A move to Portugal and its compatibility with the Non-Habitual Residents (NHR) Regime
From a tax efficiency and a wealth structuring perspective, a Luxembourg Unit-Linked life policy is a key tool in facilitating a change of residence to Portugal.
When an individual policyholder, who has previously signed a Unit-Linked life insurance contract, pursuant to the laws of a jurisdictions different to Portugal, becomes a Portuguese tax resident, the individual 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 whilst holding the life policy. In such a scenario, if the policy was appropriately designed, no changes would be required to be made to the existing contract in order to continue benefiting from life insurance advantages and there should not be a taxable event in the originating country.
Once the policyholder becomes a tax resident in Portugal, his/ her life contract will automatically benefit from the advantageous tax treatment that Unit-Linked life policies receive in Portugal. These benefits include: (i) decreasing applicable tax rates on Personal Income Tax as the policy endures, (ii) the death benefit is not subject to Stamp Tax, even if the beneficiaries do not have a familial relationship with the policyholder, and (iii) the payment of potential additional premiums are not subject to 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 immigrating 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 (a) the rendering of services of high value-added activities, intellectual property, industrial property rights and transfer of knowledge, (b) capital investments (for instance, dividends and interest income) or (c) rental income; is exempt from taxation in Portugal provided that the income may be taxed in the country of its source based on (i) the double tax treaty rules or (ii) the OECD model convention if a treaty does not exist 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 a Portuguese source of income.
- For those NHRs registered after March 2020 foreign-sourced pension income is taxed at a rate of 10%, with the possibility of offsetting tax paid in the source country (if any). For those registered in or before that date, foreign-sourced pension income may be exempt of tax in Portugal.
However, 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. Luxembourgbased) Unit-Linked life insurance policies is not exempt nor does it benefit 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 life insurance contracts corresponds to the difference between the amounts paid to the Portuguese policyholder 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 in Portugal (including different types of income and during the relevant period), and only if the client effectively accesses the policy value.
- In addition, 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; or
- 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 life 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.
- Mr. Andersson is a Swedish national that is thinking about moving to Portugal with his wife now that their children have become independent.
- His idea is to apply for the Non-habitual residents tax regime in Portugal.
- He holds a portfolio of financial assets containing some private equity investments.
- Structure his wealth through an efficient vehicle legally recognised in different jurisdictions, allowing him to move to Portugal and relocate back to Sweden if needed.
- Benefit from tax deferral on the gains that he generates also re. the private equity investments.
- Plan the transfer of his wealth to his wife/children in a simplified manner.
- Subscription of a Lombard International Assurance Private Client Portfolio, insuring Mr.Andersson’ life and appointing his wife and children as beneficiaries in the desired share.
- Consolidation of his assets under a single vehicle recognised in Sweden and Portugal.
- Full tax deferral -even for the capital gains that are taxed under the NHR regime- until partial or full redemption of the policy. Also with respect to any income arising from the Private equity investments some of which might be located in blacklisted jurisdictions.
- Compensation of gains and losses through the life assurance policy.
- Reduced taxation in the event of surrender after 5 or 8 years. Otherwise without the life policy, once Mr. Andersson’s NHR regime comes to an end, he would be subject to the full 28% tax rate on all income realized within the portfolio.
- Maximum security is provided through a state controlled policyholder regime, the Luxembourg Triangle of Security.
- Transfer of his wealth upon his death in an efficient and simple manner, avoiding lengthy succession procedures that could apply having beneficiaries in different countries.
Portability benefits of Luxembourg Unit-Linked life policies
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- Pablo Peciña
- Associate Director, Wealth Planning
- Pedro Martinho Soares
- Market Leader Portugal - Independent Contractor
- Enrique Barroso
- Market Leader Latam & Iberia - Independent Marketing Consultant