This country-specific Q&A provides an overview to tax laws and regulations that may occur in Portugal.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/
Which factors bring an individual within the scope of tax on income and capital gains?
Individuals will be liable to Portuguese Personal Income Tax (“PIT”) depending on their tax residency status: if they are considered Portuguese tax residents, they will be liable to PIT over their worldwide income and capital gains received; if they are considered as Portuguese non-tax residents, they will only be liable to PIT over their Portuguese sourced income and capital gains.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
Income subject to Portuguese PIT is divided by categories. In general, employment and related income (including pension income) is taxed at progressive and marginal tax rates that go as high as 48% (plus a solidarity surcharge of 2,5% to 5%). On the other hand, capital gains and rental income is taxed at a special fixed 28% tax rate (existing the possibility of the individual choosing to aggregate this types of income and subject them to the progressive and marginal tax rates). Please note that income from tax havens is usually taxed at an aggravated 35% tax rate.
The Portuguese tax year runs from January 1st to December 31st.
Individuals who are subject to PIT in Portugal are obliged to submit a PIT return between April 1st and June 30th of the year following the one to which the income relates to.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Income paid by Portuguese entities is, usually, subject to PIT withholding in Portugal. In general, employment income received by Portuguese tax residents is subject to withholding at progressive and marginal tax rates annually fixed by the authorities. On the other hand, employment income received by Portuguese non-tax resident is subject to a fixed 25% withholding tax rate. On the other hand, investment income is subject to a withholding tax rate of 28%. Payments to lower tax jurisdictions are subject to an aggravated 35% rate.
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
Portugal levies Stamp Tax on inheritances or gifts if the underlying assets are deemed as located in Portugal (such as real estate located in Portugal or money deposited in Portuguese bank accounts).
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
There are Stamp Tax exemptions foreseen regarding transfers (by succession or by donation) between spouses, ascendants and descendants.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Specific deductions in Personal Income Tax and Corporate Income Tax are available for contributions to certain cultural, social and charitable entities.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Portugal levies property taxes regardless of the residency of the owner. Sale of real estate property is subject to real estate transfer tax (IMT), with rates up to 6,5% in general and 10% for buyers located in lower tax jurisdictions. Ownership of property is taxed under IMI, with rates up to 0,45% for urban property, 0,8% for rural property, 7,5% for holders located in lower tax jurisdictions. An additional IMI of 0,4% to 0,7% is applicable to high value property (tax value above € 600.000).
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
Besides PIT, Stamp Tax, IMT and IMI, and also the different sales taxes existent, no Portuguese taxes are personally imposed on income or property held by individuals.
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
The Portuguese law foresees two special and more favorable PIT regimes applicable to individuals who become Portuguese tax residents:
- the “Programa Regressar” (“Boomerang Program”), which is applicable to (i) individuals who have been Portuguese tax residents in the past and before 2015, (ii) have spent, at least, two years abroad and (iii) become Portuguese tax residents again; and
- the Non-Habitual Resident (“NHR”) regime, which is applicable to (i) individuals who may or may not have been Portuguese tax residents in the past, but have not been such for, at least the previous 5 years, and (ii) become Portuguese tax residents again or for the first time.
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
It is of the most relevance to note that the entry and permanence in Portuguese territory is a matter of emigration law and tax residency is a matter of tax law. This said, before becoming a registered tax resident, the individual must determine whether he/she already has a right to reside in Portuguese territory or if that right must be acquired.
If the individual is (a Portuguese or) European citizen he/she has the right to reside in Portugal (which, in any case, must be formalized by means of the acquisition of a certificate of residency with the Portuguese municipal authorities of his/her area of residency). If the individual is a third State citizen, he/she must acquire a Portuguese residency permit.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
The Portuguese civil law determines the reserve of a portion of 2/3 of the deceased’s inheritance for his/her spouse and children. Thus, only 1/3 of his/her estate may be freely disposed of.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
There are special regimes for matrimonial property (separation of property, total communion of goods and communion of goods after marriage), although such regimes do not alter the mandatory succession regime of the spouse quota.
What factors cause the succession law of the jurisdiction to apply on the death of an individual?
As European regulations are directly binding for Portugal, Regulation (EU) no. 650/2012, of July 4th, 2012 concerning succession related matters, is applicable. Thus, at the light of the foreseen in article 21, no. 1 of Regulation no. 650/2012, which contains the general rule of determination of the law applicable to the succession, “the law applicable to the succession as a whole shall be the law of the State in which the deceased had his habitual residence at the time of death”.
Regarding non-European States, it is important to note that, for Portuguese civil law purposes, the last place of the individual’s habitual residence is also relevant to determine the place where the succession should be managed.
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
Please see answer to question above.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
A will of testament can be celebrated as a public testament (written directly by the notary, in his notebook) or as a closed testament (written and signed by the individual, but has to be formally notarized, and can be stored by the individual, by someone designated by the individual, or by the notary).
Concerning the requirements Portugal imposes on this matter, it is relevant to underline that a will of testament will be considered valid in Portugal if the formalities required by the place where the testament was made or by the deceased nationally are met and it does not shun aside the Portuguese civil law applicable to the succession.
If an individual does not have a will, the general rules apply and all the deceased’s assets will be attributed to his/her spouse and children (and in their absence to the other classes of heirs: ascendants, siblings and their descendants, other family members up to the fourth level of kinship and, lastly, the State).
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
The estate of a deceased individual is administered by a representative of the heirs (“cabeça-de-casal”), which may be, for instance, the spouse, a nominated executor or another legal heir.
Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
Trusts are not foreseen in the Portuguese legislation, thus cannot be created in Portugal. The most commonly used structures in Portugal would be family companies and private foundations.
How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?
The requirements concerning the constitution of a corporate structure and the corresponding disclosure obligations vary with each kind of structure. In any case, every structure is subject to registry and reporting obligations to the tax authorities.
What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?
Central registry of the beneficial owner is in force in Portugal. In addition, any income generated at the level of the structure is communicated with the beneficiary’s state of residence, under the Common Reporting Standard. In addition, new domestic legislation mandates financial institutions to report on accounts with net balance over € 50.000 to the tax authorities.
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Not applicable for Portuguese entities, as Portugal does not foresee trusts. As regards foreign trusts, distributions to the settlor are considered investment income and liquidation proceeds are considered capital gains. Liquidation proceeds to a trust’s beneficiary (insofar not being the settlor) is not subject to tax. Controlled Foreign Companies rules deeming attribution of profits may apply in certain structures.
Are foreign trusts, private foundations etc recognised?
Although trusts are not recognized in Portugal, trusts are considered separate legal entities for Portuguese tax purposes. The Portuguese tax authorities have ruled that trusts shall not be considered as persons for double tax treaties purposes unless specifically covered by the relevant treaty.
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
See reply to 20 above.
To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
In general, possible Portuguese structures are based on the separate legal entity status. However, several exceptions to separate legal entity status exist in the Portuguese legislation, namely if the structure constitution is deemed to aim at avoiding creditors.
What provision can be made to hold and manage assets for minor children and grandchildren?
Private foundations and personal legacies are available in specific conditions.
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Provisional arrangements for future incapacity are not common in Portugal. The legitimacy to implement restrictions of asset disposal by individuals rests mainly with the spouse and/or the family. The most common procedure is disabling an individual from being able to dispose of assets, by proof of incapacity.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Private foundations are the most commonly established by individuals. The specific forming procedure varies according to the type of foundation.