Advice and wealth management in the private client sphere are becoming increasingly complex as the profile of high-net-worth individuals evolves. This matter becomes even more crucial when dealing with internationally mobile clients, as practitioners and personal advisers need to address concerns around investment, tax, reporting and succession planning in a multi-jurisdiction landscape. These clients are in need of wealth-planning solutions which are flexible enough to remain tax-efficient in the long term and adaptable to the requirements of the different jurisdictions where they may reside.

Consider, for example, the case of a Swedish national moving together with his family to the South of Europe, in particular to Portugal, a jurisdiction that has put into place a very attractive tax framework for foreign individuals relocating in-country. As for any other transfer of residence, a change of domicile from Sweden to Portugal should be carefully assessed in order to ensure that the investment structure held by the client will work in both jurisdictions. In this context, a life assurance solution issued from Luxembourg can perfectly accommodate a potential relocation between both jurisdictions without the need to restructure the assets or realize taxable gains at an inappropriate time insofar as the life policy is properly designed at inception to ensure an efficient relocation to Portugal.

While tax-resident in Sweden

While resident in Sweden, the policyholder of a life insurance policy issued by a Luxembourg insurer will be able to benefit from a solution offering great investment flexibility (i.e. flexible investment rules laid down by the Luxembourg insurance regulator, the Commissariat aux Assurances, allowing access to international and complex assets not necessarily registered in Sweden), no capital gains or income tax applied on proceeds of the life assurance (the policy is instead taxed with a small annual yield tax) and with the possibility for the policyholder to directly manage the portfolio of assets linked to the policy.

Relocation from Sweden to Portugal

Should the policyholder decide to relocate to Portugal after having subscribed to a life insurance policy in Sweden, it is worth noting that no Portuguese premium tax will be applied on the initial premium contributed at inception and Swedish yield tax will cease to apply after the relocation to Portugal. The policy will allow to continue deferring taxation, with no taxable event in Sweden or Portugal, while moving from one jurisdiction to the other.

Once tax-resident in Portugal

The life insurance policy will allow the policyholder to benefit from full tax deferral on any income and capital gains accrued accumulated under the policy, that is to say, taxation will only apply if the policyholder partially/totally surrenders the policy. The taxation applied in Portugal to the gains realized on a life assurance policy depends on the duration the contract has been in force (i.e. time since issuance), becoming really attractive when the holding period exceeds 5 and 8 years. In addition, the policyholder will enjoy in Portugal from the same degree of investment flexibility and degree of control over the underlying investments. I.e. the client will not be compelled to restructure the investment features of his policy upon relocation from Sweden to Portugal.

If moving back to Sweden

Subject to the review of the underlying portfolio of the life assurance policy, the latter will be fully portable if moving back to Sweden, allowing the policyholder to enjoy from all the above-mentioned benefits in this jurisdiction. One of the key aspects to consider in Sweden is the necessity to implement a substantial death cover in life assurance contracts in order to avoid a risk of requalification. As the policy was originally designed to comply with the Swedish tax and legal provisions, the solution would already meet all Swedish requirements that including the minimum death cover applicable to life insurance contracts, and no further changes would be required before moving back to Sweden

Payment upon death of the life assured

Regardless of whether the client dies being Portuguese or Swedish tax-resident, any beneficiaries of the policy who are tax-resident in any of these countries will receive the payment of the policy tax-exempt.

CASE STUDY: The Johansson's

Mr. Johansson is a 60 year old Swedish national living together with his wife in Stockholm.  The couple has two adult children who also live in Sweden. He is now considering moving to Portugal to enjoy his retirement in a warm and sunny climate together with his wife.

Mr. Johansson subscribes a Swedish-compliant and tax-efficient solution designed by Lombard International Assurance while living in Sweden. The policy is also fully compliant in Portugal and it contains from inception all requirements to remain tax-efficient upon relocation to Portugal.

During the whole life of the policy, Mr. Johansson will be able to maintain the same investment manager and custodian bank for the investments made under his policy and will access to a wide range of sophisticated investments, usually not offered by local insurers.

From a tax perspective, significant tax savings will be achieved while resident in Sweden since the policy will only be taxed with a small yield tax on an annual basis. Indeed, any potential withdrawals while Swedish resident will be entirely free of tax. Upon relocation to Portugal, Mr. Johansson will continue benefiting from significant tax advantages as the profits generated within the life assurance policy will benefit from full tax deferral and will only be taxed in case of making a partial/total surrender from the life policy. According to Portuguese tax rules, the tax applied to any gain realised upon a surrender decreases after 5 years and even further after 8 years counting as from the inception of the life policy.

Should Mr. Johansson decide to move back to Sweden, the policy will be fully portable and he will benefit from any tax advantages related to life assurance products for Swedish resident policyholders, concretely, any withdrawals and surrender will be free of tax.

Regardless of whether Mr. Johansson would die while in Portugal or once he is back in Sweden, his wife and children will receive the payment of the policy (the value of the underlying assets increased by 1%) free of tax. 

By Pablo Peciña and Gonzalo García Pérez

This article was originally published on the FundsPeople portal in Portuguese.