, the value certified by an official appraiser, or the value shown in the judicial inventory or an apportionment deed, whichever is higher;

mortgaged property is valued on the basis of the updated cadastral value or mortgage value, whichever is higher;

gold, silver, jewels, precious stones and similar items are valued on the basis of a certificate made by an official appraiser;

the value of a commercial, industrial or agricultural undertaking and of quotas in limited liability companies and rights in partnerships is as follows:

-if there is a balance sheet, that shown in the last balance sheet;

-if there is a judicial apportionment, that shown therein;

-if the apportionment is not made by a court, that shown therein provided it is higher;

in the absence of a balance sheet or apportionment, that shown in the declaration of goods;

if the company or partnership is not the direct heir, legatee or donee of the deceased partner or the donor, then the value of the quotas or participation rights is that shown in the formation deed;

a pension or annuity for life is valued at 20 times the annual income from it: if it is a pension or annuity for a specified period of time, the value is equal to the number of years to run (limited to 20 times the annual income derived from it) ;

the value of an usufruct on property (separate from the property) is equal to the value of the underlying property, in the case of a life estate; in the case of usufruct for a definite period, its value is 5% of the value of the underlying property multiplied by the number of years remaining.

1.4.1 Exclusions

Property which is not subject to ISD includes[18]:

-proceeds from life insurance policies, unless the debt claim attached thereto matured for the policyholder/ insured prior to his death without such proceeds having been withdrawn[19].

-pensions and subsidies paid by social security institutions, as well as those retirement or disability pensions payable on pensioner’s death by the governmental CGA (Caixa Geral de Aposentações);

-family subsidies due upon death of the person entitled to receive it;

-donations by charitable organizations;

-donations which, under the individual income tax code (CIRS) and the corporate income tax code (CIRS) are considered to be of public interest or destined for cultural purposes[20].

-transferred for descendents not older than 18 years[21].

1.5 Rates and tax-free base amounts

The inheritance and gift tax rates are progressive and depend on each recipient’s taxable base and his or her relationship to the deceased or donor. For this purpose, the following categories of recipient (graus de parentesco) are established[22]:

Category I: spouse and major descendants

Category II: ascendants and siblings

Category III: uncles or aunts, nephews or nieces

Category IV: any other recipients.

2000 Inheritance and gift tax rates table[23]

Transferences / to
730.000$ / From
730.000$
to 2.860.000$ / From
2.860.000$
to 7.280.000$ / From
7.280..000$
to 14.300.000$ / From
14.300.000$
to 35.880.000$ / From
35.880.000$
to 71.240.000$ / From
71.240.000$
Category I / - / 3 / 6 / 9 / 13 / 17 / 24
Category II / 7 / 10 / 13 / 16 / 21 / 26 / 32
Category III / 13 / 17 / 21 / 25 / 31 / 38 / 45
Category IV / 16 / 20 / 25 / 30 / 36 / 43 / 50

In applying the ISD rates, the following rules must be observed:

-the rates applicable are those in force at the time of the transfer rather than the date of the assessment[24];

-the recipient’s share or gift received is to be split in two parts; the first part, is the highest amount within the pertinent bracket; the rate for that bracket applies on that amount. The second part, is the amount in excess up to the upper limit of the immediately following bracket; the rate for that bracket is then applied on the excess[25];

-the tax-free allowance for spouse and children must be taken on the first part of his/her share[26];

-the ISD amount of tax due is the sum resulting from applying the rates to the two parts; and

-the tax due may not be such as to leave the heir, legatee or donee with an after-tax amount which is less than the amount which would have been if his taxable base had been equal to the upper limit of the immediately preceding bracket[27].

Example (in Esc)

Mr A. is married with a marriage settlement and has two children, a child and an adult. The net value of Mr A’s estate under the settlement upon death is appraised by the tax office at 41,600,000; the estate is apportioned as follows:

-13,500,000 to his children; and

-14,600,000 to his widow.

The child´s transfer is now[28] not subject to ISD.

The adult tax would be assessed (under category I) as follows:

-first part of the split:

-7,280,000 – 730,000 (allowance)= 6,550,000;

-second part of the split : 6,220,000.

Thus ,the total tax due would be:

953,000 (i.e. 6% of 6,550,000+9% of 6,220,000)

The wife’s tax would be assessed (under Category I) as follows:

-first part of the split:

-14,300,000 – 730,000 (allowance) = 13,570,000;

-second part of the split:300,000.

Thus, the total tax due would be:

1,260,000 (i.e.9% of 13,570,000 + 13% of 300,000).

Unless the taxpayer request permission from the tax authorities to pay his tax liability in a single payment, the tax due is payable in half-yearly instalments, after the taxpayer receives notice of the assessment from the competent tax office. The number of instalments depend on the amount of tax due (from 16, if the tax due does not exceed 100.000 Esc. to 6, if the tax due exceeds 1.500.000 Esc.). The taxpayer may, however, choose to pay the total tax in a single instalment. In that case, he will benefit from a tax reduction calculated a monthly rate of 1% on the outstanding tax due.

1.5.1 Tax-free amounts[29]

-any amount received by an inheritance, bequest or gift inter vivos from the Portuguese state agencies and other public bodies; local government and their federations and trade unions; entities of public or administrative scope; public libraries and museums, educational, scientific, literary or artistic institutions and associations, charities and welfare institutions and associations and recognized churches;

-an amount not exceeding 75.000 Esc for each recipient of any inheritance, bequest or a gift “inter vivos”; if the amount received exceeds the limit, then the entire sum is subject to ISD , but the tax payable cannot supersede the excess over the limit;

-an inheritance or bequest received by the deceased’s parents not exceeding 365,000 Esc. If the amount received exceeds the limit, then the entire sum is subject to ISD, but the payable tax may not supersede the excess over the limit;

-copyrights on literary, scientific or artistic work;

-amounts accumulated under a retirement savings plan (PPR) or a private pension fund and received by the deceased’s surviving spouse or children; and

-the balance of home purchase–related savings accounts and emigrant savings accounts.

-In the case of the substitute ISD it will be tax-free income from bonds issued throughout the years 1999-2002[30] and pension funds income created under Portuguese national law[31].

There is only one personal allowance granted under the Portuguese CIMSISD. Accordingly, each recipient of an inheritance, bequest or gift “inter vivos”, who is the deceased’s or donor’s spouse or child is granted a tax-free amount of 730,000 Esc.[32]

1.6 Striking features

Furthermore, any shareholder (resident or non-resident) will be subject to substitute ISD on a yearly basis, not because he/she/it owns any shares (quoted or unquoted) in a Portuguese SA, but because he/she/it receives dividends attached to such ownership[33].

Moreover, as the substitute ISD is not, according to the Portuguese formal classification of taxes, a tax on income (thus not covered by any Portuguese comprehensive double tax convention) all (individual and corporate) shareholders of Portuguese SAs who are resident in double taxation convention countries will be subject, without exception, in addition to the Portuguese withholding tax on outbound dividends under double taxation conventions, to a separate withholding tax of 5% on the gross amount of such dividends[34].

2. Double taxation relief

Portugal has not concluded any double taxation conventions for the avoidance of double taxation for inheritances and gifts.

Portugal has no unilateral relief for international double taxation in this field. Internal double taxation is, however, mitigated if the same assets (property or right thereon) which were acquired by inheritance, bequest or gift are transferred again within a five-year period by death and if inheritance or gift tax was paid (or is to be paid) on the first transfer. In that case, the current tax liability is reduced by 50%. Where the personal allowance applies, the portion of assets on which the allowance was previously taken does not benefit from the current 50% reduction[35].

It is worth noting that there is only an agreement between Portugal and France concluded in 1994 and published in Diário da República nº 184 – I Série – A, of 10th August 1994. This agreement establishes that the tax-free provisions of ISD that each contracting party applies to the state and to the local council, and also to the public law collective persons of the state and local council that pursue activities in the scientific, artistic, cultural, education or welfare work, apply also to the other contracting party. This agreement is applicable to the state and local council in respect of all inheritances and gifts made after 1st January 1992.

3. EC Law

In the EU there are as many jurisdictions in the field of inheritance and gift taxes as member states. As consequence, moving from one member state to another, to loose the nationality, or to be naturalized, purchasing immovable property in another jurisdiction or moving assets from one jurisdiction to another may have unexpected consequences. This may cause multiple taxation, but, on the other hand, by making use of estate planning techniques we can obtain substantial tax advantages. The EU has not yet solved the problem of direct tax harmonization in order to create fiscal neutrality and to guarantee the EU freedom of movement.

There are real and serious problems in the fiscal environment of small and medium sized enterprises (SME).They are discriminated against SA companies. The later are not subject to substitute ISD being the former subject to the penalised progressive ISD rate of taxes[36].

In Portugal we have also a specific problem with the substitute ISD. Non-residents, in addition to Personal Income Tax (IRS) and to Corporate Income Tax (IRC), are also subject to a non-deductible and non-creditable 5% substitute ISD, as a final tax, on domestic source dividends from any shares issued by domestic corporations and on interest from bonds. Moreover, securities liable to this tax are not subject to the progressive inheritance or gift tax.

This causes problems of compatibility with 90/435/EEC Directive[37]. After 1st January 1992, as a consequence of that Directive, the regime of elimination of double taxation has been extended to resident entities that have a participation in the capital of the other company, of no less than 25 per cent and for a consecutive period of two years or since the constitution of the participated entity during two consecutive years, resident in another Community Member State, as long as the conditions of Art. 2 of the Directive are fulfilled[38]. Art. 5º, paragraph 4 admits that Portugal may collect a source tax on profits distributed by resident affiliated companies to their parent companies resident in another member state until eight years after entry into force of the Directive.

The source tax can’t exceed 15 per cent in the five earlier years and 10 per cent in the last three years. But, when we are in presence of a dividends distribution it’ll be subject to a 10 per cent withholding tax and a separate withholding tax of 5% of substitute ISD that can’t be deducted. This may violate the direct tax harmonization and the avoidance of double taxation pursued by the Directive, and it is in opposition to the free capital movement principle within the EU[39].

4. Case

-Individual X who:

is domiciled in England (A)

is a national of Germany (B) that was left by the individual within the last 10 years.

is a resident of France (C)

has situs property in Portugal (D)

deceases during a holiday in Spain (E)

-Would your country tax if it is in the position of:

Country A – No

Country B – No

Country C – No

Country D - Yes

Country E – No

May 2000

1

 Tax Professor, Universidade Fernando Pessoa-Porto. Lawyer, António Marcos-Advogados.

[1] For an historical tax perspective of this tax see Pamplona Corte-Real, Carlos: “Breve panorâmica do Direito Sucessório português” and Dias Garcia, Maria da Glória Ferreira Pinto: “Breve exposição sobre o Imposto Sobre as Sucessões e Doações”, in Cadernos de Ciência e Técnica Fiscal, nº 122.

[2] About “Sisas” in Portugal see Soares Martinez, Pedro: Direito Fiscal, Almedina, Coimbra, 1996, pag. 588 et seq..

[3] Portuguese Constitution (CRP) art. 104º nº 3 and art. 40º CIMSISD.

[4] Art. 92º CIMSISD by Decree Law 472/99 of 8 November 1999.

[5] Art. 48º General Tax Law (L.G.T.) (Law 41/98 of 4 August 1998).

[6] Art. 59º CIMSISD. In case of absence of domicile in Portugal, the assessment will be carried out in the municipality or quarter in which the immovable property is located and, if there is more than one municipality or quarter, where the most valuable assets are located. In the absence of domicile or immovable property, the assessment is carried out in the municipality or quarter of the last domicile and, in the absence thereof, where most of the assets are located. The General Tax Director can authorise that the assessment will be carried out in a different tax office in case of real damage or special trouble to the interested.