Investment options

JUST BECAUSE YOUR INVESTMENTS ARE TAX EFFICIENT IN ONE COUNTRY DOES NOT MEAN THAT THE TAX ADVANTAGES WILL TRANSFER TO ANOTHER. MARK QUINN AND DEBRAH BROADFIELD LOOK AT WHAT OPTIONS ARE OPEN TO RESIDENTS LOOKING TO LEGALLY SHELTER FROM TAXATION

BANK ACCOUNTS All bank interest is reportable and potentially taxable in Portugal, irrespective of where the account is located or if you use it or not.

If you have Non-Habitual Residence (NHR), interest earned on foreign accounts is tax-exempt, unless located in a blacklisted jurisdiction such as the Channel Islands, when it is taxed at 35%. So, if you are still holding large sums in these ‘tax havens’ you should consider restructuring.

For non-NHRs, all interest earned on foreign accounts is taxed at 28%. Interest from Portuguese accounts is always taxed at 28%, irrespective of your NHR status.

DIVIDENDS Dividends are a great source of income if you are a NHR as these are tax-free in Portugal during the 10-year period.

It is worth thinking about what you are doing with the income once received. You may want to consider investing this in a tax-efficient manner.

For normal residents, dividends are taxed at 28% but there is the potential for tax savings if you can restructure.

PROPERTY Foreign-sourced property income is reportable in Portugal but is tax-exempt during NHR. PostNHR, this income is taxed at scale rates (up to 48% plus solidarity tax at 2.5%/5%) with a credit given for tax paid in the country where the property is located (if there is a double tax treaty).

NHR does provide a unique tax-saving opportunity when selling a foreign property. Usually, 50% of any gain on sale is taxed in Portugal at scale rates, but if sold during the NHR period there is no tax to pay. However, tax may still be due in the country where the property is located.

CAPITAL GAINS TRAP One thing NHR does not protect investors from is capital gains tax (except for foreign property above). So, if you have an investment portfolio, company shares or direct holdings, any capital gains (realised when investments are sold/switched) are taxable on an arising basis. It does not matter if you have not taken anything out, it is still reportable and taxable at 28%.

STRIVING FOR TAX EFFICIENCY One of the most common and tax-efficient ways to save is within an ‘offshore investment bond’. Such structures are recognised throughout most of the EU and in the UK.

Unlike a standard investment portfolio, that attracts capital gains and income tax as it arises, gains within an investment bond grow free of both income and capital gains tax. This is also known as ‘gross roll up’ and works in a similar way to a pension or a UK ISA. The other main advantages over directly held investments are:

– You can control the timing of taxation. With standard investment holdings, when income or dividends are produced, they are deemed paid (whether actually paid out to you or not) and are taxable on an annual basis. With a tax-sheltered structure, income and gains are only taxable when a withdrawal is made.

– Withdrawals are very tax efficient. Withdrawals are split into capital and growth and tax is only payable on the growth. Although the tax rate on the growth element starts at 28%, you enjoy a 20% tax reduction after five years and a 60% tax reduction after eight years.

It is worth knowing that this preferential tax treatment is enjoyed by both NHRs and standard Portuguese tax residents. It can also coincide nicely with the end of NHR, so for those who intend to stay permanently you can maintain low rates of tax.

These structures offer a unique tax planning opportunity for those who might return to the UK. Under UK rules, only investment growth generated whilst resident in the UK is taxable. So, for those who have spent many years abroad in Portugal, this can create the opportunity for very advantageous tax planning on a return to the UK.

Lastly, choosing the right jurisdiction and provider is essential to ensure compliance in Portugal. You will also want to avoid jurisdictions with withholding taxes and bonds in tax havens, as these are punitively taxed at 35%.

Ask The Experts

Debrah Broadfield and Mark Quinn are Chartered Financial Planners (level 6 CII) and Tax Advisers (UK ATT) with 20 years of combined experience advising expatriates in Portugal on cross-border financial and tax planning issues.