PORTUGAL: An Introduction to Private Wealth Law

Portugal's economy, still reeling from the COVID-19 pandemic, is now facing an energy crisis and soaring inflation, which have been exacerbated by the war in Ukraine.

Amid rising energy and food commodity prices, inflation reached an average of 7.8% in 2022. In 2023, inflation is likely to remain high, with the Bank of Portugal forecasting a rate of 5.8%.

Despite the ongoing economic uncertainty, Portugal's economy has shown resilience in 2022 and is displaying promising signs of growth. Portugal's appeal to high net worth individuals (HNWI) is due to a variety of factors, including its robust economic outlook, excellent quality of life, low cost of living, and one of the most attractive tax regimes in Europe – the ten-year non-habitual tax resident regime (NHR). As a result, an increasing number of HNWI are considering relocating to Portugal, not only from countries such as Brazil or the UK but from all corners of the globe.

In 2023, there is expected to be an increase in the number of non-European HNWI relocating to Portugal, as several visa options remain available, despite the recent much-publicised modifications to Portugal's Golden Visa system. For those looking to relocate to Portugal, there are several alternatives to the Golden Visa, which, combined with the NHR, mean that Portugal continues to be an attractive place for many HNWI.

New Tax Regime for Crypto-Assets 

On the private wealth side, the key development for 2023 is undoubtedly the introduction of a new tax regime for crypto-assets.

Until recently, the disposal of crypto-assets was not subject to income tax and stamp duty in Portugal, making it one of the most attractive destinations for crypto investors.

This new tax regime was long overdue, as Portugal was one of the only European countries where crypto-assets were tax-exempt.

Non-fungible tokens (NFTs) are outside the scope of this new tax regime, in line with the approach taken in the recent MiCA EU Regulation.

Capital gains from the sale of crypto-assets that are not classed as securities are now subject to a tax rate of 28%. However, there are two important exceptions to this rule:

1. There will be no tax on capital gains from the sale of crypto-assets held for a year or more.

2. There will be no tax on the sale of crypto-assets held for less than a year if they were sold in exchange for another crypto-asset.

These exceptions do not apply if the paying entity is not a resident for tax purposes in the EU, EEA or another state with which an international double taxation treaty or a bilateral or multilateral agreement providing for the exchange of tax information is in force. In view of the decentralised nature of the crypto world, the legislature is attempting to direct taxpayers to conduct trades via centralised exchanges resident in the EU/EEA or treaty countries.

Under the new cryptocurrency tax regime there is also an exit tax, while the disposal of crypto-assets through gratuitous transfers (eg, donations, inheritance) can, in certain circumstances, be subject to stamp duty.

Capital Gains Reforms 

Outside of the crypto world, another hot topic for 2023 is the long-awaited amendment to the legislation covering real estate capital gains of non-residents. This puts to an end a long-standing tug of war between the tax authorities and taxpayers that has given rise to several court decisions, including a decision by the Court of Justice of the European Union (CJEU) in favour of the taxpayer.

Following this amendment, real estate capital gains of non-residents will no longer be taxed at a flat tax rate of 28%, but will rather be taxed under the same regime provided for tax residents in Portugal. This means that normal and progressive tax rates will apply, with only 50% of the respective balance being subject to tax.

Despite some much-welcomed changes, 2023 also marks the beginning of the controversial taxation of short-term capital gains from the sale of shares or other securities.

Under this new regime, when the taxpayer’s total taxable income is equal to, or greater than, EUR75,009.00 and, cumulatively, the shares or securities have been held for less than a year prior to the sale, the positive balance of capital gains and losses will be taxed by aggregation at the general and progressive rates, which can reach as high as 53%. From 2023, taxpayers will need to be mindful of these new rules, which will require splitting gains between long-term and short-term assets. Private banks will also need to adjust their systems to ensure that their clients will be able to continue to have all necessary information to comply with the new reporting obligations.

Controlled Foreign Companies and Succession Planning 

Business succession planning and wealth structuring has also become increasingly important in the Portuguese legal market. This is because many Portuguese family-owned businesses are now being passed on to the next generation, which will drive asset restructuring and M&A activity, and because foreign nationals are moving to Portugal and bringing with them an increasingly complex set of structures, such as trusts, foundations or private wealth companies, which are uncommon in Portugal.

In this context, the risk of the application of Controlled Foreign Companies (“CFC”) rules, which are designed to prevent profit shifting through entities based in low-tax jurisdictions, must be assessed on a case-by-case basis. This is especially relevant in the HNWI practice, as the tax authorities have made it clear that Portuguese CFC rules apply not only to corporate entities but also to trusts, foundations and other fiduciary-type structures.

The risk of the application of anti-abuse rules and the fact that substance requirements are increasingly onerous means that taxpayers need to carefully consider whether creating a structure to hold their assets is the right solution, or whether these should be held personally.

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In conclusion, Portugal continues to attract foreigners from all over the world and this trend is likely to continue in 2023. While the new rules do pose some risks, the recently announced changes to the Golden Visa system are not likely to dampen this trend. Portugal should continue to attract a large number of HNWI, who make a significant contribution to Portugal's economy.