Part nº3: Advantages of a Delaware LLC - the final part in a series providing an in-depth analysis of Delaware LLCs, by Dennis Swing Greene.
The widespread use of Delaware LLCs in Portugal came as a direct replacement of so-called “Black-listed” Offshore Companies that were driven away by punitive measures in fiscal legislation. A decade ago, it became a common response to “redomicile” a Gibraltar or similar company to Delaware, avoiding severe tax penalties inflicted on “Offshore” structures. In the years since, the practice has continued, often with little concern about eventual consequences.
One such outcome has crystallised in potential buyers’ current hesitance to accept the fragile points common to many Delaware LLCs, such as underlying Capital Gains Tax liabilities. Let us examine the facts associated with Capital Gains assessment of a Delaware LLC.
1) If a Delaware LLC sells a Portuguese property, how is Capital Gains Tax calculated?
As a flow-through company, tax is assessed directly to the Owners, not to the Company. Since the sale of a Portuguese property is a chargeable event under Portuguese fiscal law, the profit should first be declared in Portugal. The taxable gain is calculated under “IRC” rules and subsequently reported on the appropriate “IRS” form. These rules permit adjustment for inflation as well as deduction of necessary expenses.
If the Company re-invests the proceeds of the sale into another property, there is a 50% exclusion on the taxable gain assessed to the shareholders.
If the Owners are not tax residents in Portugal, the “IRS” tax rate will be 25%. If resident, the gain is added to other sources of income and final tax calculated at marginal rates (14.5% - 48%). For non-residents, if a tax treaty is in place between Portugal and country of the Owners’ tax residence, double taxation is normally eliminated by the country of residence by means of international tax credits.
2) If the shares of a Delaware LLC are sold, how is Capital Gains Tax calculated?
CGT should be due in jurisdiction of tax residence of the Sellers or “members” of the Company. Normally, the gain will be determined by the net difference between purchase and selling prices with no adjustment for inflation.
Keep in mind several potential pitfalls:
a) Original share values were often kept artificially low to limit liability. There could be a “boomerang effect” that could exaggerate the assessable Capital Gain.
b) Conversely, original share values may not reflect building costs or capital improvements made to the property over time. If proper procedures in record keeping or basic management practices were lax or absent altogether over the years, gaps in the record could potentially open the door to overstatement of long-term tax liabilities.
CONCLUSION
We all realise that there is neither an ideal nor a universal solution to any situation. This is why it is essential that you study the pros and cons of each position to understand which factors may or may not be relevant to your individual circumstances. For some, the flexibility and liability protection may attract some owners to a LLC. On the other hand, potentially burdensome tax obligations, far-reaching international repercussions and perplexing ambiguity may tip the scales negatively for others. It is for each buyer to choose and make an informed decision.
Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a. Private consultations can be scheduled at in Guia (Albufeira) 89561333, Lisbon (Chiado) 213424210 and in Funchal (Sé), Madeira 291221095, by e-mail at info@eurofinesco.com or on the internet at www.eurofinesco.com.
