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The tax burden on residents of Portugal has increased significantly over recent years. Nonetheless, Portugal can still offer expatriates tax advantages compared to other European countries, depending on your circumstances and tax planning.

In July, the Secretary General of the CGTP trade union confederation, Arménio Carlos, presented a study showing that every household paid an average of €1,415 more income tax in 2014 compared to 2012. The report, which focused on inequalities and impoverishment, revealed that income tax rose 42% over the period, “with households paying in an extra €3.4 billion”.

Higher taxes were imposed as part of austerity measures. Even when the economy has improved enough, there may be other factors that require the government to increase tax receipts.

For example, Health Minister Paulo Macedo indicated in June that tax hikes will be necessary to finance increasing healthcare costs. The government needs to consider whether to fund the extra expenditure through higher taxes or find alternative sources of funding. While Sr. Macedo did say the possibilities include a new tax on the pharmaceutical industry, he supports the continued use of progressive taxation to fund the healthcare system, with high-income taxpayers paying more.

2013 saw the largest tax hikes in modern history in Portugal. Income tax rates now range from 14.5% for income up to €7,000 to 48% for income over €80,000. Temporary surtaxes increase the top rate to 56.5%.

A 3.5% surtax is levied on net taxable income over €6,060 per person, and applies to all income received by Portuguese tax residents included in their tax returns, so is also payable on capital gains. An additional solidarity tax is charged on individuals at 2.5% on income between €80,000 and €250,000 and 5% on income exceeding €250,000.

Investment income (interest, dividends, capital gains etc) is taxed at a flat rate of 28%. Residents can opt for the scale rate of tax, but once you chose this for one source of income it must apply to all.

Many expatriates have savings and investments in the Isle of Man, Channel Islands or Gibraltar. These jurisdictions are included in Portugal’s official list of “tax havens”, and where investment income is derived from assets held within these territories it is taxed at the higher rate of 35%.

These offshore centres are therefore not efficient homes for your capital if you live in Portugal.

Income tax rates have not changed this year, but many expatriates have been affected by a new law to tax distributions from trusts and other fiduciary structures.

From 1st January 2015, where a distribution is made from a trust, the whole amount is taxed at 28%. Where a trust is wound up and distributed to the settlor, the distribution is still taxed at 28% but in this case only on the gain. Where payment is to someone other than the settlor, it is subject to ‘stamp duty’ (Portugal’s equivalent of inheritance tax) instead.

The new law only applies to payments made to residents of Portugal; payments to non-residents are not affected.

 

While some of the benefits of a trust have been taken away, they still have a role to play in estate planning. It is still possible to set up your investments to provide tax efficient income and gains if you take expert advice.

If you are not yet resident or have recently arrived in Portugal, you may be able to benefit from the Non Habitual Residents (NHR) regime. It was introduced in 2009 to encourage wealthy people to move to Portugal to live and work and provides very favourable tax treatment for the first 10 years of residence, for retirees and those in employment (if providing a ‘high value added service’).

Even if you are not eligible for the NHR scheme, with specialist advice you can still find that Portugal offers tax advantages for your capital investments and pensions.

Your tax planning, estate planning and investment planning should all be considered together. You need a tax informed investment strategy, based on a thorough understanding of the local tax landscape. Use investment arrangements that are specifically tailored for the needs of Portuguese residents today, and that will provide tax and estate planning advantages as well as access to highly rated fund managers. They should also provide investor protection if possible.

Everyone’s situation is different, so take personalised professional advice to ensure the arrangements used are suitable for your circumstances and objectives.

24 July 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.