The personal income taxation of Unit Linked in Portugal Portugal has emerged as one of the most contentious and ambiguous topics in recent tax practice. As international investors, high-net-worth individuals, and even lottery winners increasingly use these financial instruments for wealth planning, the lack of legislative clarity is becoming a pressing issue—not only for taxpayers but also for the Portuguese Tax Authority (Autoridade Tributária e Aduaneira – AT) and practitioners alike.
The Core Issue: Partial Redemptions and Taxable Income
At the heart of the debate lies the treatment of partial redemptions from ULIPs (Unit Linked Insurance Policies)—life insurance policies in which the policyholder bears the investment risk. Under the Portuguese Personal Income Tax (PIT) Code, only the “positive difference between the amount received and the capital invested” should be subject to taxation under Category G (capital-gains).
However, the Portuguese Tax Authority has, in recent years, adopted a pro-rata approach, arguing that each redemption proportionally withdraws both invested capital and latent income. Thus, even when partial redemptions remain below the total capital invested, the AT presumes taxable income arises. This interpretation has been used by the Portuguese Tax Authority to justify tax assessments based solely on gross values reported via CRS (Common Reporting Standard) exchanges between Portuguese and foreign jurisdictions.
The Turning Point: Arbitration Case Law
A pivotal moment came with Arbitration Case 942/2024-T, involving a taxpayer who had invested a €64 million into two ULIPs. Over the years, the taxpayer made multiple partial redemptions without ever exceeding the initial amount invested.
The arbitration court sided with the taxpayer, ruling that no taxable income could be deemed to exist under current law unless the redemptions exceeded the capital invested. This judgment aligns with a growing line of decisions (notably Cases 174/2022-T, 199/2023-T, and 421/2024-T) that affirm a literal interpretation of the Portuguese Personal Incom Tax Code: no income exists without an actual gain.
The Tax Authority’s Position: A Shifting Ground
It is important to mention that the Portuguese Tax Authority and its staff once accepted the literal interpretation of the tax law, but later reversed this stance, citing a decades-old decision by a Secretary of State for Tax Affairs which supported the pro-rata method. Today, despite referencing that outdated decision, there’s a growing sense—shared by many tax professionals—that even the Tax Authority lacks confidence in the legal foundation of its current approach.
What Does This Mean for Taxpayers?
In practice, this legal uncertainty exposes taxpayers to:
- Disproportionate tax assessments on non-existent income;
- Expensive and lengthy litigation, often required to reclaim taxes wrongly assessed;
- Unpredictable outcomes, dependent on access to arbitration and the evolving stance of courts.
It also places an undue burden on those who receive sound financial and estate planning advice and choose ULIPs as part of their long-term strategy.
Looking Ahead: Legislative Reform or Continued Limbo?
Portugal now faces a policy deadlock:
- Clarifying the law by codifying the pro-rata method implicitly acknowledges that the statute does not support it.
- Maintaining the status quo invites further legal disputes, inconsistent rulings, and a two-speed system where only those with the resources to litigate can protect their rights.
ULIPs remain a tax-efficient financial instrument when adequately understood and structured; however, it is the lack of legal clarity in Portugal that makes professional advice essential for investors.
Final Thoughts
If you’re considering using such instruments as part of your financial strategy or facing a tax assessment involving partial redemptions, seek specialized legal and tax advice immediately to better understand the taxation of Unit Linked in Portugal.
At Madeira Corporate Services (MCS), we offer precise, up-to-date guidance on all aspects of Portugal’s international taxation and wealth structuring. Contact us today to safeguard your wealth and confidently navigate the Portuguese tax system’s complexities.
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