PORTUGAL: An Introduction to Private Wealth Law
Private clients in Portugal – current environment and update
Portugal continues to be one of the most attractive countries in Europe for private clients to work and reside. The Non-Habitual Resident regime (NHR), which provides for an exemption from tax in Portugal of most types of passive income from foreign sources where not derived from a tax haven, continues to prove particularly appealing to those who have not been resident in Portugal in the previous five years and wish to change their tax residency to Portugal. It is a very stable regime, which has hardly changed over the last 10 years, even though Portugal had until very recently a Government ruled by the socialist party, supported by two left-wing parties.
As a result of the NHR, as well as several other aspects, the country has in recent years continued to attract an ever-increasing number of high or ultra-high net worth (HNW) individuals. Following the pandemic, we have seen a clear shift in the type of HNW clients looking for support in their relocation. In the more recent past we have been advising not only clients with significant net worth, all of which is of a passive nature, but also the younger entrepreneurs or senior executives of large international corporations who move to Portugal to take advantage of the flexibility introduced by the normalisation of remote working practices. Naturally, these individuals are attracted also by the possibility of being taxed on their employment or self-employment income at a fixed rate of 20% as afforded to NHR taxpayers who are carrying out activities considered to be of a “high-value added” nature.
The tax consequences of having employees working in Portugal for foreign corporations needs to be analysed in detail. Although this reality has always existed, we are witnessing its massive dissemination in a post-pandemic world, which has not yet given the Portuguese authorities time to fully process all the tax consequences generated by this influx of individuals who are living in Portugal whilst working remotely. Therefore, the need to carefully consider each individual case still exists and is, in our view, mandatory, ideally prior to the move to Portugal.
In addition, Portugal is slowly becoming an important hub for the owners of digital assets and cryptocurrency, with some of the world's biggest players establishing themselves in our country. This is in part due to the beneficial treatment that gains derived from the sale of crypto assets on a personal and sporadic basis may have under the current Portuguese Income Tax (PIT) legislation, provided all applicable conditions are met. Even though not all income linked with crypto assets is excluded from tax in Portugal, capital gains derived from the sale of crypto assets that do not qualify as securities and do not form part of the individual’s professional activity as a trader, may be out of scope of PIT in Portugal. This is an area where we are seeing clients having an oversimplified view of the Portuguese tax regime relating to crypto, meaning that a careful analysis of the portfolio and income sources should be carried out prior to the move.
Similar considerations apply in relation to the exclusion of taxation on the gains generated on the disposal of, e.g., works of art, antiques, or collector's cars – when these sales are made on a personal basis and not as part of the taxpayer's trading activity, they will likely not be subject to taxation in Portugal.
Additional interesting features of the Portuguese PIT Code that have been in place for a long time include special regimes related to capital gains tax, namely a reinvestment relief related to the sale of property (which determines that capital gains arising from the sale of the taxpayer’s habitual abode in Portugal may be excluded from tax, provided the proceeds of the sale are reinvested in the acquisition of a new habitual abode or in some savings instruments or life-insurance policies), as well as a reduced effective tax rate related to capital gains on the sale of equity stakes in micro, small and medium sized companies not listed on regulated or non-regulated stock exchange markets.
Importantly and as is well known, contrary to what happens in several other European countries, Portugal does not levy wealth tax, which means that there is no obligation to report the ownership of assets (with the certain limited exceptions such as bank accounts in financial institutions located outside Portugal).
One of the most distinctive features of the Portuguese tax system as related to private clients is the exemption of gift and inheritance tax in the straight line (for example, between parents and children or grandparents and grandchildren and vice versa) and between spouses or unmarried partners, regardless of the donated or inherited asset. Additionally, the Portuguese stamp duty code (under which gifts and inheritances are taxed) has a strict territorial scope, meaning that in many circumstances the gift or inheritance of assets that are not Portuguese assets are outside of the scope of taxation in Portugal. Notwithstanding the fact that in 2015 there was speculation about changing what can be considered as a very favourable gift and inheritance tax regime, the reality is that no such change was put forward and there are currently no plans or proposals to introduce changes to this regime.
Against this generally positive picture, the more left-wing configuration of Parliament has however produced some recent changes in the tax space as applicable to private clients, such as the increase of the tax rates related to the acquisition of luxury real estate, applicable to acquisitions worth more than EUR1 million, and the proposed penalisation of short-term capital gains on securities, i.e. capital gains derived from the purchase and sale of securities sold within one year of having been acquired.
A proposal was introduced back in 2021, but not approved due to the collapse of the budget and the Government. This proposal has now resurfaced in the 2022 draft budget. Should it be approved, as is widely expected, short-term capital gains on movable assets will be taxed at the general progressive rates whenever the taxpayers’ total taxable income for the year, including said capital gains, exceeds EUR75,000. These short-term capital gains will now be subject to a tax rate of 48% (instead of the fixed rate of 28% applicable under the current legislation), plus a potential solidarity surcharge. The changes, if approved, will come into effect in January 2023.
Despite the above, Portugal meets all the necessary features to continue to attract private clients to its shores: good quality of life and relatively low costs of living as well as a tax regime which is very stable specially as it applies to NHR taxpayers, and which provides several benefits from income tax, wealth tax, inheritance, and gift tax perspectives. It is therefore perhaps no surprise that we are seeing an ever-increasing number of moves to Portugal from an increasingly diverse type of clients – from wealthy retired individuals to young entrepreneurs in the tech or crypto space, Portugal has currently something to offer for all, and will continue to be a destination of choice for thousands of individuals looking for a new personal or professional experience.