A historic ruling by the European Court of Justice should strengthen Portugal’s position as an investment destination for non-resident UCIs. A recent webinar hosted by TMF Group looked at the implications of the case and options for structuring investment opportunities in the country.
Portugal is changing fast. In recent years, the government has focused on modernizing and stabilizing the economy, increasing its international competitiveness, and facilitating investment and business for foreign companies. Progressive policies include corporate income tax (IRS) rate reductions, legislative reform, and financial and tax incentives for R&D activities and investment projects to spur innovation and business creation. jobs.
As the country develops, it becomes a more suitable jurisdiction for the fund industry, especially when it comes to real estate investments. Thanks to the legal, tax and financial incentives in force, the market is raising awareness and interest in regulated entities, leading to a diversification of players, both in terms of investors and in terms of the type of investment structure. Luxembourg, as a major hub for European Union (EU) funds, has been a key jurisdiction for a significant portion of recent investment.
In a new impetus, in March this year, the European Court of Justice (ECJ) issued a favorable decision regarding the withholding tax (WHT) imposed on dividends of Portuguese origin paid to a German UCITS. The decision, in the AllianzGI-Fonds AEVN case (C-545/19), is expected to become a major turning point for investment funds facing WHT leaks and create an opportunity for WHT redemptions across the EU.
TMF Group recently partnered with leading legal services provider Vieira de Almeida (VdA) to deliver a webinar exploring new opportunities for the alternative funds market, setting up investment management and recovering WHT .
Luxembourg: providing a stable base
The logical starting point for exploring these new opportunities is to understand Luxembourg’s role in the equation and how fund promoters in Portugal are taking advantage of the jurisdiction’s key strengths.
With Jersey and Guernsey no longer part of the EU, Luxembourg has consolidated its status as the leading fund hub in Europe. The country is rated Triple-A and features stable political and fiscal environments. Above all, it has acquired a huge base of knowledge, experience and infrastructure gained through the European UCITS Directive (1988).
“Luxembourg is the leading European back-office country”, explains Anja Grenner, Head of Sales – Funds, TMF Luxembourg. “It has, for example, 265 alternative investment fund managers (AIFM), 141 central administrators and 57 depositaries.”
“It also has a multitude of different legal structures available that can be used to structure an investment fund. While the Anglo-Saxon world uses partnerships, the French use corporations and the Germans generally use mutual funds. investment, Luxembourg offers it all Regulators all over the world are accustomed to Luxembourg structures, and so as soon as a company decides to raise funds and attract investors in an EU country like Portugal, then the Luxembourg is normally the country to use.”
Luxembourg offers a classic partnership structure, with a general partner designating the AIFM, which can be based in Luxembourg or elsewhere in the EU and which manages the fund. Beneath the fund are a Luxembourg acquisition company and a local Portuguese SPV that focuses on target investments in the Portuguese market. There is also a more complex parallel fund structure, where a local Portuguese fund is created for Portuguese investors while a Luxembourg fund is created for international investors. They work in parallel, managed by a management company in Portugal or Luxembourg.
An important aspect to consider regarding fund structures is tax substance. There is growing convergence between the Alternative Investment Fund Managers Directive (AIFMD), which provides for minimum substance tests and a minimum level of activity, and global tax trends, such as the initiative of the OECD on Base Erosion and Profit Shifting (BEPS). The European directive ATAD 3 is also on the horizon, which will propose new minimum rules of substance which must be applied by January 2024.
“That basically means that in Luxembourg you would need substance with local domiciliation, managers and administration, and in Portugal the same thing; substance with admins, domicile and administration,” Grenner added. . “You have to take that into consideration and make sure you have enough substance. It’s a point of caution, because you need enough assets under management to make your structure efficient and interesting.”
Portugal: a golden age for investment funds
“The growing interest in Portugal as an investment jurisdiction has been driven by favorable macroeconomic trends, such as the surge in tourism in the aftermath of the Arab Spring,” said Mariana Verissimo, Country Manager, TMF Portugal. “But there have also been a significant number of business-friendly government measures, including the Golden Visa.”
Created in 2012, the Golden Visa program is designed to stimulate foreign investment for the benefit of the Portuguese economy. It allows non-EU citizens to qualify for a residence permit, and ultimately a passport, through investments.
There are a number of investments someone can choose to make to qualify for a Portuguese Golden Visa, including a capital transfer of a minimum of €1.5 million. One can also choose to invest in a VC type fund, known as fundos de capital de risco, which has a minimum subscription of €500,000.
This helps guide a more sophisticated choice of fund structure in the country. “There are now two main models for structuring collective investment vehicles,” said Carlos Couto, Senior Partner, VdA Portugal. “There is the more traditional route of a contractual structure of the fund with a management company, or you can opt for a collective investment company, which can either be self-managed or have an external management company.
“The traditional structure still accounts for the majority of local funds, but collective investment companies, which have existed in Portugal since 2010, are now gaining popularity. This sees the transformation of existing real estate trading companies into collective investment companies which can benefit of the tax system.
Collective investment companies can be self-managed, in which case the administrators will exercise the role traditionally assigned to a management company. Or they can be managed externally, with an option being a Luxembourg-passported management company in Portugal.
In 2019, the Portuguese government approved a new regime to create a new type of investment vehicle, specifically aimed at attracting foreign investment and strengthening the real estate sector – the Sociedades de Investimento e Gestão Imobiliária (SIGI). This is the Portuguese version of real estate investment trusts (REIT).
“The advantage of an SIGI is that it is a less regulated vehicle, more akin to a commercial company and therefore attractive to investors who do not want such a complex vehicle to operate,” said Francisco Cabral Matos, Partner, VdA Portugal.
“At the same time, it will eventually have to be listed, at least in part, but it has created an opportunity for Portuguese groups and multinationals operating in Portugal to refinance, because it’s a good way to create a vehicle where you can raise capital from equity investors.”
“Portuguese SIGIs also encompass activities beyond residential real estate – they are used in the hospitality sector, but also in agro-industry, such as large plantations in the countryside that produce almonds and olive oil. They give new flavors to the diversity of investments. This can be considered.”
The last piece of the puzzle
With the range of investment vehicles becoming increasingly sophisticated, the landmark ECJ decision in the AllianzGI-Fonds AEVN case has now given further impetus, heralding the end of the WHT for investment funds.
According to Portuguese tax law, dividends paid to non-resident UCIs are subject to WHT, while the same type of income is not taxed when paid to resident UCIs. The CJEU ruled that this differential treatment is incompatible with the principle of free movement of capital.
Given the outcome of this case, it is expected that other UCIs, EU residents or not, will be able to claim reimbursement of the WHT suffered on the dividends distributed by Portuguese resident companies.
“In the past, the only real downside to investing directly with funds was that they might not be able to directly benefit from EU directives or double tax treaties, due to their tax regime or legal characteristics” , explained Matos. “That is why we believe that this case will be a turning point in terms of investments made directly by investment funds, in Portuguese companies in this case, but also in companies in general. This could give a new impetus to the space of European funds.”
The facts of the case brought by the Portuguese tax authorities were quite straightforward. The question was whether it was acceptable from the point of view of European law that a German investment vehicle was subject to a final WHT in Portugal of 25%, while a similar Portuguese investment vehicle benefited from a total exemption – therefore not being subject to the WHT and, ultimately, not being subject to corporation tax at all. The CJEU ruled that this was a violation of EU law.
“The law has not yet been changed, but the decision will probably be taken into consideration in the coming months with the Portuguese state budget,” Matos added. “Even though the WHT still applies on a transitional basis, investment funds will now be able to fully recoup the WHT they have suffered due to dividend and interest payments from Portugal. is that we can go back four years to recover the WHT levied on foreign funds.”
Working with the TMF group
Portugal was already an attractive jurisdiction to invest in, thanks to a series of business-friendly government initiatives. With the introduction of boundary-pushing investment structures and the ECJ ruling, which laid the foundation for WHT refunds, it has become a very attractive investment destination.
The TMF Group is well placed to help you put all the pieces of the puzzle together. We can combine Luxembourg’s privileged position as a fund hub, recent case law and Portugal’s wide range of fund structures to provide seamless solutions to clients worldwide, managing all aspects of the value chain profitable transactions.
Contact us for more information.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.