Investors always have a recurring doubt: where and how to invest liquidity in a safe environment that is also efficient from a tax standpoint.
Portugal’s Golden Visa program offers one the opportunity to obtain a residency permit for a five-year period without any obligation to obtain a permanent tax resident status. Investors can stay in the country for an average of seven days per year (or 14 days every two years) and keep their investments for as long as they wish to maintain their temporary residency permits. This allows an investor and their family – as family regrouping is also available – to get a temporary visa permit within the Schengen Area, making the Portuguese program one of the most attractive for third country investors worldwide.
Selecting the investment path of real estate or investment funds
The answer to the question about which investment is more attractive – real estate or investment funds – is not straightforward since it depends on the risk profile of each investor and the volatility of both markets.
Real estate is by far the most common vehicle for getting the Golden Visa in Portugal; it provides with reasonable yields and a tangible asset that provides additional security to the investor. Moreover, the property can be used by the investor or leased, with the rents being subject to 28% final Personal Income Tax (PIT) withholding. The acquisition is also subject to up to 7% property transfer tax and an annual municipal tax is also calculated over the tax value of the property (varying from each municipality). Short leases are quite common in the country due to tourism – Portugal is recognized as one of the most attractive countries in the world. Capital gains arising from such sales is taxed at a flat rate of 28%. To these costs, one also needs to add maintenance, insurance, and other costs that might impact the final return on investment.
Investment funds are more volatile since the investor places funds in exchange for participation units that float in value because of the investments made either (indirectly) in real estate, bonds or equity. Each fund has its own investment policy, and these entities are subject to close regulation by the capital markets supervisor. Subscription and maintenance fees are also due, and the investment must, as a rule, be kept for at least five years for a full utilization of the residence permit. There are investment funds especially dedicated to Golden Visa programs, with a minimum investment of 350,000 euros, a threshold that will increase to 500,000 euros from January 2022. The expected return and profile of each fund varies, but the investor cannot intervene in the management of selected investments. Also, the capital invested is not guaranteed, although the trend is toward a fund model that preserves the invested capital combined with obtaining a return in line with the wage rates practiced in the money market.
Industry investment trends for Portugal
With the growing tendency to invest in funds due to the limitations brought by the new Golden Visa regime for 2022, it is undeniable that this financial investment offer is growing. From a tax standpoint, non-resident investors benefit from a full exemption on income derived from such investments, either through the form of a capital return or the redemption of participation units at the end of the eligible period. This is a significant add-on for this product, allowing for a greater expectable return on investment.
Overview of the investment requirements in Portugal
For real estate, the minimum investment eligible for Golden Visa is 280,000 euros but this amount is only applicable to properties that have been built more than 30 years ago or are in urban redevelopment areas, and are subject to refurbishment, and are in a specific low population density areas. If the property meets the first two requirements but is not located in one of the low population density zones as specifically stated in the law, then the minimum eligible amount rises to 350,000 euros.
The minimum amount legally required for investment in most properties throughout the country, regardless of its age or refurbishment, is 500,000 euros. This minimum amount decreases to 400,000 euros if the property is in the low population density zones as specified by the law.
These requirements will continue to apply in 2022 when the new Golden Visa regime enters into force, but it would only be for real estate properties that are not destined for housing purposes.
From January 1, 2022, investments in real estate that are destined for housing will only be eligible for the Golden Visa if they are in inland territories and the autonomous regions of Madeira and Azores. This move will exclude Lisbon and Oporto, the two biggest markets for investors.
Regarding investment funds, the investor would need at least 350,000 euros if the investment and subsequent application for a Golden Visa is made by the end of 2021. From January 1, 2022, this amount will rise to 500,000 euros.
Ultimately, the choice between investing in real estate or investment funds depends on an investor's profile, but the tax regime cannot be ignored as investors benefit from a full tax exemption on investment funds.
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