Trusts in Portugal are a complex matter. Portugal’s tax regime, particularly concerning the old Non-Habitual Resident (NHR) program, has been lauded for its ability to attract foreign investment and retirees seeking a tax-efficient haven. However, beneath the veneer of this tax-friendly facade lies a more complex and potentially punitive framework for the taxation of foreign trusts that warrants a closer examination.
Everything about Trusts in Portugal
The Portuguese tax code delineates specific circumstances under which income from trusts, or ‘fiduciary structures’ as they are referred to, are taxed. These include distributions from such structures, as well as amounts received by individuals due to the liquidation, revocation, or extinction of these trusts. The tax implications are profound and multifaceted, affecting both settlers and beneficiaries in ways that may not be immediately apparent.
For settlors, the reality is stark: amounts received as a result of the dissolution of a trust are taxed as capital gains. This taxation occurs at rates of 28% or even 35% if the trust is domiciled in a jurisdiction blacklisted by Portuguese authorities. This punitive tax rate underscores a growing trend among nations to clamp down on what they perceive as tax avoidance strategies, especially those involving entities in so-called tax havens.
Beneficiaries not in the role of settlors face their own set of challenges, with transfers not considered for consideration attracting a 10% stamp duty. This applies only to assets located within Portugal, adhering to the territorial principle of taxation. The implications are significant, particularly for individuals who might not have anticipated these charges upon receiving their distributions.
Moreover, distributions from trusts are taxed as investment income at a flat rate of 28% or 35%, depending on the domicile of the trust. This applies irrespective of the recipient’s role within the trust, indicating a broad brush approach to taxation that may not account for the nuances of individual cases.
The transfer for consideration of rights on trusts, including beneficiary positions, is also subject to taxation as a capital gain at a rate of 35% for trusts domiciled in favorable tax regimes. This is a critical consideration for those looking to manage or restructure their investments within such trusts.
Furthermore, the definition of a trust’s domicile for tax purposes is broadly construed to include the location of the trustee’s office or, if the trustee is a natural person, their tax residency. This wide-reaching definition can ensnare unsuspecting individuals and entities, making them subject to the higher tax rates and rigorous compliance measures.
Capital gains derived from rights on trusts with a significant real estate component in Portugal are deemed to have Portuguese source income, thereby attracting local taxation. This provision ties the taxation of trusts closely to the Portuguese real estate market, potentially impacting investment decisions.
The taxation of trusts in Portugal, as laid out, reveals a landscape fraught with complexity and potential pitfalls for the unwary. While the NHR program and other tax incentives have been successful in attracting foreign interest, the treatment of trusts highlights a less welcoming aspect of Portugal’s tax regime. It underscores a need for careful planning and professional advice for those considering Portugal as a base for their fiduciary structures.
As Portugal continues to refine its tax legislation, it is imperative for potential investors and residents to stay abreast of these developments. The “ugly truth” about the taxation of trusts in Portugal serves as a cautionary tale, reminding us that tax efficiency often comes with its own set of challenges and complexities.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered legal or tax advice. Please consult a qualified professional for specific guidance tailored to your circumstances.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
