On 17 December last year, the Government of Portugal introduced a change to its tax law meaning distributions from trusts to Portuguese residents would be taxed at 28% from this year.
Under the new laws, a distribution paid out of a trust, such as an income payment, would be taxed at 28%.
In addition, when a trust is wound up and the assets distributed to the settlor, this distribution will also be taxed at a rate of 28%. However, in this case the 28% will only be applied on the “gain” i.e. the difference between the value settled on trust at the outset and the value of the trust when it is wound-up, rather than the whole distribution.
Previously, trusts had fallen outside of the country’s tax code, therefore making them legitimate non-taxable structures under Portuguese civil law. Trusts are common law structures and have therefore historically fallen outside of civil law systems across Europe.
There has been a recent trend however, for civil law countries to legislate directly against what are seen as tax avoidance schemes, with France having “virtually made trusts redundant”, according to one expert, and Spain increasing the scheme’s transparency considerably.
Closing down loopholes
Many British expatriates living in Portugal and who had at least £250,000 of investable assets on arrival are likely to have been encouraged to establish a trust. It is also possible some expatriates will have registered as Non-Habitual Residents in order to benefit from a more favourable tax regime.
Under this scheme, the expatriates would benefit from a flat 20% tax on their Portuguese income and an exemption on almost all of their foreign income for 10 years. There are also further tax exemptions available under the Non-Habitual Resident scheme, however, Jason Porter, director at Blevins Franks, said it is unlikely this scheme will offer any exemption from the new trust tax laws.
“The liability to declare trust distributions and pay the resulting tax will fall on the settlor – the individual who settled the money on the trust, with no exemption likely under the Portuguese NHR rules,” explained Porter.
“Historically, the Portuguese tax authorities have not been particularly effective in chasing down tax evaders, and non-declaration of income and assets has been commonplace.
“However, this law change would appear to be Portugal’s first real move to catch up with the rest of Europe in closing down perceived 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 in rooting our non-declarers, and Portugal has a history of following what is effective in Spain.”
Porter added that the trust changes had not been widely reported locally in the Portuguese media, nor picked up by professional advisers, and it is therefore likely these changes could come as a surprise to many.
