As we move into a new year, let us have a look at the tax landscape in Portugal. A year ago there was speculation that the new socialist government could introduce an inheritance tax. This has not happened, but a ‘wealth tax’ on property was introduced instead.
Income tax and surcharges
The income brackets and tax rates for personal income tax remain unchanged (there have been no changes since 2013).
Income / Tax rate
€0 – €7,000 / 14.5%
€7,001 – €20,000 / 28.5%
€20,001 – €40,000 / 37%
€40,001 – €80,000 / 45%
Over €80,000 / 48%
However, the surtax introduced under austerity measures will be phased out during 2017. Individuals who pay tax under PAYE will cease to pay surtax at different stages in the year, depending on their income level (see table below).
If you are not subject to PAYE but receive, for example, pension and investment income, you are subject to surtax at the above rates until December 31, 2017.
The additional solidarity tax applied to individuals with higher income (2.5% on income over €80,000 and 5% over €250,000) continues to apply.
As previously, interest and investment income is taxed at a flat rate of 28%. If you are resident here, you can choose to be taxed at the scale rates above instead, if this is more beneficial.
If the bank account or investment is in a jurisdiction on Portugal’s blacklist of ‘tax havens’ –including the Isle of Man, Channel Islands and Gibraltar – income is taxed at a higher rate of 35%.
Non-Habitual Residents regime
Portugal’s NHR regime remains in place, providing new residents with very attractive tax benefits for their first 10 years. If you are not yet resident in Portugal, seek advice on how you could use this regime to your advantage.
Portugal’s new wealth tax applies from 2017 and is actually an extension of the property tax Imposto sobre Imóveis (IMI).
It is an annual tax, at a fixed rate of 0.3%, charged on the ‘catastral’ value of Portuguese situs real estate, regardless of where the owner is resident. You are liable if your property (or share of a property) is worth over €600,000. Married couples/civil partners can have a combined allowance of €1,200,000.
The €600,000 allowance is available for individuals and estates, except for those tax affairs that are not in order. Some companies are not eligible, for example where less than half their activities are agricultural, commercial or industrial, property-dealing companies, and those incorporated in tax havens.
Property used in tourism or for commercial, industrial or agricultural purposes is exempt.
Wealth tax can be offset against any income tax payable on rental income from a property, provided you pay tax at the progressive rates. It can also be offset against a company’s corporation tax liability on rental income.
The previous stamp duty tax residential property valued at over €1 million has been abolished.
There are no changes this year to the tax treatment of trusts in Portugal. Since January 2015, Portugal taxes distributions from fiduciary structures such as trusts and foundations made to individuals resident in Portugal.
There can still be good value in a trust – they remain very effective for estate planning purposes. However, if and how you should use a trust, and how you combine it with investment arrangements for an income and gains perspective, depends on your specific circumstances and objectives.
From 2017, Portugal’s official blacklist is no longer the sole source of determining whether a jurisdiction is blacklisted. Now, where the rates of tax levied in a jurisdiction are less than 60% of the equivalent Portuguese tax rate, the jurisdiction will be deemed to be blacklisted.
This could affect you if you own a Portuguese property through a company, since the entire value of the property would be subject to the new wealth tax, with no allowance. If the company is wound up and the property distributed to a Portuguese resident, it would be liable for 35% corporation tax.
Your estate planning, tax planning and investment planning should be considered together. You should have a tax informed investment strategy, based on a thorough understanding of the tax landscape. Look to protect your wealth for the long-term, 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 Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.