Navigating Trust Structures under Portuguese Tax Law
António Pratas Nunes | Lawyer
It is important to note that trusts are not legally recognised under
Portuguese law. Consequently, their tax treatment and the way taxpayers relate to and derive income from them have raised several questions.
What is a Trust?
Given the practical difficulties and the absence of a domestic legal definition, we must look to international sources for guidance.
Here, Article 2 of the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition – a convention never ratified by Portugal – provides a useful reference, defining the term “trust” as a legal relationship created by the settlor, who places assets under the control of a trustee for the benefit of a third party.
Essentially, a trust is a legal relationship where:
- A person (the settlor)
- Transfers ownership of certain assets (legal ownership) to one or more persons (trustee(s)),
- Who holds such assets in trust,
- For the benefit of third parties (the beneficiaries), who hold the beneficial ownership.
Having defined the figure and identified the key players, we can now consider some notes on taxation.
Taxation of the Settlor
In the absence of specific rules under Portuguese law regarding income from trusts, if the settlor receives income from such instruments, two situations may arise:
- Passive income: where the settlor is, in substance, also a beneficial owner of the trust. In this case, income derived from the trust’s activity should be classified as Category E (capital income). Assuming the settlor is resident in Portugal, the general flat rate of 28% will normally apply.
- Revocation or termination: if the trust is revoked or extinguished, and the settlor recovers assets initially contributed, the taxation should fall under the rules on
capital gains, calculated by reference to the gain realised compared to the original contribution.
Taxation of the Trustee
For the trustee, the analysis is more complex. The trustee’s mission is to administer the trust assets, hold them, and keep them under control.
- The trustee may be remunerated for this activity. Such remuneration will be taxed as Category A (employment income) or Category B (self-employment income), in the case of individuals, or under Corporate Income Tax (IRC) if the trustee is a company.
- Importantly, if the trustee’s activity is exercised abroad, Portuguese taxation only applies if the trustee (individual or corporate) is
resident or established in Portugal and carries out the activity here.
Taxation of the Beneficiary
For the beneficiary, the relevant moment is the distribution of income by the trust. If such income is not derived from a professional activity of the beneficiary, but merely from their status as beneficiary, it should be classified as Category E (capital income).
In the case of revocation or termination of the Trust, where value is allocated to the beneficiary who is not also the settlor, such income is generally exempt from the IRS. However, Stamp Duty may apply if the assets held by the trust are based in Portugal.
A final and important consideration: There may be situations where profits or income of the trust are imputed to Portuguese resident taxpayers (even if not distributed), when such income arises from entities located in a jurisdiction with a privileged tax regime (as listed by decree or identified by other legal mechanisms).
This is a complex but highly relevant topic for individuals considering relocation to Portugal, especially when they wish to benefit from favourable tax regimes such as IFICI+ or the former Non-Habitual Resident regime.
If you would like to explore how Portuguese tax rules may affect your trust or succession planning,
please do not hesitate to contact us.
