You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad? Just because your investments are tax efficient in one country does not mean that the tax advantages will transfer to another.
Investment options for Portuguese residents
By Portugal team
This article is published on: 12th July 2023
Mark Quinn and Debrah Broadfield look at the taxation of typically held investments in Portugal and what options are open to residents looking to legally shelter from taxation.
All bank interest is reportable and potentially taxable in Portugal, irrespective of where the account is located or if you use it or not.
If you have Non-Habitual Residence (NHR), interest earned on foreign accounts is tax-exempt, unless the account is held in a blacklisted jurisdiction such as Guernsey, Jersey, or the Isle of Man, in which case it is taxed at 35%. So, if you are still holding large sums in these ‘tax havens’ you should consider restructuring this.
If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28%. Similarly, interest from Portuguese bank accounts is always taxed at 28%, irrespective of your NHR status.
We usually see individuals with dividends paid from their own companies, directly held shares, or investment portfolios. This is a great source of income if you are a NHR as these are tax-free in Portugal during the 10-year period.
It is worth thinking about what you are doing with the income once received. If you are not spending it all and it is accumulating in a bank account earning little or no interest, you should consider investing this in a tax-efficient manner to get your money working for you.
For normal residents, dividends are taxed at 28% but there is the potential for tax savings if you can restructure.
Foreign-sourced property income is reportable in Portugal but is tax-exempt during NHR. Post-NHR, this income is taxed at scale rates (up to 48% plus solidarity tax at 2.5%/5%) with a credit given for tax paid in the country where the property is located (if there is a double tax treaty).
NHR does provide a unique tax-saving opportunity when selling a foreign property. Usually, 50% of any gain on sale is taxed in Portugal at scale rates, but if sold during the NHR period there is no tax to pay. Do note however that tax may still be due in the country where the property is located.
Striving for tax efficiency
One of the most common and tax-efficient ways to save is within an ‘offshore investment bond’. Such structures are recognised throughout most of the EU and in the UK.
Unlike a standard investment portfolio, that attracts capital gains and income tax as it arises, gains within an investment bond grow free of both income and capital gains tax. This is also known as ‘gross roll up’ and works in a similar way to a pension or a UK ISA.
The other main advantages over directly held investments are:
– You can control the timing of taxation. With standard investment holdings, when income or dividends are produced, they are deemed paid (whether actually paid out to you or not) and are taxable on an annual basis. With a tax-sheltered structure, income and gains are only taxable when a withdrawal is made.
– Withdrawals are very tax efficient. Withdrawals are split into capital and growth and tax is only payable on the growth. Although the tax rate on the growth element starts at 28%, you enjoy a 20% tax reduction after 5 years and a 60% tax reduction after 8 years.
It is worth knowing that this preferential tax treatment is enjoyed by both NHRs and standard Portuguese tax residents. And because the structure becomes more tax efficient over time, these are great long-term planning tools for those with NHR who intend to remain in Portugal once they are subject to the standard rates of tax post-NHR, or for long-term residents without NHR.
– These structures offer a unique tax planning opportunity for those who might return to the UK in the future. Under UK rules, only investment growth generated whilst resident in the UK is taxable. So, for those who have spent many years abroad in Portugal, this can create the opportunity for very advantageous tax planning on a return to the UK.
Lastly, choosing the right jurisdiction and provider is essential to ensure compliance in Portugal. You will also want to avoid jurisdictions with withholding taxes and bonds located in tax havens, as these are punitively taxed at 35%.