There are many attractions to living in Portugal, as I am sure most readers would agree. What can surprise people is that taxation can be one of them.
Unlike other expatriate destinations like Spain and France, there is no wealth or succession tax here. While we do have stamp duty, as estate taxes go it is relatively benign and your immediate family is not taxable.
Portugal also offers the Non-Habitual Resident scheme to attract wealthy people to live here. It offers new residents substantial tax exemptions for their first 10 years.
However, while on the surface taxation here can seem relatively straightforward, there is more to it than meets the eye. I often meet expatriates who are unsure about some elements, or who have misunderstood the system or been misinformed. It is important to take professional advice for your tax planning.
And then there is income tax, which is not so benign. 2013 saw the largest tax hikes in modern Portuguese history, and they are still in place today. Income tax rates range from 14.5% to 48%, with the top rate applied to income over €80,000.
Solidarity and surtaxes, introduced under austerity measures, take the top rate of tax to 56.5%. We had hoped at least one would have been removed by now, but they remain in place for 2015 income (though part of the 3.5% surcharge on income could be rebated next year, depending on how much tax revenue the government earns).
Investment income (interest, dividends, capital gains) is taxed at a flat rate of 28%. However, if it is derived from a tax haven on Portugal’s ‘blacklist’, the tax increases to 35%. The Isle of Man, Channel Islands and Gibraltar are included on this list and so are not tax efficient homes for your savings.
The most recent change came into effect on January 1 this year, when Portugal began to tax distributions from fiduciary structures, such as trusts and foundations, made to individuals resident in Portugal.
This was a significant change, and the tax treatment depends on whether distributions are made from a trust or a trust is being wound up; or if payments are made to someone other than the settlor.
This change to the taxation of trusts was a move against avoidance, as we have seen in the UK and other European countries over the past few years.
Many UK nationals had set up trusts for the estate planning benefits they offer. There is now a lot of uncertainty and concern over whether you should still have a trust in Portugal or not.
In fact there is still good value in a trust. They remain very effective for estate planning purposes and many people will continue to successfully use them as such.
However, if and how you should use a trust for an estate planning perspective, and how you combine it with investment arrangements for an income and gains perspective, depends on your specific circumstances and objectives.
For example, will you be taking anything from the funds held within the trust? Or are you using it purely for estate planning purposes? Where are the beneficiaries resident? Might they be living elsewhere when they receive distributions from the trust?
Over recent years the Portuguese government has taken steps to improve methods of tracing and preventing tax evasion in order to increase tax revenue. It has increased the number of tax inspectors and signed up for the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard for automatic exchange of information on a global scale. From 2017, it will receive information on its taxpayers’ overseas assets and income, whether the individual declares them or not.
Your situation is unique. What works for someone else may not necessarily work for you. You need personalised guidance and planning, based on your and your family’s specific circumstances and what you are trying to achieve.
Your estate planning, tax-planning and investment planning should all be considered together. You should have a tax informed investment strategy, based on a thorough understanding of the tax landscape. Use investment arrangements that are specifically tailored for the needs of Portuguese residents today; that will provide tax and estate planning advantages as well as access to highly rated fund managers. They should also provide investor protection if possible.
Look to protect your wealth for the long-term, both for yourself and your family. There are many opportunities available to residents of Portugal to help you do just that, if you take specialist and personalised advice.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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