Are offshore trusts back on the agenda?
A recent move by the Portuguese government surprised the expat community by declaring the immediate removal of 15 tax jurisdictions from their offshore black list. The fundamental reason for such a move was the signing of bilateral Tax Information Exchange Agreements (TIEA).
Portugal has now signed TIEAs with the following countries: Andorra, Antigua and Barbuda, Belize, Bermuda, British Virgin Islands, Dominica, States of Guernsey, Gibraltar, Cayman Islands, Isle of Man, Jersey, Liberia, Santa Lucia, St. Kitts and Nevis, Turks and Caicos Islands.
These bilateral agreements, legally known as TIEAs, are an integral part of a more comprehensive international partnership to assist in the collection of sovereign taxes.
The agreements follow an international standard set by the Organisation for Economic Co-operation and Development (OECD) for fiscal transparency and exchange of information.
These agreements include sharing of information about citizens’ income, ownership of foundations/trusts, movements of capital, investment funds and other entities.
These standards have now been adopted by nearly half of the world’s tax jurisdictions in order to promote international co-operation in tax matters and to mitigate tax evasion.
The OECD programme has been covered extensively since 2014 but for now let’s focus on little Portugal.
Are trusts and other offshore structures a viable option in Portugal once more?
If the above was not sufficient bad news, the Portuguese government at the time superintended, without consultation, implemented (for the fiscal year of 2015) with immediate effect punitive changes to the personal tax regime in the treatment of investment income to Portuguese residents emanating from their international holdings.
The government termed these investments ‘fiduciary structures’, which do not have a permanent representation in Portugal and are domiciled in a blacklisted jurisdiction.
Thereafter, if you had investments, for example normal high-street bank accounts, financial instruments held in insurance bonds, which are held or domiciled in one of the listed jurisdictions noted above, the income and gains would be taxed at 35% irrespective of its distribution or otherwise. This compares to the 28% fixed rate that normally applies to investment income.
Renowned tax lawyer in Lisbon (previously at Ernst & Young), Dr Francisco de Carvalho Furtado, commented to me the following:
“The referred changes to the blacklisting do not change either the taxable events, or the tax transparency nature of fiduciary structures/trust entities.
The major tax effects are:
a) Capital gains paid by or to entities located in such jurisdictions, or derived from the extinction of trust entities, will not be subject to the increased tax rate of 35%
b) Cease to apply the need to prove that the payments made to a company located therein are real and at arm’s length
c) Removal of restrictions to consider as a deductible cost the losses on the selling of shares of entities domiciled in such jurisdictions
Regarding the Non-Habitual Tax Residents (NHTR) benefits, we must stress that there is no Double Tax Treaty (DTT) entered into with the referred jurisdictions. Therefore, the NHTR tax exemptions are only applicable if according to the OCDE DTT draft the state where the income is sourced is allowed to tax, and the same income is not deemed obtained in Portugal.
In general, interest and dividends may be taxed by the state where the income is sourced, meaning that the NHTR tax benefits may be applicable. However, regarding capital gains that are not related to real estate located therein or assets owned by entities or permanent establishments located therein, there may be no benefit because the power to tax is given to the residency state.”
What does one do and how to invest?
There are a myriad of considerations when contemplating an investment strategy. You need to consider how such international investments will incorporate with the rest of your overall financial portfolio. This obviously goes hand in glove when you assess how appropriate it is when you consider your objectives and risk tolerance.
Notwithstanding the above, you need to consider the regulation of the jurisdiction the chosen investment structure is domiciled in, and evaluate if you are satisfied with the level of regulation it provides.
My advice is, before you do anything, seek professional help – it’s a jungle out there.