An efficient investment

Being veryversatile for financial planning and an important wealth protection instrument,unit-linked insurance is also a very efficient investment vehicle forindividuals, from a portuguese tax perspective. In fact, under PortuguesePersonal Income Tax (PIT) Code no tax is due upon the growth of the policyduring its term, meaning that if no surrender occurs, no tax will be due onincome or gains in the assets held within the policy (this being an importantadvantage when compared to direct investment). Also, in case of partialsurrenders, the positive difference between the amounts paid and the incomederived from the policy in the assets held within the policy (this being animportant advantage when compared to direct investment). Also, in case ofpartial surrenders, the positive difference between the amounts paid and theincome derived from the policy premiums paid.

In case ofsurrender, advance disposal or maturity of the policy, the positive balancebetween the amounts paid under the form of premiums or amounts invested by thebeneficiary, and the amounts withdrawn shall be considered, for individualtaxation purposes, as investment income (capital income). In order to encouragethese savings instrument, the Portuguese legislator established a regimeprovided to which, where the sum of the premiums paid during the first half ofthe term of the policy amounts to,  atleast, 35% of the total premiums paid during the term of the policy, thetaxable income will be reduced as follows: if the maturity occurs (i) betweenthe 5th  and the 8th year of the durationthe policy, only 80% of the above difference will be subject to tax, (ii) on orafter  the 8th year of the duration ofthe policy,  only 40% of the abovedifference will  be subject to tax. Inthe remaining cases, the total amount of the income shall be subject to tax.The taxable income (i.e., 100%, 80% or 40% as applicable) shall be subject to28% flat rate (resulting in effective tax rates of 28%, 22.4% and 11.20%,respectively). Alternatively - even though it is generally less favorable – thetaxpayer has the option to include (aggregate) such income with other sorts ofordinary taxable income (e.g., business, employment, pensions). In that casethe income will be subject  to tax atprogressive rates up to 48%, plus additional solidarity surtaxes.

Under thespecial Non-Habitual Residency (NHR) regime, taxable persons who meet theconditions to qualify as residents under Portuguese law and have not been taxresidents in this territory in the five preceding years may benefit from thespecial scheme for a period of 10 years. The granting of NHR status allowstaxpayers to obtain tax advantages in respect of the following income sources:(i) employment and self-employment income obtained in Portugal from high addedvalue activities as listed in a ministerial order; (ii) employment income;self-employment income from high added value activities; passive income andpension income, whenever, in any of these cases, the income is earned abroad.

As far aspassive income is concerned, it includes interest, dividends, other investmentincome, rental income and capital gains. This class of income will be exemptfrom Portuguese taxation as long as (i) It may be taxed in the source state inaccordance with a double taxation agreement made between Portugal and  that state, or in case no tax treaty exists,if: (a) this income may be taxed in the sourcestate in accordance with the OECD Model Tax Convention; (b) the same is notdeemed earned in Portugal under the PIT Code; and (c) the country, territory orregion that is the source  of the income isnot on the Portuguese list of tax havens.

Therefore, when derived from aPortuguese source, the income originating from unit-linked insurance will notbenefit from NHR scheme but will be taxed in accordance with the advantageousregime described above. When the insurance company is not located in Portugal,the exemption of the income received under NHR status depends on whether thetax treaty entered into force with the source country refers to the definitionof interest of each of the signatory countries and the income is qualified assuch under such source country legislation. Hence, in most cases, althoughincome will not be exempt under NHR and will be subject to PIT according to thegeneral rules applicable to this instrument although we are aware that incertain jurisdictions and under certain circumstances this status quo may beabout to change very soon. Finally, note that there is no inheritance tax inPortugal.

Gifts and transfers upon death are subject to Stamp Tax (at a 10%rate), although gifts and transfers upon death between spouses and betweenparents and their children are exempt from Stamp Tax for both the donors andthe recipients, regardless of their tax residency. Nonetheless, credits arisingfrom life insurance policies, notably death benefits, are not subject to Stamp Hence,even if NHR do not benefit from an exemption on income derived fromunit-linked, this instrument allows for a very efficient tax planning,providing for policyholder to determine when (and if) liability to tax arises,benefitting from a tax saving (under circumstances described) and allowing noStamp Tax to arise on payments to beneficiaries of insurance policyirrespectively of the degree of kinship with the policyholder.


Mafalda Moreira
Is a senior associate of PLMJ’s tax team, based in Porto. Ma
falda has over 10years’ widespread experience in tax advice and litigation and works within allareas of tax law (direct and indirect taxes), dealing with national and international corporate and individualtaxation, estate planning and structuring for high and ultra-high net worthindividuals. Mafalda is part of PLMJ’s French team.

Miguel C Reis
Heads PLMJ’s tax team, based in the
firm’s Porto office. Miguel is one of Portugal’s leading tax lawyers with over 30years’ extensive experience in advising clients on high-profile domestic andinternational tax matters in M&A, corporate restructuring and foreigninvestments and financial transactions. He also advises on estate planning andstructuring for high and ultra-high net worth individuals and gives day-to-day taxadvice to companies and financial institutions. Miguel is a member of PLMJ’s board of directors and part of its UK team.

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