We have heard so much that many passive income recipients are moving to Portugal. But what can Portugal offer in this regard? In this article, we will explore the financial investment opportunities available in Portugal. So if you live in this country and are looking to diversify your income, this material is for you! I should note that the methods presented below are high-risk, so if the risk is not for you, I suggest you check out an article on risk-free savings instruments instead.
In general, the same investment instruments that are common in other countries are available in Portugal. The Portuguese haven't come up with anything super specific in terms of investments. However, the implementation of investment instruments in Portugal may have its own peculiarities and limitations, and the aim of this article is to familiarize you with some of them.
Buying shares to receive dividends
While in Portugal, you can acquire shares of Portuguese and foreign companies that pay dividends. Dividends are a portion of the profit that the company distributes among its shareholders. Not all profitable companies always share their earnings with their shareholders. The decision to pay dividends each year is made at the shareholders' meeting. In 2022, the number of Portuguese companies paying dividends was slightly less than 20. These include large market participants such as EDP, Galp, Sonae, CTT, NOS, and others.
On the one hand, Portuguese corporations are considered quite profitable in terms of dividends, as more than half of them have a dividend yield ratio of over 4%, which is the ratio of the annual dividend per share to the share price. On the other hand, much higher yields can be found in companies from other countries.
Dividend income is subject to a tax rate of 28% (22.4% in the Azores) and sometimes the tax is withheld by the broker. If the dividends are paid by an offshore company, the tax rate is 35%. For tax purposes, it is very important to know if your broker has a branch in Portugal and where the company paying you dividends is registered (Portugal/EU or other countries). Depending on these two factors, it will determine in which section of the tax return to declare this income, and whether they need to be declared at all.
Trading securities on the stock exchange
You can also buy shares of companies for subsequent sale on the stock exchange and profit from the difference in prices between purchase and sale. Currently, there are shares of 55 Portuguese companies available on the stock exchange, and of course, you can also purchase shares of foreign companies. Profit from the sale of shares must be declared and taxed accordingly. Losses from the same activity can also be declared to reduce taxable income for the next 5 years. Profit from the sale of shares of Portuguese companies is subject to a tax rate of 28% (22.4% for residents of the Azores).
There are many nuances to trading on the stock exchange, particularly when it comes to declaring income. We will not delve into these details within the scope of this article. Very detailed explanations can be found on bank websites, for example, here.
What brokers do the Portuguese use?
It is possible to carry out securities operations in Portugal through your bank (most banks provide access to the investment section from the client's account). However, most people use brokerage platforms, which are called "corretora". Usually, these platforms charge a fee for asset storage and for conducting operations. The latter can represent a certain percentage of the transaction amount or a fixed commission for the operation or for the month. Bank commissions are often quite high, so for many Portuguese people, investment platforms are more attractive. Platforms such as DEGIRO and XTB are actively promoted in the Portuguese market, but in reality, there are many other platforms available to residents and residents of Portugal.
In Portugal, the activities of companies providing brokerage services are regulated by an organization called the Comissão do Mercado de Valores Mobiliários (CMVM). The scope of this organization applies to companies registered with it, and the list of which can be found here. Additionally, CMVM provides information about these companies to investors. For example, it is possible to compare the service fees of all these companies on a single page.
To protect investors, there is the Sistema de Indemnização aos Investidores (SII), a system of investor protection that guarantees the return of up to €25,000 in the event of a registered broker's bankruptcy in Portugal. However, this system does not protect against any other risks of capital loss, such as risks associated with the activities of the companies whose shares the investor has acquired. Therefore, if an investor invests in a company that goes bankrupt while the broker continues to operate, there will be no compensation. Platforms such as DEGIRO and XTB, being companies from Germany and Poland respectively, are subject to the rules of investor protection systems from their own countries and guarantee slightly lower amounts of return.
Investment funds
Instead of selecting and purchasing securities on your own, you can invest money in investment funds. The essence of this financial instrument is that a single fund is formed from the funds of several investors, which is used to purchase securities and is managed by a specialized organization, such as a bank or an investment company. The investor does not own any securities directly but owns a share in the fund, proportional to the amount of his contribution.
Usually, investors pay a subscription fee, a management fee, and a withdrawal fee to the fund.
The supervision of investment funds is entrusted to the Securities Market Commission (CMVM).
There is a wide variety of investment funds, and for Portugal, the following classification by asset nature is relevant:
- Fundo de Investimento Imobiliário (FII), a fund that prefers to invest in securities related to real estate or in securities of companies whose main objective is real estate deals, brokerage, or exploitation.
- Fundo de Investimento Mobiliário (FIM), a fund that invests in tradable securities.
Investment funds in securities are of the following types:
- Fundos de Ações, equity funds. According to CMVM classification, these are funds that invest at least 70% of their assets in stocks.
- Fundos de Obrigações, bond funds. According to CMVM classification, their assets must consist of at least 50% of bonds, and they cannot directly or indirectly invest in common stocks.
- Fundos Mistos, mixed funds.
- Fundos de Tesouraria, treasury funds. Their investment policy is oriented towards assets characterized by high liquidity, such as commercial paper, bank deposits, and securities with a maturity of less than one year.
- Fundos de Fundos, fund of funds. They hold shares in other funds in their portfolio.
- Fundos Garantidos, guaranteed funds. These funds guarantee full or partial preservation of capital at the expense of a lower possible return.
- Fundos de Índices, index funds. The goal of their investment policy is full or partial replication of a securities index.
- Fundos Especiais de Investimento, special investment funds, which define their investment policy in accordance with various objectives.
- Fundos de Poupança Reforma (PPR), pension funds.
According to the type of rewards of participants, funds are:
- Fundos de Rendimento are income funds that periodically distribute the income received among participants, with the value of each participant's share remaining constant over time.
- Fundos de Capitalização are capitalization funds in which the income earned is added to each participant's share without periodic income distribution.
To invest in an investment fund or a couple of them, you need to contact a bank or an investment company. Usually, at the initial stage, the bank or investment company will ask the client to fill out a small questionnaire to determine their investment profile and thus select the optimal fund for them.
P2P lending platforms
Lending to individuals and companies through specialized online platforms and without the involvement of banks is currently very popular in many countries. In Portugal, this trend is only beginning to gain traction in the market. Nevertheless, on YouTube, you can already find many videos from bloggers who talk about how much money they lost on this financial instrument. And it's not surprising, because it's a very risky activity where there is a high chance of encountering fraud or a pyramid scheme.
The idea of the tool is that when an individual or company needs a loan that they can't get from a bank for some reason (or the bank offers it on unfavorable terms), they can instead borrow money from several lenders. Each lender will only lend a small amount and receive some interest as payment for its use. The collection of amounts from lenders, their transfer to the borrower, as well as the repayment of the debt and interest on it, takes place through an online platform that earns its percentage on it.
On platforms registered in Portugal, a lender can earn up to 6-7% annual interest, while foreign platforms may offer up to 15% annual interest. No matter which platform the lender chooses, if he is a resident of Portugal, his income will be subject to a 28% tax.
The activities of these platforms in Portugal are regulated by the Securities Market Commission (CMVM), as mentioned earlier, and only 4 companies registered in Portugal are currently listed on their website. Portuguese organizations that want to engage in peer-to-peer lending must be registered with the CMVM. However, this requirement does not apply to foreign platforms that accept money from residents and citizens of Portugal.
The Securities Market Commission oversees the activity of the platforms, investigates their violations, imposes sanctions on them, and imposes fines. However, CMVM does not evaluate the projects offered for lending on the platforms.
The obligation of P2P lending platforms registered in Portugal is to provide complete and accessible information necessary for lenders to make a decision on financing a particular project, including:
- The document called Informações fundamentais destinadas aos investidores de financiamento colaborativo (IFIFC), the format and completeness requirements of which are described by CMVM.
- Information about the beneficiary, the form and term of the loan, interest rate, total project amount, risks, and guarantees.
- Summary information about funded projects, including the number of projects and corresponding amounts, as well as their status (e.g. loan not granted, loan repaid on time, loan not repaid on time) and average profitability and loan term.
- Prices and fees for their services.
- Procedures for investor protection that will be taken in the event of insolvency, cessation of activity, or prolonged inactivity of the platform. According to information from CMVM, P2P lending operations in the majority of cases are not covered by the Investor Protection System, SII, which was mentioned earlier.
To protect investors, the following restrictions also apply:
- The maximum loan limit for one project by one investor is 3,000 euros.
- The maximum amount of all investments through P2P lending platforms that one person can make within a year is 10,000 euros.
These limitations do not apply to companies or individual investors with an annual income equal to or greater than 70,000 euros.
It should be emphasized once again that the above rules apply only to P2P lending platforms registered in Portugal. Platforms created in other countries are subject to the regulatory documents of their countries, and it is the responsibility of the investor to find out what guarantees they will have when working with foreign platforms.
Seguros de capitalização tool
This financial tool has a legal form of life insurance in Portugal, however, it has nothing to do with insuring risks to life and health. I would translate the name of this product as an accumulation instrument in the form of insurance. The instrument is designed for savings accumulation in the medium and long term perspective. Funds can be deposited either once or repeatedly with a chosen frequency.
It is expected that this financial instrument has a very low level of risk. However, unlike bank deposits, there is no fund that guarantees the preservation of invested capital. The preservation of invested funds depends heavily on the insurance company. To check the reliability of the insurance company, it is necessary to check its solvency ratio. Since these companies have very high capital requirements, the risk of bankruptcy and, consequently, the risk of loss of invested funds by investors is greatly reduced.
Typically, the instrument has a guaranteed minimum yield, and the insurer can annually review the interest rate. In some cases, there is also a profit-sharing component that can vary depending on the insurer's profits.
Seguros de capitalização has a more favorable tax regime compared to fixed-term deposits, receiving dividends, and trading on the stock exchange. In this regard, the instrument is very similar to Portuguese pension savings plans, as the tax rate depends on when the investor requests the money back:
- up to 5 years from the subscription date to Seguros de capitalização - 28% tax rate;
- from the 5th to the 8th year - 22.4% tax rate;
- from the 8th year - 11.25% tax rate.
However, it should be noted that in order to be eligible for the tax reduction starting from the 5th year, at least 35% of the capital must have been contributed in the first half of the insurance period.
You can subscribe to Seguros de capitalização either at an insurance company or a bank.
Is it worth investing in Portugal?
I am not in any way advocating for it. However, in my opinion, for those who plan to live in Portugal and are interested in investments, it makes sense to at least look at what the country can offer in this regard. And if you plan to receive income from financial instruments from other countries while being a resident of Portugal, then you definitely need to study tax issues.
In any case, I wish you success in diversifying your income!
