Unit Linked Policies in Portugal: How Are Surrenders Taxed under Personal Income Tax?
Unit Linked policies are frequently used as investment and wealth-planning instruments, particularly by investors and internationally mobile individuals.
Although structured as life insurance contracts, their value is linked to the performance of financial assets, investment funds or other reference units.
This hybrid nature has raised a number of questions about Unit Linked taxation, particularly where the policyholder decides to make a partial surrender of the policy.
The issue became particularly relevant following the publication of Supreme Administrative Court Judgment no. 13/2026, which established uniform case law regarding the taxation of partial surrenders of Unit Linked policies.
The conclusion is particularly important: taxable income may arise for Portuguese Personal Income Tax purposes even where the total amount surrendered remains below the aggregate amount of premiums paid.
What is a Unit Linked policy?
A Unit Linked policy is, broadly speaking, a life insurance contract whose value is linked to the performance of certain assets or financial instruments.
The premiums paid by the policyholder are associated with units of account whose value fluctuates according to the underlying assets.
Unlike products offering a predetermined return, the investment performance of a Unit Linked policy depends on the evolution of the assets linked to the contract, with the financial risk generally being borne by the policyholder.
It is this feature that makes such products economically similar to other forms of investment.
For tax purposes, however, that similarity does not mean that the resulting income is treated as a capital gain.
How does Unit Linked taxation work in Portugal?
The Portuguese Personal Income Tax Code classifies as investment income – Category E the positive difference arising upon the surrender, advance payment or maturity of life insurance policies and similar transactions, by reference to the premiums paid or amounts invested.
Accordingly, income obtained through a Unit Linked policy is not generally treated as a financial capital gain falling within Category G.
Instead, it is taxed under the specific rules applicable to investment income arising from contracts of this nature.
As a general rule, such income is subject to taxation at a rate of 28%, without prejudice to the rules on aggregation with other income, the source of the income and the taxpayer’s particular circumstances.
The duration of the policy may affect the tax treatment
The Portuguese Personal Income Tax Code provides more favourable tax treatment for certain life insurance policies held for longer periods.
Where the statutory conditions are met, part of the income may be excluded from taxation when the surrender takes place after certain periods of the policy’s duration.
The duration of the policy and the timing of the surrender may therefore have a significant impact on the amount of tax due.
This is one of the matters that should be assessed before carrying out a surrender involving a significant amount.
The issue of partial surrenders
For several years, there was disagreement as to how taxable income should be calculated where the policyholder surrendered only part of the policy.
One interpretation was that the first surrenders should be treated solely as a recovery of the capital originally invested.
Under that approach, taxable income would arise only once the total amount surrendered exceeded the amount of the premiums previously paid.
A different interpretation was that each partial surrender should proportionately reflect the appreciation attributable to the units corresponding to the amount surrendered.
It was this second interpretation that ultimately prevailed.
What did the Supreme Administrative Court decide?
In Judgment no. 13/2026, the Portuguese Supreme Administrative Court established uniform case law to the effect that a partial surrender of a Unit Linked policy may give rise to taxable income for Personal Income Tax purposes even where the amount surrendered remains below the total amount of premiums paid.
In these circumstances, the taxable income corresponds to the portion of the appreciation attributable to the units covered by the surrender.
In practical terms, the Court rejected the proposition that initial surrenders must necessarily be treated simply as a repayment of the capital originally invested.
The assessment must instead focus on the income effectively attributable to the portion of the policy being surrendered.
“I have not yet recovered my original investment” may not be sufficient
This is one of the principal practical consequences of the judgment.
The fact that the policyholder has not yet recovered the total amount originally invested through previous surrenders does not necessarily mean that no taxable income has arisen.
The relevant question is instead the appreciation attributable to the particular units covered by the surrender.
It is therefore especially important to understand how the insurer calculates and documents each transaction.
What if the Unit Linked policy was taken out abroad?
This issue is particularly relevant for individuals moving to Portugal.
Many Portuguese tax residents retain policies previously entered into with insurers established in the United Kingdom, Luxembourg, Ireland, Switzerland or other jurisdictions.
The fact that the policy was taken out abroad does not mean that the resulting income falls outside the Portuguese tax system.
An individual who is tax resident in Portugal is, in principle, subject to Portuguese Personal Income Tax on both Portuguese-source and foreign-source income.
A surrender made under a foreign insurance policy may therefore have Portuguese tax consequences, even where the policy was entered into many years before the individual became resident in Portugal.
Specific Portuguese reporting obligations may also apply in such cases.
A move to Portugal should be taken into account
For international clients, the date on which Portuguese tax residence begins may be particularly significant.
An individual may have entered into and funded the policy while resident in another jurisdiction and only subsequently become Portuguese tax resident.
Where a surrender is made after the individual has become resident in Portugal, its tax treatment must be assessed in accordance with Portuguese rules and, where applicable, the international rules intended to prevent double taxation.
This situation arises with some frequency among individuals relocating to the Algarve while retaining investments and financial products established abroad.
Unit Linked policies and the reinvestment of real estate capital gains
Unit Linked policies may also be relevant in a different context: the reinvestment of capital gains arising from the sale of an owner-occupied permanent residence.
The Portuguese Personal Income Tax Code allows, in certain circumstances and for certain taxpayers, the sale proceeds to be invested in a financial life insurance contract, thereby benefiting from the reinvestment regime applicable to real estate capital gains where the investor is over 65 years of age.
Certain Unit Linked products may satisfy this qualification.
However, not every product will automatically be eligible, since the tax treatment depends on the specific characteristics of the contract and compliance with the applicable statutory requirements.
Where the intention is to combine the sale of a property with an investment of this nature, the structure of the transaction should be reviewed before the product is taken out.
The policy documentation is essential
Correct Unit Linked taxation depends not only on the commercial name of the product, but also on its specific characteristics and the available documentation.
Relevant information may include, in particular:
- the general and specific terms and conditions of the policy;
- the history of premium payments;
- the policy commencement date;
- information regarding previous surrenders;
- the appreciation of the underlying units;
- the jurisdiction in which the insurer is established;
- the tax residence of the policyholder.
In the case of foreign policies, the documentation provided by the insurer is not always prepared with Portuguese tax requirements in mind.
A prior review may therefore be required before the Portuguese Personal Income Tax return is filed.
What should a holder of a Unit Linked policy do?
Anyone who is tax resident in Portugal and holds a Unit Linked policy should avoid considering Unit Linked taxation only after making a surrender.
This is particularly important where significant amounts or foreign contracts are involved.
A prior assessment can determine the nature of the product, the tax treatment applicable to the surrender and any reporting obligations arising in Portugal.
Frequently Asked Questions
Is a Unit Linked policy taxed every year as its value increases?
As a general rule, the mere appreciation in the value of the policy does not, in itself, trigger the taxation discussed here. Taxation generally arises when income is made available through surrender, advance payment or maturity.
If I surrender less than I originally invested, will I avoid Portuguese Personal Income Tax?
Not necessarily.
Supreme Administrative Court Judgment no. 13/2026 confirmed that taxable income may arise on a partial surrender even where the amount surrendered remains below the total amount of premiums paid.
Is income from a Unit Linked policy treated as a capital gain?
As a general rule, no. Income arising from the surrender of policies of this nature is classified under the Portuguese Personal Income Tax Code as investment income falling within Category E.
Can a foreign Unit Linked policy be taxed in Portugal?
Yes. Where the policyholder is Portuguese tax resident, a surrender under a foreign policy may give rise to Portuguese taxation and reporting obligations.
Can a Unit Linked policy be used for the reinvestment of a real estate capital gain?
Certain contracts may fall within the regime applicable to financial life insurance policies, provided that the statutory conditions are satisfied. Eligibility must be assessed by reference to the specific characteristics of the product.
How can we help?
URB Law Services, based in Almancil, advises domestic and international clients on Unit Linked taxation, financial investments, foreign-source income and Portuguese Personal Income Tax.
We also advise on situations in which these products interact with relocation to Portugal, wealth planning and real estate transactions in the Algarve.
A prior review of the policy and the holder’s tax position can be particularly important before a surrender or other significant transaction is carried out.
Contact us to find out more.
