IN415 - Taxation of Trusts in Portugal and the Implications for Non Habitual Residents

When individuals who are potential beneficiaries of trusts are planning to move to Portugal and will become Non Habitual Residents (NHRs) they need to review the trust position prior to any future distributions being made.

Background

Legislation was approved in Portugal at the end of 2014 regarding the taxation of fiduciary structures, which includes trusts.

Distributions made by fiduciary structures, such as trusts, to Portuguese resident beneficiaries were already subject to tax in Portugal. Such distributions made by the trustee to a Portuguese resident beneficiary were treated as gifts/donations and therefore taxed under the Stamp Duty Code.

The enactment of the new Law of 31 December 2014 amended the taxation of fiduciary structures and removed certain loopholes that had previously existed. The new laws made specified gratuitous transfers/distributions to Portuguese resident beneficiaries liable to Personal Income Tax (PIT).

Distributions Through the Life of a Trust

  • Distributions During the Life of a Trust – What is the Rate of Tax?

Under the new regulations, distributions to Portuguese residents by a trust will be taxed at a rate of 28%, regardless of whether the distribution relates to original capital or to the income or gains of the trust.

  • Taxation of Distributions by a Trust to a Non Habitual Resident

When the beneficiary of a trust structure is an individual qualifying as a Non Habitual Resident in Portugal, the distributions received during the life-time of the trust will be exempt from tax as long as:

  1. The distribution has the potential to be taxed in the source state in accordance with the specifications of an appropriate Double Taxation Treaty; OR
  2. The distribution has the potential to be taxed in the source state according to the rules of the OECD Model Tax Convention on Income and Capital if no Double Taxation Treaty exists.

The regime requires a "potential" tax liability in the source country under the rules of a tax treaty or the OECD Model Tax Convention; it does not require "effective" taxation.

If the distribution is derived from a trust located in a region or territory included on the black list of Portuguese tax havens, it will be taxed at the rate of 35%.

Taxation on the Winding Up of a Trust

  • General Taxation on the Winding Up of a Trust

Under this new legislation, the gain element of distributions received by the settlor on the winding up of a trust will be taxed at the rate of 28% under the PIT Code, unless the trust is located in a region or territory included on the black list of Portuguese tax havens, when the gain will be taxed at the rate of 35%.

The gain is defined as the excess of the value distributed to the settlor on the winding up compared to the value settled into the trust.

Distributions on a winding up received by a beneficiary resident in Portugal, who is not the settlor of the trust, will be treated as a gift/gratuitous transfer and will be subject to tax under the Stamp Duty Code rules at a general rate of 10%. Stamp duty is only payable on assets situated in Portugal.

  • Taxation of a Non Habitual Resident Settlor: On Distributions Received on the Winding Up of a Trust

Distributions received by a settlor resident in Portugal under the Non-Habitual Residents Regime, as a result of the winding up of the trust, will be exempt from tax as long as:

  1. The distribution has the potential to be taxed in the source state in accordance with the specifications of an appropriate Double Taxation Treaty; OR
  2. The distribution has the potential to be taxed in the source state according to the rules of the OECD Model Tax Convention on Income and Capital, if no Double Taxation Treaty exists.

The regime requires a "potential" tax liability in the source country under the rules of a tax treaty or the OECD Model Tax Convention; it does not require "effective" taxation.

If the distribution arises from a trust located in a region or territory included on the black list of Portuguese tax havens, then the gain will be taxed at the rate of 35%.

  • Taxation of a Non Habitual Resident Beneficiary: On Distributions Received on the Winding Up of a Trust

Distributions received from a trust by a Non Habitual Resident beneficiary in Portugal, as a result of the winding up of the trust, will be taxed under the Stamp Duty tax rules at a general rate of 10% under the same terms detailed above for a Portuguese resident beneficiary.

It is important to note that there are certain exemptions for beneficiaries who are direct descendants of the settlor.

What Steps Should NHRs Take?

NHRs should carefully consider where the trustees of trusts from which they might benefit are located. If they are resident in a jurisdiction which is featured on the Portuguese black list they face distributions from the trust being taxed at a rate of 35%.

In many circumstances trust distributions would not need to be made as the provision of annual financial support to beneficiaries can be organised in many ways through underlying entities.

If however there is a wish for a substantial distribution to be made it may be beneficial if the trustees were changed to other more tax efficient jurisdictions or for a distribution to be made to a trust elsewhere.

NHRs could therefore consider moving assets that are to be distributed to trustees in locations not on the Portuguese black list and which may still offer an advantageous tax position on the distribution of these assets. A number of jurisdictions in Europe could provide for this opportunity to be implemented with a tax saving position.

How Can Dixcart Help?

The Dixcart offices in Cyprus, Malta and Switzerland are licensed to provide trust services and trustees. If you require additional information on the services available in each of these jurisdictions please speak to your usual Dixcart contact or to Gisela Martins at the email address detailed below.

Additional Information

If you require additional information regarding the taxation trusts in Portugal, please contact Gisela Martins or Catarina Sardinha: advice.portugal@dixcart.com at the Dixcart office in Portugal or your usual Dixcart contact.

 

Categories: Jurisdiction, Portugal, Year, 2016, Category, Dixcart Domiciles