Portugal: Protecting your wealth with a trust?

Trusts are a centuries-old concept which allow assets to be held by trustees on behalf of beneficiaries. They have been used in Britain since the Middle Ages when the knights departing for the Crusades used them to protect their interests and look after their wives and children.

They come in many forms nowadays and remain widely used in business, finance and the charitable sector; they are also used to hold insurance policies and by couples buying houses. The main role of family trusts is to pass assets down to younger generations. They work as a control mechanism to ensure youngsters do not blow their inheritances and to protect assets from claims if there was a future divorce.

Trusts in Portugal

In Portugal however, the government introduced a reform to the personal income tax at the end of 2014 meaning that income derived from foreign trust structures by Portuguese resident individuals or beneficiaries are subjected to a 28% tax. This also includes income payments paid out of a trust and trusts that have been wound up with the assets distributed to the settlor. However, in this case, the 28% will only be applied on the “gain”, i.e. the difference between the value of the trust when it is wound-up rather than the whole distribution.

If you have a trust while being a non habitual resident in Portugal it is important that you review your tax planning prior to any further distributions being made.

Previously, trusts in Portugal had fallen outside of the country’s tax code, making them a legitimate non-taxable structure under civil law (countries with this structure law include Portugal, Spain and France). Trusts are typically structured on common law (countries with this structure law include England, United States and India) and have historically fallen outside of the civil law systems across Europe.

In recent years there has been a movement for civil law countries to legislate diversity against what could be considered as tax avoidance schemes. For example, in France trusts have become virtually redundant and Spain is continually increasing scheme transparency.

Portugal has been following suit in closing loopholes. Previously, expatriates living in Portugal with considerable investable assets would have been encouraged to set up a trust as well as registering as a non habitual resident in order to benefit from superior tax rate. Under the special non habitual tax regime, tax residents receive a flat income tax rate of 20% for certain Portuguese employment source income and an exemption on almost all their foreign income for 10 years.

Now, ordinary distributions during the lifetime of the fiduciary structure (trust) to resident individuals are qualified as investment income and subject to tax at a flat rate of 28%. Even if you are a non habitual resident you will not be exempt from the tax law.

Tax Ruling

The tax ruling of foreign trusts is such a complex field. Naturally some points remain unclear, such as the exact scope of the term ‘fiduciary structure’ and the types of trusts involved, the transfer of assets from the settlors to the trustee, or the residence of trust and sourcing rules. All this considered, a case -by – case analysis is recommended to determine the concrete tax implication of foreign trusts in Portugal.

There is an obligation on you to declare any trust distribution and pay the resulting tax, with no exemption under the Portuguese ruling. Historically, the Portuguese tax authorities have not always been the most effective at chasing down tax evaders, and non-declaration of income and assets have been commonplace.

This law change appears to be Portugal’s first real move to catch up with the rest of Europe in closing apparent loopholes. In the future they may decide to go a step further and introduce some form of annual worldwide asset declaration which Portuguese resident individuals would be required to complete. This has been particularly effective in Spain, when rooting out “non-declarers”, and Portugal has a history of following what is effective in Spain.

Fiduciary structures are intricate and perplexing. The first step towards adjusting your tax plan is, of course, to speak to a financial adviser. We at deVere  Portugal are happy to help and offer a free tax consultation. With good planning, you can structure your wealth to take advantage of all reliefs available and ensure you don’t receive an unnecessarily large tax bill.

If you would like to find out more, deVere Portugal is holding a ‘Tax and Trust’ seminar at the beginning of February. You can get in contact throughhttps://www.devere-portugal.pt/