September 25, 2017
Portugal has long been known as a tourist destination for its amazing weather, delicious food and world-famous wine. But closer examination of the country reveals that it has much more to offer than codfish, port and holiday sunshine. High net worth individuals should look carefully at the multiple advantages offered by Portugal for establishing residence.
At the meeting point of three continents, the Iberian nation boasts an advantageous geographic location and excellent transport connections both to the rest of Europe and overseas destinations. Once the hub of a colonial empire, it offers touristic sites full of history and impressive architecture redolent of past imperial glory. This period has left a permanent mark in the country’s deep cultural ties with Brazil, India (Goa), China (Macau) and Portuguese-speaking countries in Africa. But today Portugal is a strongly-rooted democracy with a dynamic economy that has emerged from many years of economic struggle.
Whether in the northern Douro Valley wine region or on the southern Algarve coast, the country offers excellent quality of life at low cost and a very attractive fiscal regime with no wealth or inheritance taxes. Portugal has also an extensive double tax treaty network to mitigate the risk of double taxation of income earned in multiple countries. In addition, the government has stimulated inbound mobility by creating the Non-Habitual Residents regime and the Golden Visa programme.
An individual may qualify as a NHR by registering as a tax resident in Portugal, as long as they have not been tax-resident in any of the previous five years. Individuals meeting this condition may benefit from the special regime for a 10-year period, involving a special tax rate of 20% applicable to work-related income from high added value activities as well as tax exemption for foreign-source income.
The Golden Visa programme offers a special residence card for foreigners meeting an investment criterion, including a minimum €1 million capital transfer or the purchase of real estate worth at least €500,000, allowing investors to live and work in Portugal. The residence permit also allows visa exemption for travel within the Schengen Area and the opportunity to apply for permanent residence or citizenship.
Once they decide to move to Portugal, high net worth individuals must meticulously assess the most efficient and compliant way to structure their wealth.
Advantages of a foreign unit-linked life product
Until 2015, it was still advantageous to establish a foreign trust or foundation in order to enjoy untaxed distributions after transferring one’s tax residency to Portugal. However, following major amendments to national tax law, sums distributed by fiduciary structures to Portuguese residents are now treated as investment income subject to a 28% income tax rate. In addition, these structures are fully targeted by CFC and transparency rules for past years.
These changes have necessitated a review of the use of these tools, opening the way for more efficient means to structure the wealth of Portuguese tax residents.
Unit-linked life insurance is a structure fully recognised and compliant in Portugal. Since it entails a savings regime for individuals, it enjoys favourable tax treatment. By comparison with traditional fiduciary structures, it can be a more effective means of investing and transferring wealth in a flexible and tax-efficient way. Although many people in Portugal are not yet very familiar with this structure, demand has been increasing in recent years as the high net worth community and its advisors learn about the product and its benefits for wealth structuring and asset protection.
This dynamic product can offer cross-border flexibility and the unique security of a contract issued in Luxembourg, a leading investment jurisdiction that offers the protection of a rigorous regime popularly known as the Triangle of Security. In addition, Luxembourg offers tax neutrality since taxation is based on the policyholder’s country of residence.
Moreover, contracts can be tailored to provide portability if individuals relocate between various jurisdictions during their lifetime. They can access a flexible and wide range of underlying assets, including external investment funds and internal collective funds, as well as dedicated funds that offer discretionary management according to the policyholder’s personal objectives. Another interesting feature is that clients may withdraw a portion of their original investment if needed.
Regarding taxation, the attractive treatment of unit-linked life insurance in Portugal provides gives extremely broad scope for inheritance and tax planning. For death claims, life insurance benefits are tax-free, not being subject to either income tax or stamp duty. In the case of surrenders, only the portion exceeding the amount initially invested is subject to taxation. If at least 35% of the total premiums are paid in the first half of the policy lifetime, either one-fifth or three-fifths of the income may be excluded from taxation in cases where the surrender takes place after five or eight years respectively of the contractual period, which could result in an effective taxation rate as low as 11.2%.
All these factors mean that unit-linked life insurance may be the best option for individuals to hold financial assets that can produce income to be distributed throughout their lifetime. If properly structured, it can be the most efficient wealth management tool, since it offers great flexibility in terms of investment and a more attractive tax regime than other options.
In a changing world where transparency is de rigueur and control is a priority for investors, unit-linked life insurance facilitates compliance with the evolving legal, regulatory and fiscal environment, at a time when certain traditional structures risk losing competitiveness and relevancy.
To learn more, please contact Andre Piovezan. Article by Taiza Ferreira.
