Real estate investors typically finance their real estate projects through a mix of bank debt and own funds.
Third Party Financing is usually secured against property (through a mortgage) and/or the shares of the company owning the property and/or property generated income.
A mortgage is an in rem guarantee that grants the creditor, in the event of default of the secured obligation, the right to be paid, with preference over the borrower’s non-secured creditors from, the proceeds of the sale of real estate properties (provided other creditors do not benefit from special privileges, which would be the case, for instance, of the tax authorities with regard to property taxes). Mortgages are the most common security provided in real estate acquisitions in Portugal.
Mortgages are created by means of a notarial deed executed before a notary, or in a private document signed before, and certified by, a lawyer, solicitor or chamber of commerce and industry. The notarial deed must set forth the maximum amount secured. The mortgage may also secure interests of up to three years and also a certain amount for recovery expenses.
Mortgages follow the changes affecting the asset thus, and without prejudice to the rights of third parties, a mortgage shall be automatically extended to all improvements and constructions carried out on the secured real estate property.
Mortgages must be registered with the Land Registry Office as a condition for being valid and enforceable. Typically, mortgages are enforced by means of a judicial process in the course of which the property is sold and the creditor is paid with the proceeds of the sale. Alternatively, depending on the legal procedure, the creditor may in certain circumstances apply for the award of the asset as payment in kind.
Pledges over shares and pledges over receivables (rents, deposits, indemnities, etc.) are commonly used in Portugal.
Generally, both loans and guarantees are subject to Stamp Duty, at a variable rate depending on the maturity of the loan and/or guarantee, as follows:
- Loans – 0.04% (monthly), 0.5% or 0.6% applicable on credit granted for less than one year, one year or more, or five years or more, respectively;
- Credit used in the form of a current account, bank overdraft or any other form in which the term of use is not determined or determinable, on the monthly average obtained by summing up the outstanding amounts, calculated on a daily basis, during the month divided by 30 – 0.04%;
- Interest paid to financial institutions – 4%;
- Any fees or commissions paid for financial services – 4% (except for commissions for guarantees provided, applying a rate of 3%).
At the level of Stamp Duty, some exemptions are available:
- Shareholder loans – loans granted by the direct shareholder of the borrower for a minimum term of 1 year may benefit from a Stamp Duty exemption, (i) provided that the shareholder directly holds a minimum participation in the capital of the borrower of 10% and (ii) provided that this holding is kept for a minimum period of one year prior to the execution of the shareholder loan. If the borrower was incorporated by the lender, the one year holding period may be complied with after the granting of the loan;
- Short-term (up to one year) loans granted to cover treasury needs by a holding company to its subsidiary or vice-versa or by a parent company to its subsidiary (where a minimum 10% stake is held uninterruptedly for at least one year);
- Guarantees that are ancillary to the financing transaction (granting of loans) are exempt from Stamp Duty, provided that the guarantee is granted simultaneously with the secured loan, even if in a different instrument or title.
A withholding tax of 25% applies on interest paid by a Portuguese entity to a non-resident lender (other than a non-resident financial institution). The withholding tax may be reduced or fully eliminated pursuant to a double tax treaty, provided certain conditions are complied with.
In addition, no withholding tax is applicable under the Interest and Royalties Directive, if the lender is able to claim the benefits of the directive. The withholding tax exemption applies provided that the lender has a direct holding of at least 25% of the share capital or voting rights of the borrowers for at least two consecutive years, or vice-versa. The withholding tax exemption also applies if both the borrower and the lender are directly held by a common shareholder holding at least 25% of the share capital or voting rights of each company, for a minimum period of two consecutive years.
Limits on the deductibility of net financing expenses
Portugal does not have thin capitalization rules. However, the Corporate Income Tax Code foresees an interest barrier rule, which sets the limits for the deductibility of net financing expenses. In 2019, the net financing expenses are deductible up to the greater of the following limits:
- € 1 Million; or
- 30% of EBITDA (Earnings before Interest, Taxes, Depreciations and Amortizations, with some tax adjustments).