NHR tax question relating to dividend or accumulating funds?

[CqpedVulture]

I’m based in Portugal.
I have NHR.

There is a tax advantage in dividend paying funds. You pay 0% income tax for the 10 year period of NHR.
However, my question is what happens if you sell part of that fund? Are you still liable for a Capital Gains tax?
I’m talking about Irish domiciled ETF’s.
There is a tax treaty with Ireland and Portugal.

I’m trying to ascertain whether it’s worth investing in dividend/ distributing ETF’s or just buy accumulating funds, which in Portugal are only liable to a Capital Gains tax when selling the fund.

It doesn’t make sense to buy a dividend paying fund then, if all I will do is reinvest that dividend back into the fund.

[Hyperborea]

I’m based in Portugal.
I have NHR.

There is a tax advantage in dividend paying funds. You pay 0% income tax for the 10 year period of NHR.
However, my question is what happens if you sell part of that fund? Are you still liable for a Capital Gains tax?

I’m talking about Irish domiciled ETF’s.
There is a tax treaty with Ireland and Portugal.

My understanding on that is yes, you do owe capital gains. The NHR status only waives taxation on foreign investments if they are liable to tax in another country. Capital gains by treaty are taxable in the country of residence and so are not exempt by the NHR and therefore you have to pay Portuguese tax on them.

I’m trying to ascertain whether it’s worth investing in dividend/ distributing ETF’s or just buy accumulating funds, which in Portugal are only liable to a Capital Gains tax when selling the fund.

It doesn’t make sense to buy a dividend paying fund then, if all I will do is reinvest that dividend back into the fund.

There are two reasons that I can see for holding the distributing fund as opposed to the accumulating fund in this situation. The first is that you have access to the dividends if you need/want to spend them - might not now but things change over 10 years.

The second is that the reinvested dividends buy shares at a different cost basis than the original purchase. Those reinvested dividends have a cost basis from the value of the fund on the day you reinvest them and that basis should be going up. If you held an accumulating fund then the cost basis of all the investment would be based on the date that you purchased the fund and so all the accumulated dividends that would have been tax free have been converted to capital gains when you sell the fund.

[CqpedVulture]

I’m based in Portugal.
I have NHR.

There is a tax advantage in dividend paying funds. You pay 0% income tax for the 10 year period of NHR.
However, my question is what happens if you sell part of that fund? Are you still liable for a Capital Gains tax?

I’m talking about Irish domiciled ETF’s.
There is a tax treaty with Ireland and Portugal.

My understanding on that is yes, you do owe capital gains. The NHR status only waives taxation on foreign investments if they are liable to tax in another country. Capital gains by treaty are taxable in the country of residence and so are not exempt by the NHR and therefore you have to pay Portuguese tax on them.

I’m trying to ascertain whether it’s worth investing in dividend/ distributing ETF’s or just buy accumulating funds, which in Portugal are only liable to a Capital Gains tax when selling the fund.

It doesn’t make sense to buy a dividend paying fund then, if all I will do is reinvest that dividend back into the fund.

There are two reasons that I can see for holding the distributing fund as opposed to the accumulating fund in this situation. The first is that you have access to the dividends if you need/want to spend them - might not now but things change over 10 years.

The second is that the reinvested dividends buy shares at a different cost basis than the original purchase. Those reinvested dividends have a cost basis from the value of the fund on the day you reinvest them and that basis should be going up. If you held an accumulating fund then the cost basis of all the investment would be based on the date that you purchased the fund and so all the accumulated dividends that would have been tax free have been converted to capital gains when you sell the fund.

To your point about Capital Gains, is it that we don’t pay tax in Portugal under NHR on foreign income, hence not on Irish domiciled dividends?

To your 2 reasons from above statements, are you implying you would ultimately pay less Capital Gains tax at the point you sell the fund?
I think you are saying that with the accumulating fund, you’re capital gains are always calculated from the very first date which you purchase some shares in the fund, whereas with the dividends, if you reinvest them into the fund, the capital gain would be based on a later date of purchase, each time you reinvest the dividend, and therefore the capital gain calculation would be less?
Effectively you are getting a lower tax obligation?

The other point is that when NHR stops after 10 years, you would then need to pay income tax on the dividends the fund distributes.
If you wanted to sell the entire fund and put it into an accumulation fund, I’m assuming you’d be paying less tax than if you sold the whole accumulation fund?

Are you also Portugal based?

[Hyperborea]

To your point about Capital Gains, is it that we don’t pay tax in Portugal under NHR on foreign income, hence not on Irish domiciled dividends?

NHR status allows you to not pay tax in Portugal on income outside the country that is liable to tax in another country. Note that this is liable to tax but that may or may not in actuality be taxed. So dividends and interest are by the standard tax treaties liable to tax in the country of origin but capital gains are taxable in the country of residence of the owner of the fund/ETF/stock etc. So, dividends and interest earned outside Portugal are not taxable in Portugal for somebody with NHR status whether or not the country where those dividends or interest are earned taxes them or not. Capital gains would be taxable in Portugal even for somebody with NHR status.

To your 2 reasons from above statements, are you implying you would ultimately pay less Capital Gains tax at the point you sell the fund?
I think you are saying that with the accumulating fund, you’re capital gains are always calculated from the very first date which you purchase some shares in the fund, whereas with the dividends, if you reinvest them into the fund, the capital gain would be based on a later date of purchase, each time you reinvest the dividend, and therefore the capital gain calculation would be less?
Effectively you are getting a lower tax obligation?

Yes, when you finally sell the accumulating fund all those accumulated dividends will have been rolled into the fund over those years. They will raise the value of the fund and all of that gain from dividends will be taxed as capital gains. If you had used a distributing fund then those dividends would have been received tax free. You would also have bought new shares in the fund at a likely elevated price due to the growth of the underlying investment. Those shares bought in year 2, 3, etc. would likely have a higher cost basis and so the calculated capital gains would be lower when sold and so result in lower tax there too. The accumulating fund turns those dividends into capital gains and keeps your basis artificially low. Both of these resulting in more tax.

Are you also Portugal based?

Yes, as of this year. I was in a situation where I was able to sell my investments tax free before arriving in Portugal so I made sure that all of my investments were in funds that I could leave alone and that are distributing.

[CqpedVulture]

Yes, when you finally sell the accumulating fund all those accumulated dividends will have been rolled into the fund over those years. They will raise the value of the fund and all of that gain from dividends will be taxed as capital gains. If you had used a distributing fund then those dividends would have been received tax free. You would also have bought new shares in the fund at a likely elevated price due to the growth of the underlying investment. Those shares bought in year 2, 3, etc. would likely have a higher cost basis and so the calculated capital gains would be lower when sold and so result in lower tax there too. The accumulating fund turns those dividends into capital gains and keeps your basis artificially low. Both of these resulting in more tax.

So ultimately you are saying it’s best to invest in dividend paying funds under NHR to save long term on the amount of Capital Gains tax one needs to pay?

However I have a few more issues.
If at the end of the 10 year NHR period, I didn’t want to pay income tax on the dividends, what is the best way to manage that?
I’m guessing that depends on the Capital Gains and income tax rates at the time. A lot can change in 10 years. Income tax would depend on my current rate at which I’m paying which would depend mainly on if I’m still working, I’m guessing?
If my actual rate of income tax, at the time is higher than Capital Gains tax (currently 28%), would it be prudent to sell the entire fund, paying a lower Capital Gain than from an accumulating fund (for the reasons you explained), and then reinvest all the money into an accumulating fund?

The other issue is I may or may not leave to work in the United States in 1-2 years from now.
Would an accumulation fund then be a better option to invest in right now, rather than a distributing?

I’m guessing one can only make a decision on what information currently exists and act accordingly. I’m finding it difficult to plan, as my current work / life situation is very unstable.

Yes, as of this year. I was in a situation where I was able to sell my investments tax free before arriving in Portugal so I made sure that all of my investments were in funds that I could leave alone and that are distributing.

That’s great!
What part of Portugal are you? I’ve just moved to the Algarve for work.
Would it please be possible to have a short chat with you regards my situation?
You know more than me. It seems a distributing fund makes more sense under NHR, but maybe not for me?

[assyadh]

Under NHR, you should not owe dividend taxes on distributing ETFs while you should owe capital gains tax.

Except for US Persons where right now it's supper muddy because of a recent court decision:

https://www.korepartners.com/insights/u ... ngs-clause

https://htj.tax/2022/05/good-news-for-u ... hr-regime/

[CqpedVulture]

Any idea where in Portugal I can find a good financial planner and tax advisor for a reasonable fixed fee?

I’ve searched everywhere.
They either don’t reply to a request, charge about €300 for 30-60’ or simply don’t know what they are doing and unable to answer my questions?

I really don’t know what to do……