Portugal’s stamp duty implications on the liquidation of trusts

The distribution of assets due to a foreign trust liquidation is in principle liable to stamp duty in Portugal. Does such taxation occur in all cases? Diogo Ortigão Ramos and Marta Duarte Silva of Cuatrecasas Portugal discuss.

Portugal has not ratified the Hague Convention regarding the recognition of foreign trusts, and it is not expected to do so either in the near future.

Portuguese law, as a rule, does not provide for the settlement of trusts, with the exception of offshore trusts in the Madeira Free Trade Zone. As a civil law country, certain legal instruments rooted in common law, including trusts, are not regulated by the Portuguese legal system.

In light of the above, foreign trusts are subject to the general Portuguese Civil Code regulations on private international matters. Under these rules, a trust must be interpreted as a bilateral agreement from which mutual obligations arise for the parties involved (the settlor and the trustee).

Foreign trusts exist as arrangements, although are generally unknown and lacking civil legislation to specifically and comprehensively deal with them. Analysis of the applicable legal framework must take into account the main features of the trust, including the parties’ obligations and the effects over the trust assets.

It was only in 2015 that most regulations on the tax treatment of income generated through fiduciary structures were introduced in the Portuguese legal and tax framework under the Personal Income Tax Reform (Law No. 82-E/2014, of December 31).

Tax treatment on liquidation

One of those regulations applies to values allocated on liquidation, revocation, and termination of fiduciary structures to taxpayers (other than those that have incorporated them, i.e. non-settlors).

It sets out that such values are not subject to Personal Income Tax, but rather fall within the scope of Portuguese Stamp Duty. Hence, values allocated upon liquidation, revocation, and termination of fiduciary structures to non-settlor Portuguese resident taxpayers are considered gratuitous transfers subject to Stamp Duty in Portugal at a 10% rate (increased to 10.8% for real estate assets located in Portugal).

However, because of the territorial scope of Stamp Duty, the tax only applies if the assets are deemed to be located in Portugal, specifically to:

Rights over movable assets or real estate in Portugal;
Shareholdings where the entity has its head office, place of effective management, or permanent establishment (PE) in Portugal (provided the purchaser also has its domicile in Portugal); and
Monetary values deposited at credit institutions with their head office, place of effective management, or PE in Portugal, or, in case of non-deposited monetary values, the transferor has is domicile, head office, place of effective management or PE in Portugal.

Stamp duty territorial scope considerations

Accordingly, distribution of assets resulting from the liquidation of a fiduciary structure to its beneficiaries will only trigger Portuguese Stamp Duty if the assets are deemed to be located in Portugal, pursuant to the aforementioned criteria.

Otherwise, there will be no territoriality for Stamp Duty purposes on a direct allocation of the assets to a Portuguese tax resident beneficiary.

The territorial scope of Stamp Duty described above comes from the general rules of the Stamp Duty Code (no specific territorial rule was introduced regarding the termination of fiduciary structures).

In other words, when we say that there will be no territoriality for Stamp Duty purposes (if the assets are not deemed to be located in Portugal), we believe that this is the correct interpretation of the applicable rules.

According to the recent binding rulings issued by the Portuguese tax authorities addressing cases of distribution of assets on the liquidation of fiduciary structures, the Portuguese tax authorities fortunately take the same view (i.e. no Stamp Duty is due on the distribution of non-Portuguese located assets to a Portuguese tax resident beneficiary (that is not a settlor) as a result of the liquidation.

In fact, Portuguese tax authorities clearly state that assets distributed in the context of liquidating fiduciary structures to a Portuguese tax resident beneficiary are only subject to Stamp Duty in Portugal provided the objective, subjective and territorial scope of Portuguese Stamp Duty is verified.

Structuring a liquidation

Notwithstanding the current binding rulings of the Portuguese tax authorities, one must proceed with caution. Liquidating a fiduciary structure with a Portuguese tax resident beneficiary must be properly structured to mitigate the possibility of being scrutinised by the Portuguese tax authorities and ultimately triggering Stamp Duty.

In particular, two issues must be considered when structuring:

The documentation supporting the liquidation of a fiduciary structure must undoubtedly prove that the asset allocation aims at terminating the fiduciary structure; and
The fiduciary structure must be totally terminated (partial liquidation or termination is not advisable).

Overall, liquidating fiduciary structures with assets allocated to a non-settlor may be an interesting planning route, especially for individuals considering a change of tax residence to Portugal to take advantage of the tax incentives of our Non-Habitual Tax Resident Regime, as well as for those already in Portugal wishing to restructure their wealth at the lowest tax rate possible.