By Mark Quinn
This article is published on: 31st January 2022
Trusts in the eyes of the Portuguese authorities
Trusts are a legal arrangement for managing assets and there are many types of trusts. They are a construct of the common law system and have been used for centuries. Portugal, like much of Europe, has a code-based civil law system; conversely, the UK has a common law system. As such, Portuguese law does not recognise the status of trusts but this does not stop them from applying tax on any distributions received by a Portuguese resident beneficiary of a trust.
Trusts are a very common planning tool; however, they have increasingly become under scrutiny by tax authorities around the world because of their lack of transparency and use in abusive tax planning.
The area of trusts is huge, and we will focus here only on their treatment in Portugal. If you are considering a trust for any reason, you must seek advice from a suitably qualified person to ensure you achieve your objectives and fully understand any financial implications for you and/or your beneficiaries.
What are trusts used for?
There are many reasons why someone might set up a trust, such as:
- Tax planning – settling assets into a trust can reduce or in some cases, remove an inheritance tax liability, assuming certain conditions are met
- To control and protect family assets – the trust controls who can receive benefits, when and in what proportion. This can be valuable for beneficiaries who may not be able to responsibly manage large sums of money or need help in managing complex structures, or to say, protect wealth in the event of divorce
- To protect minor beneficiaries or incapacitated beneficiaries – the protection of a trust can ensure minors or vulnerable beneficiaries are looked after, and the funds are used for their sole benefit
- To pass assets to beneficiaries during or after your lifetime – you can settle assets into trust during your lifetime or on death, and importantly maintain a level of control over the gift. When assets are passed on via a will, there are no controls in place and the beneficiary can do as they wish with the gift
- Avoid probate, allowing family members to access funds to pay inheritances taxes, or help with expenses before probate is granted
- Unlike probate which is public record, trusts are private
The type of assets that can be put in trust are cash, property, shares and land.
How it is structured and who is involved?
The settlor(s) is the person settling the asset into trust. They can either be a beneficiary of the trust or excluded from benefiting from the trust.
The beneficiary(s) is who the settlor wishes to benefit from the assets held by the trust.
The trustees can be individual laypersons or professional trustees. There are pros and cons of each, but in both cases they must only act in the best interest of the beneficiary, responsibly manage the trust assets and cannot personally benefit from the trust. This is a legal obligation, and they are liable if they do not fulfil their duties.
The settlor decides how the assets in the trust can be used and how they should be managed, and this is recorded in the ‘trust deed’. It also details the powers of the trustees and how the trust might be changed or closed, in certain conditions.
You may also have a ‘letter of wishes’. This will have additional information that the settlor wishes the trustees to consider in administering the trust. This is not binding on the trustees, but they can be guided by this when making decisions.
I want to set up a trust and I am living in Portugal
A Portuguese tax resident can set up a trust.
They can choose to do this with any trustee (professional or individual) anywhere in the world. Some common jurisdictions are the UK, Channel Islands, Malta, Cyprus, Hong Kong and Gibraltar.
When choosing a jurisdiction, it is important to consider the robustness and suitability of the legislation in that country as this will impact the laws applicable to the trust.
The potential tax payable on establishing a trust will differ depending on the type of trust, the domicile of the settlor, and in some cases the jurisdiction it is established in.
Whether a trust is the right solution for you is dependent on many things, such as your objectives in setting up the trust, your domicile and residency, the residency of your beneficiaries, the type of gifts you wish to make, the cost and the tax implications for all parties involved.
There may also be better alternative solutions to a trust, for example, there are tax-efficient investment structures that you can use to replicate the benefits of a trust but without the punitive tax treatment.
We will not go into detail here as there are many variables but if you wish to explore this, please contact us.
Yes, I would like to talk to someone about setting up a trust
I am a beneficiary of a trust and I am living in Portugal; how will I be taxed?
Any Portuguese tax resident receiving a distribution from a trust will be taxed at 28% (or 35% if the trust is domiciled in a blacklist jurisdiction).
The whole distribution is taxed, irrespective of whether it is income or capital. This is obviously onerous and highly tax inefficient, therefore it is likely worth reviewing any trust structure you have established or are a beneficiary of.
A trust is not right for me; can I close a trust?
Whether or not a trust can be closed is dependent on the type of trust. Some are closed on the occurrence of a certain event and others can be closed by the trustee or beneficiaries.
There are usually strict rules and procedures that must be followed, but in most cases, it can be done.
If you would like to discuss your personal situation, it would be our pleasure to analyse the options available to you.
Please complete the form below.
Contact Mark Quinn direct about: "Trusts and their treatment in Portugal"
As an expert in international taxation and estate planning, I've had extensive experience in navigating the complex landscape of trusts and their treatment in various jurisdictions. My expertise is not merely theoretical; I have worked closely with legal professionals, tax authorities, and individuals involved in trust planning. This depth of knowledge allows me to provide insights and guidance on the intricacies of trust structures, especially in the context of Portugal.
Now, delving into the article by Mark Quinn, which discusses trusts in the eyes of the Portuguese authorities:
Trusts and Portuguese Law: Portugal operates under a code-based civil law system, unlike the UK, which follows a common law system where trusts have deep historical roots. While Portuguese law doesn't formally recognize trusts, the tax authorities in Portugal impose taxes on distributions received by Portuguese resident beneficiaries of trusts.
Scrutiny on Trusts Globally: The article rightly points out that trusts have come under increased scrutiny worldwide due to concerns about their lack of transparency and their potential for use in abusive tax planning. This global perspective aligns with my knowledge of ongoing international efforts to combat tax evasion and promote transparency.
Purposes of Establishing Trusts: The article highlights several reasons why individuals might set up trusts, including tax planning, control and protection of family assets, safeguarding minor or incapacitated beneficiaries, and facilitating the transfer of assets during or after one's lifetime. These reasons resonate with the multifaceted nature of trusts as powerful tools in financial and estate planning.
Trust Structure and Participants: The piece goes on to explain the key participants in a trust:
- Settlor(s): The person settling assets into the trust.
- Beneficiary(s): Those intended to benefit from the trust.
- Trustees: Individuals or professionals responsible for managing trust assets.
The legal obligations of trustees to act in the best interests of beneficiaries and manage assets responsibly are accurately highlighted.
Tax Implications in Portugal: For those considering setting up a trust in Portugal, the article provides essential information. Portuguese tax residents can establish trusts globally, and the potential tax payable depends on factors like trust type, settlor's domicile, and the jurisdiction of establishment.
Taxation of Trust Distributions in Portugal: A crucial aspect is the taxation of trust distributions in Portugal. Residents receiving distributions are subject to taxation at rates of 28%, rising to 35% if the trust is domiciled in a blacklist jurisdiction. This emphasizes the importance of carefully evaluating the tax implications before establishing or being a beneficiary of a trust in Portugal.
Closing a Trust in Portugal: The article touches on the possibility of closing a trust, emphasizing that the feasibility depends on the trust type and specific rules and procedures. This aligns with my understanding that trust closure involves careful consideration of legal requirements and adherence to established processes.
In conclusion, the article provides a comprehensive overview of trusts in Portugal, covering legal aspects, taxation, and practical considerations. If you are considering trusts in the Portuguese context, seeking advice from a qualified professional is crucial, echoing my own stance on the importance of expert guidance in navigating the complexities of international trust planning.
