It is a time of change here in Portugal, with a new government, but in terms of taxation 2016 is not looking that different from 2015. The tax hikes introduced in 2013 remain in place, though this will be the last year the surtax is payable.
Speaking during the parliamentary debate on the 2016 budget, Prime Minister António Costa said that this was the first budget in years that did not hike taxes or VAT, and instead was cutting taxes. The government instead is raising indirect taxes like tobacco and fuel duties.
Income tax and surcharges
The progressive tax rates are unchanged since 2013, and range from 14.5% (for income under €7,000) to 48% (for income over €80,000).
Solidarity and surtaxes, introduced under austerity measures, currently take the top rate of tax to 56.5%.
The surtax applies to all income over the minimum wage, currently €7,070. The rate used to be 3.5% for all income over this amount, but for 2016 this rate only applies to income over €80,000. Income between €7,070 and €20,000 is taxed at 1%, then income up to €40,000 at 1.75%, then income up to €80,000 at 3%.
An additional solidarity tax of 2.5% is charged for income over €80,000, increasing to 5% for income above €250,000.
The good news is that the government has confirmed that this is the last year these two surtaxes will be applied.
Investment income (interest, dividends, capital gains etc.) is taxed at a fixed rate of 28%.
Portugal residents can continue to opt for the scale rates of tax instead, but remember, once you choose this for one source of income, it must apply to all sources.
The same applies for rental income. The tax rate is 28%, but residents can have it taxed under the income tax rates.
Income from ‘tax havens’
Portugal publishes a list of “blacklisted jurisdictions” which are countries and territories considered to have favourable tax regimes. This includes the Channel Islands, Isle of Man and Gibraltar.
Income arising from assets held in any of these jurisdictions is taxed at a higher rate of 35%.
Holding investments in such offshore centres is therefore not tax efficient. There are alternative arrangements which are approved in Portugal and provide attractive tax benefits.
With effect from January 1 2015, Portugal now taxes distributions from fiduciary structures such as trusts and foundations made to individuals resident in Portugal. 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.
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 from an income and gains perspective, depends on your specific circumstances and objectives.
Crackdown on tax evasion
We expect the new government to carry on its predecessor’s fight against tax evasion, both local and offshore.
Next year it will start to receive information on its taxpayers’ overseas income and assets from 58 jurisdictions around the world. This will increase to at least 93 the following year. It will then be able to compare tax returns against the information received.
Earlier this year it was also reported that the government was considering a move to obtain the bank balances of everyone paying tax in Portugal.
Non-Habitual Resident regime
This attractive regime for new wealthy residents remains in place. It is open to those who have not been tax resident here for any of the previous five years, whether employed or retired. It offers substantial tax exemptions for your first 10 years of residence.
Future tax reforms?
The new government has promised to reduce taxes and ease austerity – not an easy balancing act. It may need to find other ways to increase tax revenue in future, and one way could be to impose higher capital taxes on the wealthy. We have seen this happen in other European countries.
It is worth noting that there are legitimate tax efficient investment structures available which have largely been unaffected by changes brought in by European governments and which are definitely worth considering in Portugal.
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. 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 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