U.S Reporting Requirements for Portugal Golden Visa Funds

US citizens applying Portugal Golden Visa investment fund route, must follow certain US tax laws and reporting requirements, regardless of where they live to comply with US law. Americans must know that residence permit initially granted for one year followed by two 2 year renewals.

First, US citizens must pick the right investment fund that adheres to US reporting requirements. Some funds dont qualify. Some funds provide short cuts Guaranteed buybacks and upfront returns circumventing 500K requirement, such funds do not meet conditions for Golden visa. Recently Portugal government started investigating funds that offered guaranteed buyback. Investors must prove to AIMA they have transferred full 500,000 euros from their non-portuguese foreign bank account. 

GV Fund Conditions

There are five essential conditions need to be met to qualify for the capital transfer path for Portuguese Golden Visa: The FCRs are governed by Law 18/2015, of March 4

• The fund must be private equity and venture capital fund  needs to be approved and regulated by CMVM (Portuguese Securities Market Commission).
• 60% of the fund’s capital must be invested in companies with headquarters in Portugal.
• The investor has to buy fund units for a minimum of €500,000.
• The investment needs to be kept during the whole Golden Visa process until permanent residency or citizenship is acquired, which takes at least 5 years (in reality, often 6-7 years).
• The fund may not, directly or indirectly, invest in real estate.

US citizens become tax residents in Portugal if they spend more than 183 days a year. They must file tax return on worldwide income. They can take advantage of NHR 2 special tax regime paying only 20% flat tax.

Tax Benefits for Americans

Portugal has several unique tax advantages for US citizens

• NHR 2,0 Special tax regime.
• Foreign Income: Potential tax exemption on foreign-source income.
• No Wealth Tax: Portugal doesn’t impose wealth taxes.
• No Inheritance Tax: Significant estate planning advantages.
• US Tax Considerations: Potential foreign tax credits and exclusions.

Non-tax residents only file a tax return and pay Portuguese taxes if they have Portuguese-source income. Foreign-source income, however, is tax-free.

US Reporting Requirements

• Americans living in Portugal must file (and potentially pay) federal US taxes. 
• Foreign Bank Account Report (FBAR): Mandatory for expats with over $10,000 cumulatively across foreign financial accounts
• Statement of Specified Foreign Assets (Form 8938): Mandatory for expats whose foreign financial holdings exceed $200,000 on the last day of — or $300,000 at any point during — the tax year
• FBI record must not be over 3 months old when you file with AIMA.

Portugal investment funds welcome US persons investing for GV purpose.  IRS requires US citizens who have direct or indirect interests in PFICs to report such as part of their annual US income tax filing Most foreign investment funds (either private equity, mutual funds, or others) are usually by default classified as PFICs for tax purposes. As a result, these are taxed at the highest federal income tax level(37%) and both dividends and capital gains from the fund are taxed at that level.

Passive Foreign Investment Company (PFIC)

Passive Foreign Investment Company (PFIC) refers to certain foreign corporations that meet specific criteria related to their income and assets. A foreign corporation classified as a PFIC if either:

• At least 75% of its gross income is passive income, which includes dividends, interest, rents, royalties, and certain gains from the sale of assets, or
• At least 50% of its assets produce, or are held for the production of, passive income

form 8621 is a tax form file annually used by U.S. taxpayers to meet reporting requirements for PFIC

Transfer of IRA (401k)

A 401(k) or Individual Retirement Account (IRA), is an increasingly popular strategy among American investors to fund 500,000 euro in a Portuguese private equity or venture capital fund. You can convert to Self-Directed 401k (SDIRA)  or Solo 401k which allows you to direct your retirement funds into a foreign country fund.A Delaware LLC is used to own the self-directed IRA.  LLCs must remain ‘in business’ to receive any interest and/or buy back.

• A self-directed 401(k) provides several investment opportunities, including private loans and limited liability companies (eg. Delaware). However you need to be careful with the prohibited transactions set by IRS such as investing in life insurance, metals etc.
• Americans need to be aware that moving your 401(k) to an international fund will result in U.S. tax liability and possibly the 10% penalty for an early withdrawal.
• Withdrawing money from a traditional 401(k) before you turn 59 ½ years, can result in income taxes. Roth IRAs and Roth 401(K) withdrawals are taxed on distributions. 

Luckily US and Portugal has signed a tax treaty.  You are not required to pay U.S. income taxes on your Portuguese-source income. This is because the United States and Portugal have a bilateral tax treaty.

Tips for US Investors

Here are some tips for US investors when it comes to investing in Portugal.

• Use professional investment managers with proven track record to get better returns with more accurate risk management
• Keep a close eye fees – subscription fee, performance fee, exit fee, hurdle rate, 
• Be sure the Portuguese bank you open an account at is FATCA compliant and that they can provide custodian services to US investors.
• File IRS form 8621 annually starting from the first year of investment; otherwise, you will likely be subject to high-interest penalties. It’s highly recommended to use a qualified expert for this.
• It’s best to do the QEF election in the first year and annually after that. (It’s possible to make the election in a subsequent investment year, but it becomes more complicated).
• Ask if the fund provides a PFIC annual statement—for it to be valid, the statement needs to be issued by the PFIC and signed by the authorized representative.

AIMA Documents

AIMA will be requesting the following supporting documents for fund investors

• Statement from a Portuguese financial institution confirming an international transfer equal to or more than €500,000 into a bank account under the name of the main applicant
• Certificate from a fund manager of the units purchased, free of any liabilities
• Declaration from the fund manager proving that the fund qualifies for Golden Visa investment (at least five years lifetime, at least 60% invested in Portuguese companies, and a suitable capitalization plan)
• If the investment is made under a single-member limited company (Sociedade Unipessoal por Quotas), then an excerpt from the commercial registry (Registo Comercial) is needed showing that the investor is the proprietor of the company

FAQs

Below are important questions, we answer for U.S investors

Please contact us if you have any questions..

Disclaimer: Please seek professional tax advice from a qualified CPA and lawyer before you commit your investment. The above information is provided in general advice, may change from time to time.