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When an individual policyholder, who has previously entered into a unit-linked life insurance contract pursuant to the laws of a country different to Portugal, becomes a Portuguese tax resident, such person is normally allowed, should he/she wish so, to keep the life policy as per its original terms. The individual can also benefit from all the tax advantages available in Portugal when holding a life policy. Normally, if the policy was properly designed, no changes will be required to the existing contract in order to continue benefiting from life insurance advantages and no taxable event should occur in the exiting country.

Once the policyholder becomes a tax resident in Portugal, his/her life contract will automatically benefit from the advantageous tax treatment that life assurance receives in Portugal. These benefits include the possibility of
(i) significantly reducing the applicable tax rate on Personal Income Tax as the policy endures,
(ii) avoiding the payment of Stamp Tax even if the beneficiaries have no family relationship with the policyholder and
(iii) avoiding the payment of ASF parafiscal charges, as the contract would not be considered as originally executed in Portugal.

A special mention to Non-Habitual Residents Regime needs to be made as many people moving to Portugal will choose to pay taxes under it. In fact, all individuals who move to Portugal and have not been deemed Portuguese tax residents in the five preceding years are eligible to benefit from this special tax regime.

In summary, Non-Habitual Residents (NHR) are taxed in Portugal as follows:

  • Portuguese-sourced employment/professional income derived from high value-added activities is taxed at 20% plus applicable surcharges.
 
  • Foreign-sourced income derived from:
    • The rendering of services of high value-added activities, intellectual property, industrial property rights and transfer of knowledge
    • Capital investments (for instance, dividends and interest income)
    • Rental income

Will be exempt from taxation in Portugal provided that the income may be taxed in the country

of its source based on:

    • The double tax treaty rules.
    • The OECD model convention if no treaty exists between Portugal and the country of source of the income, provided, in this case, that under the Portuguese domestic rules, such income is not considered as Portuguese source income. 
  • Foreign-sourced pension income will be exempt, if the income is taxed in the country of residence, based on the double tax treaty rules, or if it is not considered as Portuguese source income under the Portuguese domestic rules.

However, concrete case of increases in net worth (including capital gains) are generally taxable under the Portuguese NHR regime., Capital gains are usually taxable exclusively in the country of residence of the investor (i.e. Portugal) and may not be taxed in the jurisdiction where those capital gains originate from.

In general, income resulting from foreign (e.g. Luxembourg-based) unit linked life insurance policies is not exempt nor benefits from the 20% PIT rate. However, the tax treatment of unit linked life insurance income derived by a NHR usually still has relevant advantages and may be considered as the most effective tax structure available for NHR.

This would typically be the case when most of the income generated by the assets included in the insurance product corresponds to income that would be subject to tax in Portugal, when directly held by the NHR. For example,  income arising from participation units in investment funds, income arising from fiduciary structures and capital gains.

In fact, the tax treatment of unit linked life insurance income has the following advantages when compared with the taxation that would be levied if the underlying assets were held directly by the NHR and subject to taxation in Portugal:

  • Income derived from the assets included in the life insurance portfolio should only be taxed in the event of redemption, early payment, or maturity of the policy. As a result, taxation is deferred if compared to the moment in which the policyholders would have been taxed if the assets were held directly.
 
  • Income derived from life insurance contracts corresponds to the difference between the amounts paid on redemption, early repayment or maturity of life insurance products and the related premiums paid or amounts invested, which allows the offsetting of gains and losses during the contract’s lifetime. Therefore, only the net income should be taxed (including different types of income and during the relevant period), which would not always be the case should the assets be held or the income derived directly.
 
  • Provided that at least 35% of the insurance premiums contractually due were paid during the first half of the contract’s lifetime:
    • Only 4/5 of the income received is subject to PIT (meaning an effective tax rate of 22.4%) if the payments are made under contracts that have been in force for more than 5 years and less than 8 years; and
    • Only 2/5 of the income received is subject to PIT (meaning an effective tax rate of 11.2%) if the payments are made under contracts that have been in force for more than 8 years.

Furthermore, unit-linked insurance policies might be tax-efficient structures, even when including some specific features (e.g. influence on investment decisions). Alternative structures that sometimes try to obtain similar results may be more likely to be challenged under the scope of Portuguese CFC rules (e.g. holding of the assets by entities in low tax jurisdictions) or general anti-abuse provisions.

This matter will become especially relevant for those clients willing to stay in Portugal over the 10-year period granted in the context of the Portuguese NHR Regime. These individuals will find themselves under non-tax efficient structures when subject to ordinary Portuguese Income tax rules. However, those who have properly managed their wealth under tax efficient structures, such as unit-linked policies, on or even before arrival in Portugal, may benefit from very attractive income tax rates from the 8th year of policy holding, which would endure beyond the end of the 10-year period granted under the Portuguese NHR Regime.

Beyond the taxation aspects, it should also be highlighted that life policies can provide Portuguese resident policyholders with peace of mind and simplification in their local reporting obligations, which foreign nationals are often unfamiliar with. In case of return to their home jurisdictions, if properly adjusted in certain circumstances, the policy will still be perfectly valid and recognised as such for tax and legal purposes.

Last but not least, the life policy will always be an optimal wealth and succession planning tool with (i) flexibility to appoint beneficiaries or even revoke them at a later point in time, (ii) great value for multi-jurisdiction families with members scattered in different jurisdictions and (iii) enhanced capabilities when used to protect vulnerable targeted family members such as disabled, minors or spouses with specific financial needs. 

 

By Pablo Peciña and Gonzalo García Pérez

This article was published on the FundsPeople portal in Portuguese.