Portuguese Parliament approved last week a change to the Non-Habitual Residents’ Regime or NHR Regime. A new fixed tax rate of 10% will be introduced for all types of pensions, with the possibility of offsetting tax paid in the source country (vs. the effective exemption currently applicable for many NHRs both in Portugal and in the source country). This change will only apply to persons who register as tax residents after the changes become effective this month. Persons who were already registered as NHRs will be allowed to continue applying the current rule.
Rules for other types of income remain unchanged: dividends, interests and rental income are generally exempted and capital gains are generally not exempted (please note this needs to be analysed case-by-case in light of the applicable DTT between Portugal and the source country where the income is generated). Also, the tax treatment of income generated through unit-linked policies remains unchanged.
In this context Luxembourg life insurance will continue to provide the following advantages when compared with the taxation that would be levied should the underlying assets be held directly by the NHR:
- 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 life time. 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 / the income be derived directly;
- Provided that at least 35% of the insurance premiums contractually due were paid during the first half of the contract’s life time:
- 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.
Associate Director, Wealth Planning
Lombard International Assurance