Tax havens and Portugal – are you paying more tax?

Many British expatriates do not usually think twice about holding assets or buying funds domiciled in the UK’s offshore centres. However, if you are resident in Portugal, there are tax consequences of holding assets in a ‘tax haven’.

Portugal has long sought to protect its domestic interests from tax havens. It publishes an official Ministerial Order listing countries, territories and regions with more favourable tax regimes.

This ‘blacklist’ contains over 80 jurisdictions. It includes countries you may expect, such as Panama, Yemen, Liberia, United Arab Emirates, as well as Bermuda, Mauritius, Cayman Islands and Monaco.

Perhaps more surprisingly, it also includes all the Channel Islands, Isle of Man and Gibraltar.

If you have assets in these offshore centres, you are probably paying more tax than you need to.

Investment income and gains

The Portuguese tax regime singles out investment income and gains paid or made available to Portugal residents by entities which do not have a permanent establishment in Portugal and are domiciled in a blacklisted jurisdiction, and imposes higher taxes.

If you have investment assets, such as bank accounts, funds and bonds, which are held or domiciled in one of the listed jurisdictions, the income and gains are taxed at the penal tax rate of 35%.

This compares to the 28% fixed rate that normally applies to investment income.

There are many important considerations when choosing investment funds. You need to consider how it fits in with the rest of your portfolio, and how suitable it is for your objectives and risk tolerance. You need to consider the regulation of the jurisdiction the fund is domiciled in, and evaluate if you are satisfied with the level of regulation it provides.

Besides carrying out due diligence on any funds you invest in, you should also consider the tax consequences. This is particularly important in Portugal since funds domiciled in tax havens attract higher taxes. Although the tax tail should not necessarily wag the investment dog, you do need to be aware of the tax implications of your investment decisions.

You can then weigh up the pros and cons and consider if there are more tax efficient alternatives which suit your needs just as well, or perhaps even better.

Non-Habitual Residence Scheme

We receive many enquiries from people who are attracted to move to Portugal because of its non-habitual residents scheme. For those who are eligible, the scheme can provide substantial tax advantages for the first 10 years of tax residence, with tax exemptions applying to employment, pension and investment income if certain conditions are met.

With regards to overseas investment income, under the scheme dividends and interest are exempt from tax in Portugal, provided the income:

(1) may be taxed in the state of source under a double tax treaty, or
(2) may be taxed under the terms of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention and is not regarded as arising from a Portugal source.

It is important to note, however, that this excludes income generated in one of the blacklisted tax havens. Those applying for the non-habitual residents scheme may need to review their investment holdings if they wish to receive the full tax benefits.

Stamp tax on high end properties

Residential properties valued at €1 million or more are subject to a stamp duty tax of 1%.
Where the owner is resident in one of the blacklisted jurisdictions, the stamp duty rate is much higher at 7.5% – and this also applies where the property is owned by a company based in one of the listed tax havens.
In summary, ironically, owning assets in a tax haven is unlikely to be tax efficient.

Exchange of information

It is also worth reminding readers that offshore centres like the Channel Islands, Isle of Man and Gibraltar have signed up to the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard, which provides for automatic exchange of information on your overseas financial assets for tax purposes.

The first data exchange takes place next year, with information on assets owned in 2016. You should always have been reporting your worldwide income in Portugal; it is now more important to ensure you are doing this correctly.
For peace of mind ask a specialist wealth manager to assess your current holdings and provide options for improved tax efficiency and regulation if necessary.

The 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 must take 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. |