Changes To The Taxation Of Trusts In Portugal

Portugal’s 2015 Budget and rewritten income tax law were signed into law on 31^st December 2014. What do they have in store for expatriates in Portugal? You may need to review your tax planning, especially if you have a trust.

Portugal’s 2015 Budget and rewritten income tax law were both signed into law by the President on 31^st December 2014. So what do they have in store for expatriates living in Portugal? As you look ahead to 2015, you may need to review your tax planning, especially if you have a trust.

Taxation of trusts

A very late change was introduced to the revised income tax law on 17^th December. This will have caught many advisers and people with the targeted structures by surprise, given that it came into effect just two weeks later, on 1^st January.

This was the introduction of a law to tax distributions from fiduciary structures, such as trusts and foundations, to Portuguese resident individuals. If you have a trust, the changes are significant.

Where any distribution is made from a trust, the whole amount is now taxed at 28%.

If the trust is being wound up, and the assets distributed to the settlor, the difference between the amount invested and the amount received will be taxed as a capital gain (so also at 28%). If the payment is to someone other than the settlor, it is likely to be treated as a gift from the structure, and so potentially taxable at 10% on the whole amount.

This surprise move appears to be a continuance of Portuguese anti-avoidance laws, as the government steps up efforts to increase tax revenue. Those advisers following the changes closely should have been able to act before 31^st December 2014 to ensure their clients were in the best position possible by 1^st January.

There may still be opportunities for those who were unaware of the reform. You should seek specialist advice as soon as possible to discuss the best way forward for you. This is a huge change, and it is imperative that trust settlors and beneficiaries take expert opinion about their structures and how the new legislation affects them. Everyone’s situation is different; what is the right solution for one may not be right for you – you need personalised guidance.

This reform does not mean trusts no longer have a useful role to play in Portugal. While recent legislation in Spain has resulted in ‘look through’ provisions, the Portuguese legislation leaves the structure opaque, so they remain extremely efficient and essential for estate planning purposes.

However, if a trust is used to provide distributions to residents of Portugal, careful consideration is now needed since the distributions will potentially be taxed at 28%, regardless of whether the funds are composed of capital or income and gains.

Other tax changes

Couples can now submit individual tax returns, rather than having to make a joint one. However, for many people, the joint return is still likely to be beneficial, particularly where one individual has higher income than the other, since you can ‘pool’ the income and use both rate bands to minimise overall taxation.

Regrettably, the solidarity tax and surtax remain (many commentators had hoped that at least the 3.5% surcharge on income would be withdrawn). However, the surcharge may be rebated in part in 2016 via a tax credit (once the 2015 tax return has been submitted in 2016) if the effective tax revenue from income tax and IVA (VAT) exceeds the budgeted amount.

The solidarity contribution is set to half in 2016 and be withdrawn from 2017, although it is too early to tell if these changes will apply. However, while in 2014 this applied to pension income in excess of €1,000 per month, from 1^st January 2015 it only applies where the pension income exceeds €4,611.42. The rate is 15% at that level, increasing to 40% from €7,126.74 per month.

For those arriving in or leaving Portugal from 1^st January 2015, the tax year will be ‘split’ into periods of residence and non-residence. Residence will be determined over a 12 month period before arrival or departure to establish if this regime will apply – so if you spend less than 183 days in Portugal in a calendar year, but more than that in the 12 months before arrival or after departure, this regime will not apply. This can be beneficial for those looking to become or cease to be resident and requiring certainty of their date of arrival or departure.

Contact Blevins Franks for personalised advice and to ensure that your tax planning in Portugal is as effective as it can be, for 2015 and beyond.  

19 January 2015

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 is advised to seek personalised advice.