DOUBLE TAX TREATIES
This short note is for discussion at the I.T.P.A. workshop at Cap Ferrat.
The purpose is to outline how good tax planning and particularly the benefits of properly
structuring a venture between Ireland and Portugal can ensure the maximum after tax return.
The details are set out as follows:
A property company resident in Portugal develops a property in Portugal and other countries,
and lets the property on a time-share basis.
The company needs to set up a structure to manage and maintain the property, collect rent
and service charges, and make payments in respect of regular outgoings.
Some thought has been given to using various tax havens, but we understand that these would
not be acceptable in Portugal.
Having looked at detail at the requirements, it was suggested that an Irish company (Co. A)
would be set up which would provide management and maintenance services.
Co. A has as its main objects, the business of carrying on management of time-share
developments and other property developments, the collection of rents, fees and outlay, the
maintenance of the property and the payment of costs and outlay.
This is an Irish Resident Company which will conduct its business from Ireland, and will pay
tax at 12.5% on its taxable corporate profits.
An agreement is now entered into between the owners and developers of the time-share, and
Co. A. This places the obligation on the Irish company to take over full responsibility for
management and maintenance and collection of time-share levies, service charges and any
Thought has been given to possibly further reducing the impact of taxation.
An agreement was entered into with a B.V.I. company (Co. B) (which has expertise in time-
share development, management, purchase and re-sale, and has extensive know-how in
relation to time-share) that Co. B. would manage and maintain the time-share properties and
provide administrative services.
The Irish company pays 80% of its gross income by way of fee to Co. B. for undertaking
work which is contracted to it.
Therefore there is 3 agreements. The developers will sell the right to time-share directly to an
owner and simultaneously the management company will enter into an agreement with the
new owner, whereby the management company will provide its services, and the owner of the
time-share will covenant to pay for these services.
Co. A now in turn enters into an agreement with Co. B., requiring it to carry out, as an
independent contractor, a whole range of services including the collection of time-share
income and other service charges, and Co. B. is entitled to carry out these functions freely as
it feels proper to do so. It is independent of Co. A.
Co. B ensures that it does not create a permanent establishment in Portugal, and will use
contractors to undertake any maintenance work on foot of written or oral contracts, and all
payments for services are made from Co. A. to Co. B., including the repayment of expenses
incurred by Co. B. in carrying out its duties of management and administration of the time-
Co. A. shall receive its fees directly from the time-share owners, and shall in turn pay on to
Co. B. such fees as it may be entitled to, and reimburse that company upon request, all
expenses, costs, charges and disbursements.
An outline of the structure therefore is set out as follows:
IRISH COMPANY B.V.I. COMPANY
We now have to look at the Ireland / Portugal Double Tax Treaty which was signed in 1994.
This allows for the taxing of income and business profits in such contracting state as the
entity is resident (and it also applies to Capital Gains).
In the circumstances therefore we have created a structure where Co. A is taxable on its
profits in Ireland.
However Co. A. has contracted with a specialist outside of Ireland, to whom it can pay fees
for undertaking management, administration and accounting functions, then these fees can be
payable to Co. B., gross; and Co. A’s taxable income is reduced.
Co. B. ensures by using contractors in Portugal, that it does not establish a permanent
establishment in Portugal.
The result is that the time-share management company in Ireland pays tax on its profits in
Ireland (at 12.5%), but these are mitigated to a reasonable extent by having a structure where
Co. B. will take a substantial amount of the fees, and will not pay Corporation Tax on its