Unit-linked life insurance, often called “unit link,” is a structured financial instrument combining investment with insurance. In Portugal, these contracts are legally recognised as complex financial products, meaning they can provide tax benefits but also come with obligations and risks.
When you subscribe to a unit-linked policy, you acquire the right to receive a fixed or variable income depending on the performance of the underlying investments. This income may be payable to you as the policyholder or your chosen beneficiaries.
However, like any investment, unit-linked life insurance involves risks. These depend not only on the contract terms but also on the financial stability and management quality of the insurance company offering the product. For this reason, due diligence is essential before committing capital.
Unit Link Taxation in Portugal for Residents and Non-Residents
The Portuguese Personal Income Tax (PIT) Code makes a clear distinction between residents and non-residents:
- Residents in Portugal must report their worldwide income and are taxed accordingly.
- Non-residents are only taxed on Portuguese-sourced income.
Therefore, a Portuguese resident subscribing to a unit-linked policy must declare the income generated, regardless of whether the insurance company is local or foreign. For non-residents, reporting obligations only arise if the insurer is based in Portugal.
Because unit link taxation in Portugal involves multiple taxable events, investors should carefully understand how contributions, redemptions, and maturities are treated.
The Initial Contribution and Transfer of Assets
The investor can transfer cash or existing assets when subscribing to a unit-linked policy. Importantly, once the transfer is made, the insurer becomes the legal owner of the assets. This transfer can trigger a PIT capital gains tax under category G (capital-gains income).
- The taxable gain is the difference between the asset’s acquisition cost and value when transferred to the insurer.
- The standard PIT rate is 28%, unless the taxpayer opts for aggregation into overall income, in which case progressive rates may apply.
Additionally, under international reporting standards (such as the Common Reporting Standard), the Portuguese Tax Authority is automatically informed when a policy is established in another EU jurisdiction.
Taxation at Redemption, Advance Payments, and Maturity
The income from unit-linked life insurance is generally taxed only when effectively paid out, through redemption, partial withdrawals, or contract maturity. In these cases, the positive difference between the amounts received and the invested premiums is treated as capital income (Category E of PIT).
Reduced Taxation for Long-Term Policies
Portuguese law incentivises long-term investment. If at least 35% of premiums are paid in the first half of the contract term, then only part of the income is taxable:
- 20% taxable if redemption occurs between 5 and 8 years.
- 40% taxable if redemption occurs after 8 years.
The effective PIT rates can be reduced from 28% to 22.4% or 11.2%, depending on the holding period.
Policies with Foreign Insurers
The same taxation rules apply for Portuguese residents if the insurance company is foreign.
For those under the Non-Habitual Resident (NHR) regime, an exemption may apply depending on the double tax treaty between Portugal and the insurer’s jurisdiction. However, the general Portuguese rules apply if no treaty-based exemption is possible.
Special Regime for Scientific Research & Innovation
Since 2024, a special regime has granted an exemption for income from unit-linked policies held abroad if the taxpayer qualifies under the NHR 2.0.
Unit Link Taxation at Death
In the event of the policyholder’s death, beneficiaries receiving payouts under the insurance contract are exempt from PIT. This makes unit-linked policies a potential estate planning tool.
However, if the settlement occurs during the policyholder’s lifetime (e.g., redemption), taxation applies at the standard rates mentioned above.
Other Tax Considerations
Stamp Duty: Premiums and commissions on unit-linked policies are exempt from Portuguese Stamp Duty.
Insolvency Risk: If the insurer becomes insolvent, the policyholder risks losing their investment. Nevertheless, EU regulatory safeguards provide some protection, with the investor considered a preferred creditor.
Conclusion
Understanding unit link taxation in Portugal is crucial before investing in these financial instruments. While they can offer attractive tax efficiencies, especially for long-term contracts, they also involve risks and reporting obligations.
For residents, the primary consideration is worldwide taxation under PIT. For non-residents, obligations only arise when dealing with Portuguese insurers. Tax reductions apply for long-term holding, and exemptions may be available under special regimes such as NHR or the new research and innovation incentive.
In short, unit-linked life insurance can be a powerful investment and tax planning tool in Portugal, provided it is structured carefully and aligned with the investor’s personal tax situation.
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