At a glance: The Supreme Administrative Court (STA) has settled how partial redemptions of unit-linked (ramo vida) life insurance are taxed in Portugal. In Uniform Jurisprudence Ruling n.º 13/2026, published in the Diário da República on 26 June 2026, the court held that a partial redemption is taxable as investment income (Category E) on the net appreciation of the units redeemed, even where the amount withdrawn is lower than the total premiums paid. The argument that no tax arises until cumulative withdrawals exceed total premiums, the so-called FIFO reading, was rejected. Tax is due on the proportional gain in the units you redeem, at 28 per cent, reduced by the holding-period relief.
Anyone holding a unit-linked policy who plans a partial withdrawal needs to absorb one point: you cannot treat the first withdrawals as a tax-free return of your own capital. The Supreme Administrative Court has confirmed that each partial redemption crystallises a proportional slice of taxable gain on the units you cash in, even if the amount you take out is well below what you originally paid in premiums. For residents in Madeira, and for those relocating to the Region with an existing wrapper, the planning consequence is direct: the gain is realised redemption by redemption, not deferred to the end, and the timing of each withdrawal carries a calculable tax cost.
This post sets out what the court decided, the two readings it had to choose between, and what the ruling means in practice. It complements our general explainer, Unit Link Taxation in Portugal: What Investors Need to Know.
What the STA decided
In Uniform Jurisprudence Ruling n.º 13/2026 (Processo n.º 95/25.4BALSB, Full Court of the Tax Litigation Section, decided 26 November 2025, published in the Diário da República, 1.ª série, n.º 122, of 26 June 2026), the STA was asked to resolve conflicting arbitral decisions on a single question of law: when a unit-linked policyholder takes a partial redemption, and the amount redeemed is less than the total premiums paid, is any income taxable?
The court answered yes. Its uniformised holding is that there is taxation under Article 5(3) of the CIRS, as Category E investment income, on a partial redemption of a unit-linked policy whose redeemed amount is lower than the total of all premiums paid, on the part of the net income from the appreciation of the participation units corresponding to the redeemed amount. The arbitral decision under appeal, which had upheld the tax, was confirmed.
The two readings: pro-rata against FIFO
Article 5(3) of the CIRS taxes the positive difference between the amount paid on redemption of a life insurance operation and the respective premiums paid. For a full redemption the calculation is simple. For a partial redemption the statute is silent on method, and two readings had emerged.
The first reading, which the taxpayers urged, treats each partial redemption as a return of capital first. On this FIFO logic, nothing is taxable until the cumulative amount withdrawn exceeds the total premiums paid; only then does a gain arise. The second reading, applied by the insurer and defended by the tax authority, computes the gain proportionally. Because the premium buys participation units whose value moves, a redemption of part of those units returns part capital and part appreciation. The word respective in the statutory phrase respective premiums paid was read by the court as pointing to the slice of premium attributable to the units redeemed, not to the whole premium.
The STA adopted the pro-rata reading. Where the units have risen above their entry value, a redemption is not purely a return of capital; it contains realised appreciation that is income at the moment it is placed at the holder’s disposal, which Article 7 of the CIRS fixes as the redemption itself.
Why the court chose pro-rata
The reasoning rests on the nature of the product. The premium is converted into participation units whose value fluctuates with the underlying fund. When a policyholder redeems part of those units after they have appreciated, the insurer can isolate, unit by unit, how much of the payment is returned premium and how much is gain. In the case under appeal the insurer did exactly that and declared both components.
The court added a structural point. If the FIFO reading applied, a policyholder could redeem the capital early while the embedded income always sheltered behind the longest holding period, which would distort the relief in Article 5(3). It also rejected the argument that no gain can be known until the contract ends: the appreciation on the units actually redeemed has been realised and received, and a later fall in the value of the units left in the policy affects only the unredeemed part.
The decision was not unanimous. One judge dissented, taking the FIFO view that tax should arise only once the amount redeemed exceeds the total premiums paid, on the ground that the pro-rata method reads more into Article 5(3) than its words allow. The majority position is now the uniformised jurisprudence.
How the taxable amount is calculated
Take a single premium of 100,000 euros that buys 10,000 units at 10 euros each. The units rise to 12.50. A partial redemption of 25,000 euros cashes in 2,000 units. Of that payment, 20,000 euros is the premium attributable to those 2,000 units (2,000 at 10 euros) and 5,000 euros is appreciation (2,000 at 2.50 euros). The taxable income is the 5,000 euros of appreciation, even though the 25,000 euros withdrawn is far below the 100,000 euros of total premiums. Under the rejected FIFO reading, nothing would have been taxed until cumulative withdrawals passed 100,000 euros.
The holding-period relief then reduces the taxable slice. Where at least 35 per cent of the premiums were paid in the first half of the contract term:
- One fifth of the income is excluded if the redemption occurs after the fifth year and before the eighth, so tax applies to 80 per cent of the gain, an effective rate of 22.4 per cent.
- Three fifths of the income is excluded if the redemption occurs after the eighth year, so tax applies to 40 per cent of the gain, an effective rate of 11.2 per cent.
In the worked example, a redemption between the fifth and eighth year would tax 4,000 euros of the 5,000 euro gain; after the eighth year, 2,000 euros. Within the first five years, or where the 35 per cent condition is not met, the full gain is taxed.
The rate and how the tax is paid
The applicable rate is 28 per cent. Where the policy is held with a Portuguese insurer, the tax is withheld at source on payment. Where the policy is held with a foreign insurer, as in the cases the STA examined, both of which involved Luxembourg institutions and Portuguese-resident policyholders, there is no Portuguese withholding and the income must be declared by the taxpayer, in Anexo J of the Modelo 3. A resident may instead opt to aggregate the income with the rest of their IRS where that produces a better result, in which case the Madeira regional rates are relevant.
What this means if you are moving to Madeira
For someone relocating to Madeira holding a unit-linked or capitalisation wrapper, the ruling removes a planning assumption. You cannot draw down the policy in instalments below your total premiums and treat those instalments as untaxed capital. Each partial redemption taken while Portuguese-resident crystallises a proportional, taxable gain on the appreciated units. The sequence matters: a redemption taken before establishing Portuguese tax residence sits under a different analysis from one taken after, and for a policy held abroad the reporting obligation falls on the policyholder, not on the insurer.
Two levers remain. The holding-period relief is now more valuable, because the income can no longer be deferred through the FIFO reading, so reaching the five and eight year thresholds before redeeming changes the effective rate materially. And for a resident who opts to aggregate, Madeira applies its reduced regional IRS rates to the income rather than the mainland figures.
Practical takeaways
- A partial redemption of a unit-linked policy is taxable on the proportional appreciation of the units redeemed, even where the amount withdrawn is below total premiums paid.
- The FIFO argument, that capital comes out tax-free first, has been rejected by the STA and is now settled against the taxpayer.
- The taxable gain is the per-unit appreciation on the units cashed in, not the gross amount withdrawn.
- The default rate is 28 per cent, reduced to an effective 22.4 per cent after five years and 11.2 per cent after eight, where the 35 per cent premium condition is met.
- For a foreign-held policy, the income is self-declared in Anexo J; there is no Portuguese withholding.
- Residence status at the date of each redemption drives the analysis; model the position before withdrawing.
Where MCS can assist
MCS can review a unit-linked or capitalisation policy and model the IRS treatment of a planned partial redemption in light of Ruling n.º 13/2026, including the per-unit gain calculation, the applicable holding-period relief, and the Anexo J reporting for a foreign-held policy, subject to confirming the policy terms, the premium history, and the unit values at the redemption date. For clients relocating to or from Madeira, we can assess the residence position at the intended redemption date and its interaction with the relevant double tax treaty, where applicable, and coordinate the IRS reporting. Engagement is subject to a case-by-case review of the contract documentation.
Frequently asked questions
Is a partial redemption of a unit-linked policy taxable in Portugal even if I withdraw less than I paid in? Yes. Following Ruling from STA n.º 13/2026, the gain on the units you redeem is taxable even where the amount withdrawn is below your total premiums paid. The first withdrawals are not treated as a tax-free return of capital.
How is the taxable income measured? On the proportional appreciation of the units redeemed: the difference between their value at redemption and the premium attributable to them. The gross amount withdrawn is not itself the taxable base.
What rate applies? The 28 per cent autonomous rate, reduced to an effective 22.4 per cent after the fifth year and 11.2 per cent after the eighth, where at least 35 per cent of the premiums were paid in the first half of the contract term.
What was the FIFO argument the court rejected? That each partial redemption is a return of capital first, so no tax arises until cumulative withdrawals exceed total premiums. The STA rejected this in favour of the pro-rata method.
My policy is with a foreign insurer. Who reports the income? You do. Where there is no Portuguese insurer withholding at source, the income is declared in Anexo J of the Modelo 3. Both cases the STA examined involved Luxembourg insurers and Portuguese-resident policyholders.
Does the holding-period relief still apply? Yes, and it now matters more. The 80 per cent and 40 per cent inclusion rules apply to the proportional gain, so reaching the five and eight year thresholds before redeeming reduces the effective rate.
I am moving to Madeira with an existing policy. When am I taxed? On each partial redemption taken while Portuguese-resident, on the proportional gain. A redemption before residence differs from one after, and the timing should be planned.
This article is published by Madeira Corporate Services (MCS) for general information purposes. It does not constitute legal, tax, financial, accounting, or investment advice, must not be relied upon as such, and is not a substitute for advice obtained on the specific facts of your case.
No professional relationship. Reading this article, or contacting MCS in connection with it, does not create any client, advisory, or fiduciary relationship between you and MCS. Such a relationship arises only under the terms of a written engagement.
Currency of the content. The article reflects the law, the regulatory framework, the administrative practice of the Autoridade Tributária, and the jurisprudence in force at the date of publication, all of which are subject to change. Tax rates, inclusion percentages, and thresholds are revised, in particular through each annual Orçamento do Estado, and the position of the courts and of the tax authority may evolve, including in respect of the ruling discussed here. MCS is under no obligation to update the article after publication.
Individual circumstances. The tax treatment of any policy, transaction, or person depends on the specific facts, including the terms of the contract, the holder’s residence for tax purposes, and the applicable double tax treaty. The conclusions set out here may not apply to your case.
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Rosana Rodrigues is a co-founder and partner of TFRA Law Firm. Her work mainly involves advising foreign investors in Portugal, particularly in areas of Corporate and Tax law. She has also worked extensively in Shipping law… Read more
