Portuguese law views a trust as a contract. All transactions involving trusts are deemed to be made with the trustees – the legal owners of the trust’s assets – rather than with the beneficiaries entitled under the terms of the trust. Beneficial interest is not a right formally recognised under Portuguese legislation. Let’s examine some common questions regarding the taxation of trusts in Portugal.
Are trusts taxed in Portugal?
Historically, transfers made to the trustees or of distributions made by the trustees were not subject to income tax in Portugal. Income tax implies a certain action (work, investment, consideration) on the part of the recipient. Nevertheless, Portuguese law did allow for certain gratuitous transfers (gifts) to be taxed under the Stamp Duty Code. This assessment could apply to contributions made by a Portuguese settlor to a trust, where the trust is considered a non-resident corporate entity, and the assets being transferred were deemed to be located in Portugal. These circumstances were the exception rather than the rule.
Have there been changes?
Yes. In the 2015 Budget, Portugal began to formally recognise trusts in mainstream legislation for the first time. In these statutes, trusts are defined as bespoke fiduciary structures and are now liable to assessment.
Under current legislation, how are trusts taxed?
As defined under these rules, three forms of taxation may now be levied: a flat 28% tax on distributions from a Trust; Capital Gains Tax when winding up a Trust; and Stamp Duty on gifts distributed from a Trust. Whenever a trust is deemed to be a bespoke fiduciary structure (a private trust), transfers made by trustees to a Portuguese resident beneficiary are considered to be a chargeable event, assessed as follows:
- Distributions from the trust characterised as investment income (Category E) paid to a Portuguese resident beneficiary are taxed under the Individual Income Tax Code (CIRS) at 28%. Income paid by an entity resident in a black-listed jurisdiction is taxed at 35% rather than the normal rate;
- Distributions on the winding-up of the trust will be:
- Characterised as Capital Gains (Category G) if the beneficiary, being resident in Portugal, is the settlor of the trust, to be taxed under CIRS at the current rate of 28%. Nevertheless, no Capital Gains Tax is due upon winding up a trust when the Beneficiary is different from the Settlor;
- Qualifying as a Gift if the beneficiary, being resident in Portugal, is not the settlor of the trust and is taxed under the Stamp Duty Code at a general rate of 10% (only if the income, either cash or assets, is to be deemed located in Portugal).
- A beneficiary who is related to the settlor (spouse, ascendant or descendant) may qualify for an exemption from this tax.
My pension is paid by a “pension trust”. Do these changes affect me?
Pension trusts are considered “public pensions” and are collective rather than bespoke in nature. They have always been assessed under Category H (pensions), not in the categories elaborated above. There has been no change in the tax treatment of pension trusts.
What is an International Pension Trust?
An International Pension Trust is a segmented “public trust” as are most pension funds. These are fiduciary structures where the assets are held by trustees/administrators for the benefit of the plan’s members. These trusts are collective as opposed to bespoke in nature. The segmentation usually assures full autonomy within the structure. Investment choices of each member remain independent from others and allow full control by individual participants. Members also have the freedom to choose how and when to draw income.
Under the right circumstances, International Pension Trusts can be very tax-efficient, offering a significant exclusion that can help to minimise assessment. The same investment portfolio, taxed under Category E (Income from Capital) at 28%, can be transferred into a pension fund that pays little or no tax under Category H (Pensions).