It’s common to hear people have moved from one country to another with a product which they thought was tax efficient, only to find out in Portugal the rules are different.
Before discussing tax protected ways to invest, it’s prudent to start with some common tax headaches expats living Portugal face – all caused by improperly structuring their investments.
Watch out for Aggravated Tax & Blacklisted Jurisdictions.
Expats often accumulate savings and investments across a variety of jurisdictions.
Because Portugal has strict rules on the tax treatment of funds coming from accounts on the Aggravated Tax blacklist, it’s easy for expats to run into problems.
Financial accounts or policies held in blacklisted jurisdictions, will be subject to 35% aggravated tax on interest, dividends, and capital gains. And capital losses may not be offset against capital gains, except under certain conditions.
This applies even if you fall under the NHR or IFICI (Tax Incentive Scheme for Scientific Research and Innovation) regime.
Expats need to be particularly aware of the following popular offshore financial centres, and expat destinations:
Bahrain
Bermuda
Brunei
Cayman
Islands
Gibraltar
Guernsey
Hong Kong
Isle of Man
Jersey
Jordan
Kuwait
Labuan
Liechtenstein
Mauritius
Monaco
Oman
Puerto Rico
Panama Qatar
UAE
* Most Caribbean and Pacific islands
The full list of blacklisted countries is available here – PWC: Portugal’s Favourable Tax Regimes
How can I tax efficiently invest whilst living in Portugal?
The good news is for investors with over €100,000 locally compliant investment tax-wrappers are available.
Portuguese compliant investment-linked life insurance policies (often called Investment Bonds or Offshore Bonds) can be used to hold investments like mutual funds and exchange-traded funds (ETFs).
This allows you to benefit from tax free growth, only paying tax if you withdraw funds from your life policy.
The effective tax rates also reduce the longer the policy has been held. Making this a great solution for people planning for retirement, and looking to invest over the medium-long term.
Provided that at least 35% of the contributions paid into your investment bond, are paid within the first half of the lifetime of the life insurance agreement, then the following tax regime applies to withdrawals:
| Years the policy is held | Effective Tax Rate |
|---|---|
| 5 years or less | 28% |
| More than 5 years, and less than 8 years | 22.4% |
| More than 8 years | 11.2% |
Alternatively, you can choose to include the income from a withdrawal with your other taxable income. In this case, you will be subject to general income tax rates between 13% and 48% plus a surtax and solidarity charge.
There is also no tax payable in Portugal on the death benefits of this type of life insurance policy, making it an effective tool for estate planning.
Are all Investment Bonds treated the same in Portugal?
No. It’s important to make sure you have a policy which is compliant with local regulations and tax laws in Portugal.
If you hold an Offshore Bond domiciled in one of the favourable tax regimes mentioned earlier, you’ll pay 35% aggravated tax.
It’s common for many expats to have offshore bonds from providers in the Isle of Man, Puerto Rico and Mauritius, which are on the blacklist.
How does a Portuguese compliant Investment Bond compare to a normal Investment Account?
Both Portuguese compliant investment bond and an investment account can allow you to invest in a wide range mutual funds, ETFs, stocks and bonds.
But an investment account won’t offer any tax protection whilst your funds grow, and over the long-term can result in you paying a higher level of tax.
It also means with an investment account you’ll pay tax on an ongoing basis, instead allowing your funds to grow free of tax until they are withdrawn, which will impact your investment growth over time.
Portuguese Tax Rates:
| Type of Tax | Portuguese Compliant Investment Bond | Investment Accounts | Accounts in Blacklisted Jurisdictions |
|---|---|---|---|
| Dividends | No tax within the policy | 28% | 35% |
| Interest | No tax within the policy | 28% | 35% |
| Capital Gains | No tax within the policy | 19.6% – 28% | 35% |
| Investment Bond Withdrawals | 11.2 – 28% | N/A | N/A |
Can anyone invest in a Portuguese compliant investment bond?
They’re most suitable for investors planning to remain resident in Portugal for 5 years or longer.
Most providers require you to be already resident in Portugal. So if you have a policy which was set up before relocating to Portugal, there is a high probability it’s not compliant with local rules.
The minimum initial investment for most investment bond providers that work with expats is €100,000. With the costs reducing the higher the amount invested.
Looking for help to tax-efficiently structure your investments?
Are you an expat living in Portugal? Arrange your complimentary initial consultation today.
