When individuals who are potential beneficiaries of trusts are planning to move to Portugal and will become Non Habitual Residents (NHRs) they need to review the trust position prior to any future distributions being made.
Legislation was approved in Portugal at the end of 2014 regarding the taxation of fiduciary structures, which includes trusts.
Distributions made by fiduciary structures, such as trusts, to Portuguese resident beneficiaries were already subject to tax in Portugal. Such distributions made by the trustee to a Portuguese resident beneficiary were treated as gifts/donations and therefore taxed under the Stamp Duty Code.
The enactment of the new Law of 31 December 2014 amended the taxation of fiduciary structures and removed certain loopholes that had previously existed. The new laws made specified gratuitous transfers/distributions to Portuguese resident beneficiaries liable to Personal Income Tax (PIT).
Distributions Through the Life of a Trust
Distributions During the Life of a Trust - What is the Rate of Tax? Under the new regulations, distributions to Portuguese residents by a trust will be taxed at a rate of 28%, regardless of whether the distribution relates to original capital or to the income or gains of the trust.
Taxation of Distributions by a Trust to a Non Habitual Resident When the beneficiary of a trust structure is an individual qualifying as a Non Habitual Resident in Portugal, the distributions received during the life-time of the trust will be exempt from tax as long as:
The distribution has the potential to be taxed in the source state in accordance with the specifications of an appropriate Double Taxation Treaty; OR The distribution has the potential to be taxed in the source state according to the rules of the OECD Model Tax Convention on Income and Capital if no Double Taxation Treaty exists. The regime requires a "potential" tax liability in the source country under the rules of a tax treaty or the OECD Model Tax Convention; it does not require "effective" taxation.
If the distribution is derived from a trust located in a region or territory included on the black list of Portuguese tax havens, it will be taxed at the rate of 35%.
Taxation on the Winding Up of a Trust
General Taxation on the Winding Up of a Trust Under this new legislation, the gain element of distributions received by the settlor on the winding up of a trust will be taxed at the rate of 28% under the PIT Code, unless...