Irs Inheritance Tax Rates - DOC by aag27633


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									    Avoidance of multiple inheritance taxation within Europe

                                      António Marcos 

1. Portuguese Inheritance and Gift Tax.

1.1 An ove rvie w

The Portuguese taxation of all movable and immovable property death transfers and gift
inter vivos is levied by the Code of the Municipal Tax on Transfers of Real Estate and
of the Tax on Sucessions and Gifts (Código do Imposto Municipal de Sisa e do Imposto
Sobre Sucessões e Doações, “CIMSISD”) originally introduced by Drecree Law 41 969,
of 24 November 1958 (Código da Sisa e do Imposto sobre Sucessões e Doações) 1 , wich
became effective on 1st January 1959 and amended for the present denomination of
Decree Law 308/91 of 17 August 1991, that encompasses two different taxes:
     One charged at municipal level on real estate – related transfers for
        consideration, called Sisa 2 .
     The other, a state tax on gratuitous transfer of property, called Imposto Sobre
        Sucessões e Doações (“ISD”).
ISD is levied at progressive rates 3 in respect of real and effective immovable and
movable property gratuitously transfers (i.e. inheritances, bequests and gifts inter
vivos). This tax is not charged on the state of the deceased as a whole neither on the
donor, but on each individual recipient with respect to the amount effectively received
by inheritance or gift (the taxable base).
ISD only can be assessed and notified to the taxpayer within a maximum period of 8
calendar years after the transfer was made 4 and collected within the same period 5 .
The tax office at the municipality or quarter of which the deceased or donor was a
resident at the time of his death or of the deed or contract of donation is the competent
for ISD assessment 6 .

  Tax Pro fessor, Un iversidade Fernando Pessoa-Porto. Lawyer, António Marcos -Advogados.
  For an historical tax perspective of this tax see Pamplona Corte-Real, Carlos: “Breve panorâmica do
Direito Sucessório português” and Dias Garcia, Maria da Glória Ferreira Pinto: “Breve exposição sobre o
Imposto Sobre as Sucessões e Doações”, in Cadernos de Ciência e Técnica Fiscal, nº 122.
  About “Sisas” in Portugal see Soares Martinez, Pedro : Direito Fiscal, Almedina, Co imbra, 1996, pag.
588 et seq..
  Portuguese Constitution (CRP) art. 104º nº 3 and art. 40º CIMSISD.
  Art. 92º CIMSISD by Decree Law 472/99 of 8 November 1999.
  Art. 48º General Tax Law (L.G.T.) (Law 41/ 98 of 4 August 1998).
  Art. 59º CIM SISD. In case of absence of domicile in Portugal, the assessment will be carried out in the
municipality or quarter in which the immovable property is located and, if there is more than one
municipality or quarter, where the most valuable assets are located. In the absence of domicile or
immovable property, the assessment is carried out in the municipality or quarter of the last domicile and,
in the absence thereof, where most of the assets are located. The General Tax Director can authorise that
the assessment will be carried out in a different tax office in case of real damage or special trouble to the
There are cases of transfers of immovable property which can determine a simultaneous
incidence of both ISD and Sisa 7 . In that cases, ISD will be levied on any excess value of
the underlying property. If the value of the obligation pay is equal or greater than the
total value of the underlying property, no ISD would be levied.
Finaly we must say that the revenue collected under ISD is quite modest with very high
administrative and compliance tax costs 8 .

1.2 Crite ria for tax liability

Portugal only uses the criteria of the location of the property for taxation of inheritance
and gifts, i.e. the territoriality criteria 9 .
A gratuitous transfer is subject to ISD only if the property transferred is physically
situated or is deemed situated 10 in Portuguese territory regardless of the nationality of
transferor and recipient.

         1.2.1 Persons liable
         The persons (individual or corporate) liable for the ISD are the recipients of
         property and rights thereon11 (i.e. heirs and legatees of an inheritance or bequest
         and the donees of a gift inter vivos). The entities liable for ISD in case of
         advanced (or substitute) inheritance and gift tax (Imposto Sobre Sucessões e
         Doações por avença) are the holder or the recipient of income from securities
         subject to substitute ISD 12 .
         Liability arises, with respect to an inheritance or bequest, upon the death of the
         transferor or, in case of an inter vivos gift, when the transfer is made or the deed
         evidencing the gift is executed.

  Art. 5º CIMSISD. Transfer by a gift “inter vivos” against payment by the donee of an amount in cash or
a pension for a specified period or life annuity to the donor or with the obligation to pay debts to the
donee or a third person in accordance to the article 964º (pay ment of debts) of the Civil Code and t ransfer
at death by will with an exp ress obligation to pay debts or pensions due to the heir or legatee or a third
person, irrespective of whether the underlying property is identified and, with respect to the heir, the
value involved exceeds his share in the deceased´s debts.
  According to 1999 Budget Law, less then 1% of total d irect taxes collected are fro m ISD.
  Article 6 CIMSISD.
   According to art. 6º sole § CIMSISD the follo wing item of property are deemed to be situated in
Portugal and subject to ISD:
     -    motor vehicles, ships, aircrafts and railroad machinery and equipment, registered or licensed in
     -    rights attached to movable assets or immovable property deemed situated in Portugal (i.e. rights
          fro m intellectual and industrial property will be made and the registration was effected in
          Portugal. The rights to intellectual property will be deemed situated in Portugal if the related
          works are published in Portugal).
     -    Debt-claims, even represented by securities or consisting of quotas or other p articipating
          interests in companies of a Portuguese domiciled cred itor (i.e. if a Portuguese resident holder of
          a bank deposit account in Swit zerland dies, the deposit is deemed to be situated in Portugal for
          ISD purposes), excluding securities subject to substitute ISD. In this last case the Portuguese
          residence of the debtor prevails over the territorial taxat ion criteria. Certain securities are
          expressly exempt fro m this tax (art. 183º CIMSISD).
   Art. 7º CIM SISD.
   Art. 182º CIMSISD.
        If an heir or legatee renounces or waives his portion of the inheritance or
        bequest, the recipient of the underlying property is liable to tax at the rate
        applicable to the heir or legatee, or to the beneficiary, if that rate is higher than
        that to which the recipient himself would otherwise be liable 13 .

1.3 Tax avoidance

As an anti-avoidance measure, in death transmissions of a deceased resident in Portugal,
when no inventory of the deceased’s assets was made by a court, it is deemed that the
deceased’s estate includes household furnishings, money, jewellery, and other personal
belongings, in a minimum value calculated as follows 14 .

Portion of estate (value in Esc.)                 Rate (%)
Until 500.000                                     3
500.001 – 2.500.000                               6
2.500.001– 5.000.000                              9
5.000.001 – 10.000.000                            12
over 10.000.000                                   15

It´s also deemed: that the values deposit or keeped in the name of several persons
belong in equal parts to all of them; that belong to the inheritance the balance of bank
accounts in the name of any heir or legatee which could be mobilized by the deceased;
that qualify as gifts certain movables easily transferred which the heir or legatee states
to have payed for them to the deceased or to the spouse in the year that precede death 15 .

1.4 Valuations and exclusions

The methods of appraisal for the value of different types of property are as follows:
Under a general rule, immovable property is valued on the basis of its updated cadastral
value for Municipal Immovable Property Tax (Contribuição Autárquica) purposes, of
the judicial inventory or the apportionment deed, whichever is higher 16 . Movable
property is valued on the basis of the declaration filed with the tax office, of the judicial
inventory or apportionment deed, whichever is higher.
Therefore there are special rules for valuation 17 :
     property expropriated in the public interest is valued at the amount of the
       indemnity (compensation) paid or agreed upon;
     foreign currency quoted in Portugal is valued on the basis of the Portuguese
       Central Bank’s quotation: and unquoted domestic or foreign currency is valued
       on the basis of the value assigned by the National Mint and, in the absence of
       this, the value certified by an official appraiser, or the value shown in the
       judicial inventory or an apportionment deed, whichever is higher;
     mortgaged property is valued on the basis of the updated cadastral value or
       mortgage value, whichever is higher;

   For ISD statutory obligation of declaration see arts. 60º CIMSISD.
   Art. 26º CIMSISD. This presumption is now, after Decree Law 472/99 of 8 November 1999, a “iuris
tantum” presumption.
   Art. 9º 1º, 2º e 3º CIM SISD.
   Art. 20º § 2º.
   Arts. 20º to 23º.
      gold, silver, jewels, precious stones and similar items are valued on the basis of
       a certificate made by an official appraiser;
      the value of a commercial, industrial or agricultural undertaking and of quotas in
       limited liability companies and rights in partnerships is as follows:
            - if there is a balance sheet, that shown in the last balance sheet;
            - if there is a judicial apportionment, that shown therein;
            - if the apportionment is not made by a court, that shown therein provided
                it is higher;
      in the absence of a balance sheet or apportionment, that shown in the declaration
       of goods;
      if the company or partnership is not the direct heir, legatee or donee of the
       deceased partner or the donor, then the value of the quotas or participation rights
       is that shown in the formation deed;
      a pension or annuity for life is valued at 20 times the annual income from it: if it
       is a pension or annuity for a specified period of time, the value is equal to the
       number of years to run (limited to 20 times the annual income derived from it) ;
      the value of an usufruct on property (separate from the property) is equal to the
       value of the underlying property, in the case of a life estate; in the case of
       usufruct for a definite period, its value is 5% of the value of the underlying
       property multiplied by the number of years remaining.

         1.4.1 Exclusions
         Property which is not subject to ISD includes 18 :
         - proceeds from life insurance policies, unless the debt claim attached thereto
             matured for the policyholder/ insured prior to his death without such
             proceeds having been withdrawn19 .
         - pensions and subsidies paid by social security institutions, as well as those
             retirement or disability pensions payable on pensioner’s death by the
             governmental CGA (Caixa Geral de Aposentações);
         - family subsidies due upon death of the person entitled to receive it;
         - donations by charitable organizations;
         - donations which, under the individual income tax code (CIRS) and the
             corporate income tax code (CIRS) are considered to be of public interest or
             destined for cultural purposes 20 .
         - transferred for descendents not older than 18 years 21 .

   Art. 3º § 2º.
   Under current legislation, a transfer (by death or gift inter vivos) of life insurance policies is not
classified as a gratuitous transfer for ISD purposes, unless it consists of proceeds which are payable under
a policy which matured prior to be policyholder’s himself. Thus, proceeds from life insurance policies
which have not matured prior to the policyholder’s death are not subject to ISD;
   This matter is now regulated in the recently created Patronage Statute (Estatuto do Mecenato). Decree
Law 74/ 99 of 16 March 1999.
   Art. 3º nº 7 CIM SISD by Law 3-B/ 2000 of 4 April 2000 (Budget Law for 2000).
 1.5 Rates and tax-free base amounts

 The inheritance and gift tax rates are progressive and depend on each recipient’s taxable
 base and his or her relationship to the deceased or donor. For this purpose, the following
 categories of recipient (graus de parentesco) are established 22 :

 Category I: spouse and major descendants
 Category II: ascendants and siblings
 Category III: uncles or aunts, nephews or nieces
 Category IV: any other recipients.

 2000 Inheritance and gift tax rates table23

                 to        Fro m         Fro m                Fro m           Fro m           Fro m       Fro m
Transferences 730.000   730.000$      2.860.000$          7.280..000$     14.300.000$     35.880.000$ 71.240.000$
                  $   to 2.860.000$ to 7.280.000$              to              to               to
                                                          14.300.000$     35.880.000$     71.240.000$
Category I         -           3               6               9               13              17                24
Category II       7           10              13               16              21              26                32
Category III      13          17              21               25              31              38                45
Category IV       16          20              25               30              36              43                50

 In applying the ISD rates, the following rules must be observed:

      -   the rates applicable are those in force at the time of the transfer rather than the date
          of the assessment 24 ;
      -   the recipient’s share or gift received is to be split in two parts; the first part, is the
          highest amount within the pertinent bracket; the rate for that bracket applies on
          that amount. The second part, is the amount in excess up to the upper limit of the
          immediately following bracket; the rate for that bracket is then applied on the
          excess 25 ;
      -   the tax-free allowance for spouse and children must be taken on the first part of
          his/her share 26 ;
      -   the ISD amount of tax due is the sum resulting from applying the rates to the two
          parts; and
      -   the tax due may not be such as to leave the heir, legatee or donee with an after-tax
          amount which is less than the amount which would have been if his taxable base
          had been equal to the upper limit of the immediately preceding bracket 27 .

    Art. 43º CIMSISD and art. 1579º to 1586º o f the Civil Code.
    Art. 40º CIMSISD by Law 3-B/2000 o f 4 April 2000.
    Art. 45º CIMSISD.
    Art. 40º only paragraph CIMSISD.
    Art. 41º CIM SISD. Each recipient of an inheritance, bequest or gift inter v ivos who is the deceased´s or
 donor´s spouse or child is granted a tax-free amount of 730,000 Esc. (art. 12º nº 2 CIMSISD).
    Art. 40º only paragraph “in fine”.
Example (in Esc)
Mr A. is married with a marriage settlement and has two children, a child and an adult.
The net value of Mr A’s estate under the settlement upon death is appraised by the tax
office at 41,600,000; the estate is apportioned as follows:
- 13,500,000 to his children; and
- 14,600,000 to his widow.
The child´s transfer is now 28 not subject to ISD.
The adult tax would be assessed (under category I) as follows:
    - first part of the split:
    - 7,280,000 – 730,000 (allowance)= 6,550,000;
    - second part of the split : 6,220,000.

Thus ,the total tax due would be:
953,000 (i.e. 6% of 6,550,000+9% of 6,220,000)
The wife’s tax would be assessed (under Category I) as follows:
     - first part of the split:
     - 14,300,000 – 730,000 (allowance) = 13,570,000;
     - second part of the split:300,000.

Thus, the total tax due would be:
1,260,000 (i.e.9% of 13,570,000 + 13% of 300,000).

Unless the taxpayer request permission from the tax authorities to pay his tax liability in
a single payment, the tax due is payable in half- yearly instalments, after the taxpayer
receives notice of the assessment from the competent tax office. The number of
instalments depend on the amount of tax due (from 16, if the tax due does not exceed
100.000 Esc. to 6, if the tax due exceeds 1.500.000 Esc.). The taxpayer may, however,
choose to pay the total tax in a single instalment. In that case, he will benefit from a tax
reduction calculated a monthly rate of 1% on the outstanding tax due.

           1.5.1 Tax- free amounts 29
           - any amount received by an inheritance, bequest or gift inter vivos from the
               Portuguese state agencies and other public bodies; local government and
               their federations and trade unions; entities of public or administrative scope;
               public libraries and museums, educational, scientific, literary or artistic
               institutions and associations, charities and welfare institutions and
               associations and recognized churches;
           - an amount not exceeding 75.000 Esc for each recipient of any inheritance,
               bequest or a gift “inter vivos”; if the amount received exceeds the limit, then
               the entire sum is subject to ISD , but the tax payable cannot supersede the
               excess over the limit;
           - an inheritance or bequest received by the deceased’s parents not exceeding
               365,000 Esc. If the amount received exceeds the limit, then the entire sum is
               subject to ISD, but the payable tax may not supersede the excess over the
           - copyrights on literary, scientific or artistic work;

     By Law 3-B/ 2000 of 4 April 2000 (Art .3º nº 7 CIMSISD).
     Arts. 12º e 13º CIMSISD by Law 3-B/ 2000 of 4 April 2000.
         -    amounts accumulated under a retirement savings plan (PPR) or a private
              pension fund and received by the deceased’s surviving spouse or children;
         - the balance of home purchase–related savings accounts and emigrant savings
         - In the case of the substitute ISD it will be tax- free income from bonds issued
              throughout the years 1999-2002 30 and pension funds income created under
              Portuguese national law 31 .
         There is only one personal allowance granted under the Portuguese CIMSISD.
         Accordingly, each recipient of an inheritance, bequest or gift “inter vivos”, who
         is the deceased’s or donor’s spouse or child is granted a tax- free amount of
         730,000 Esc. 32

1.6 Striking features

Furthermore, any shareholder (resident or non-resident) will be subject to substitute ISD
on a yearly basis, not because he/she/it owns any shares (quoted or unquoted) in a
Portuguese SA, but because he/she/it receives dividends attached to such ownership 33 .
Moreover, as the substitute ISD is not, according to the Portuguese formal classification
of taxes, a tax on income (thus not covered by any Portuguese comprehensive double
tax convention) all (individual and corporate) shareholders of Portuguese SAs who are
resident in double taxation convention countries will be subject, without exception, in
addition to the Portuguese withholding tax on outbound dividends under double taxation
conventions, to a separate withholding tax of 5% on the gross amount of such
dividends 34 .

2. Double taxation relief

Portugal has not concluded any double taxation conventions for the avoidance of double
taxation for inheritances and gifts.
Portugal has no unilateral relief for international double taxation in this field. Internal
double taxation is, however, mitigated if the same assets (property or right thereon)
which were acquired by inheritance, bequest or gift are transferred again within a five-
year period by death and if inheritance or gift tax was paid (or is to be paid) on the first
transfer. In that case, the current tax liability is reduced by 50%. Where the personal
allowance applies, the portion of assets on which the allowance was previously take n
does not benefit from the current 50% reduction 35 .

   Law 87-B/98 of 31 December 1998. Fo r the years of 1996, 1997,1998 respectively Law 95 -A/95 of 28
December 1995, Law 52-C/ 96 of 27 December 1996 and Law 127-B/97 of 20 December 1997.
   Law 39-B/94 o f 27 December 1994.
   Art. 12º nº2 CIMSISD by Law 3-B/2000 of 4 April 2000.
   Art. 182º CIMSISD. See §1º, by Law 3-B/ 2000 of 4 April 2000, about substitute ISD exclusion of
registred shares owned by holding companies and group taxation co mpanies.
   Art. 184º CIM SISD. The substitute ISD has been severely criticized by international tax experts. (e.s. it
is pending in the Court of Justice of the European Commun ities an appeal about the compatibility of the
substitute ISD and Direct ive 90/ 435/ EEC. In his conclusions, the Advocate-General opinion is that the
substitute ISD violates the Directive, although being qualified in the Portuguese tax system as an
inheritance and gift tax, it is in reality an Income Tax (Proc C-375/98 Min istério Público and Others v
Epson Europe BV)).
   Art. 44º CIMSISD.
It is worth noting that there is only an agreement between Portugal and France
concluded in 1994 and published in Diário da República nº 184 – I Série – A, of 10th
August 1994. This agreement establishes that the tax-free provisions of ISD that each
contracting party applies to the state and to the local council, and also to the public law
collective persons of the state and local council that pursue activities in the scientific,
artistic, cultural, education or welfare work, apply also to the other contracting party.
This agreement is applicable to the state and local council in respect of all inheritances
and gifts made after 1st January 1992.

3. EC Law

In the EU there are as many jurisdictions in the field of inheritance and gift taxes as
member states. As consequence, moving from one member state to another, to loose the
nationality, or to be naturalized, purchasing immovable property in another jurisdiction
or moving assets from one jurisdiction to another may have unexpected consequences.
This may cause multiple taxation, but, on the other hand, by making use of estate
planning techniques we can obtain substantial tax advantages. The EU has not yet
solved the problem of direct tax harmonization in order to create fiscal neutrality and to
guarantee the EU freedom of movement.
There are real and serious problems in the fiscal environment of small and medium
sized enterprises (SME).They are discriminated against SA companies. The later are not
subject to substitute ISD being the former subject to the penalised progressive ISD rate
of taxes 36 .
In Portugal we have also a specific problem with the substitute ISD. Non-residents, in
addition to Personal Income Tax (IRS) and to Corporate Income Tax (IRC), are a lso
subject to a non-deductible and non-creditable 5% substitute ISD, as a final tax, on
domestic source dividends from any shares issued by domestic corporations and on
interest from bonds. Moreover, securities liable to this tax are not subject to the
progressive inheritance or gift tax.
This causes problems of compatibility with 90/435/EEC Directive 37 . After 1st January
1992, as a consequence of that Directive, the regime of elimination of double taxation
has been extended to resident entities that have a participation in the capital of the other
company, of no less than 25 per cent and for a consecutive period of two years or since
the constitution of the participated entity during two consecutive years, resident in
another Community Member State, as long as the conditions of Art. 2 of the Directive
are fulfilled 38 . Art. 5º, paragraph 4 admits that Portugal may collect a source tax on
profits distributed by resident affiliated companies to their parent companies resident in
another member state until eight years after entry into force of the Directive.

   See Mota Lopes, Cidália: A Fiscalidade das Pequenas e Médias Empresas, Estudo Comparativo na
União Europeia, Vida Econó mica, 1999.
   The Direct ive was implemented in Portuguese law through Decree-Law 123/ 1992, of 2nd July 1992.
About implemention of 90/435/ EEC Directive in Portugal, see Sousa de Câmara, Francisco: “O regime
fiscal co mu m aplicável às sociedades -mães e sociedades afiliadas de diferentes Estados membros da
Co munidade Eu ropeia”, in Fisco, 1992, nºs 43-44 pág. 40 et seq.and Teixeira, Glória: Taxing Corporate
Profits in the EU-A Comparison of the Portuguese, British and Dutch Systems, Series on International
Taxation, nº 17, Klu wer. Peters, Martin: “Capital movements and taxation in the EC”, EC Tax Review,
1998-1, Kluwer. Farmer, Paul: “EC law and national rules on direct taxation: a phoney war?”, EC Tax
Review, 1998-1, Kluwer.
   The exemption is also granted to resident parent companies that receive dividends from an affiliate
resident in another member state (art. 45º CIRC).
The source tax can’t exceed 15 per cent in the five earlier years and 10 per cent in the
last three years. But, when we are in presence of a dividends distribution it’ll be subject
to a 10 per cent withholding tax and a separate withholding tax of 5% of substitute ISD
that can’t be deducted. This may violate the direct tax harmonization and the avoidance
of double taxation pursued by the Directive, and it is in opposition to the free capital
movement principle within the EU 39 .

4. Case

-       Individual X who:
         is domiciled in England (A)
         is a national of Germany (B) that was left by the individual within the last 10
         is a resident of France (C)
         has situs property in Portugal (D)
         deceases during a holiday in Spain (E)

-       Would your country tax if it is in the position of:
         Country A – No
         Country B – No
         Country C – No
         Country D - Yes
         Country E – No

May 2000

  See conclusions of the Advocate-General in case C-375/ 98 M inistério Público and Others V Epson
Europe BV, 17 February 2000

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