U.S. International Tax Update with The American Club of Lisbon 21st April 2022

DERREN JOSEPH:

All right. And I'm going to do the slideshow thing. All right. So hopefully you guys can see it. So let, so let's go through this pretty quickly. So, okay. So my name is Derren Joseph, as I mentioned before, and I'm with HTJ Tax. Now we operate internationally. We operate in quite a number of jurisdictions. So in Asia, we ended a brand named Moores Rowland, a rural and task consultant in Asia. We use Advanced American Tax in some jurisdictions, etc. So we are a member of this, of a network and that's how we connected to Augusto and his team. So that's kind of like the loose Info legal framework kind of, okay. I'm actually based in Singapore, I do spend a fair chunk of my time in Portugal, but, you know, I practice what I preach. You know, Singapore is just one of those really attractive jurisdictions from a tax perspective. And it will look kind of silly if I'm advising you guys about structuring your fees globally and I don't do it myself. Right? So, Hey, next year, we'll be 10 years at and I'm actually in, I'm calling Singapore my home. So this is who I am. So providing some sort of context and the basis upon which I'm able to well to sit here today and have this conversation with you. So I'm an IRS enrolled agent. So I've been admitted to practice by the internal revenue service in the U.S. So my license is across all states, federal tax, you know, transfer taxes, give tax estate taxes. So, I mean, we do us, we do us in particular, but we do International Tax in general. So like earlier this morning, I was dealing with someone asking questions about Holland to Portugal, you know? So we international in general, you S International in particular, of course, with that comes a disclaimer, we have a license blah, blah, blah. This is not advice. Here's what I'm hoping that you guys take away. I'm hoping that at the end of this conversation, you are equipped with key concepts and key tools that you're going to take to your advisors and have a more meaningful conversation with them. So this is not, I mean, nobody can, I mean, the U.S. tax code is what, 70,000 pages, 8 million words, right? And that's a federal level. You have a state level, then you're Portugal. No, one's going to teach you everything in one goal. Right. But hopefully, you'll walk away equipped with certain key tools. And so you'll have a more informed conversation. So again, this is not meant to be advice, just putting it out there, right? So these are the sections given the demographics of the RSVPs that an shared with us, some good, it's going to jump around to four, the jurisdiction, three other jurisdictions. And then we will drill into Portugal because clearly, that's where the greatest curiosity is, you know, people wanna understand between Portugal and U.S. which is fair. After all, the other jurisdictions are more or less seasoned in that the rules haven't been very bad dramatically, but Portugal has had some big changes recently. So that whole Portugal us relationship people were still trying to figure it out. So, that's fair enough. So my head of U.S. tax compliance is Ronnie. This is Ronnie's ex JP Morgan. And, and he runs, the team that does the compliance. So I came up with this, what I think to be a cool acronym, right? B.E.S.T., do your BEST, right? And I hope this provides again, provides context it provides a useful framework for you to think, and to remember what your responsibilities are as a U.S. taxpayer abroad. So B bank accounts, what does that mean? It means that ever since, and this is not new, right? This is since 1917, 1971, the bank secrecy act, anybody that's the U.S. exposed. So this is individuals as well as legal entities, corporates, part of your responsibilities, reporting to the IRS. So we've moved to the IRS, but reporting to the treasury department, what accounts do you have outside of the U.S. so any account that you have or can control, which means any accounts you can sign for. So it may be that you have a company, are you working you an employer and employee, and your employee bosses have lots of trust and faith in you, and you have senior enough in whatever organization you're in and you can sign that needs to be important as well. So any account that you can sign for, there's some threshold that if you want to get into that, we can, but you want to think of, I have bank accounts. I may need to be reporting them. And as well as other financial accounts, so that may include foreign retirement funds. It may include brokerage accounts, mutual funds, anything that's considered a financial account or the U.S. you may want to think about reporting it. So that's B bank account. The estimated taxes. 

When you were in the US, you may have been paid on a W2 in this withholding, right? So the tax comes up on your payslip, and you saw it right now that you are outside of the US, that may not necessarily be the case. And, bear in mind that the IRS does not like to wait until the end of the year and then get their money. They want to give them money along the way. So typically a good discipline would be to follow an estimated tax schedule. And that will typically involve making four quarterly payments. So that'll be April, June, September, and the following January. And once you make that, it should be able to avoid the underpayment penalties that come with not making those payments on time state tax issues. A lot of people think you know what, Hey, I'm no longer in the US so I don't need to pay state taxes. Well, sometimes you do there's state source income. So for example, you have a rental property. You rented your home out, but under certain circumstances, even though you do not reside in the state, you may trigger tax residency. So an example would be, if it is that you still have a home that may be unoccupied, and it's not being rented out, there's no Airbnb there no tenants in it. And it's still there available for you to use, depending on the state, it may still trigger a tax residency or state tax domicile. So there are strategies that we work with our clients for severing, state domicile, assuming that you wanted the most states to have a state income tax, and helping you to think about Redamo styling to one of the eight states without an income tax. So like Nevada, Wyoming, Texas, Florida, Alaska, whatever the case may be. So that's a conversation. We have something to keep in mind. Otherwise, you need to make sure that state taxes are paid. We've had so many cases of people living, living abroad. And then at some point in time, they returned to the US and they're faced with a huge state tax bill because remember that federal and state speak to each other. So you may think they don't know what you're earning, but the IRS does report to the franchise tax boards, what your earnings and activities are. 

So keep that in my last, but not least would be your transfer taxes, gift taxes. And, and that's a bit of a morbid topic, but it's state taxes as well. So when you, when you were overseas, you know, depending on your, your status, your situation, you may, it typically happens. You get into a relationship boyfriend, girlfriend, or foreign spouse, and there may be a transfer of assets back and forth. Now, if you were both US citizens or more specifically, the US domiciled and domiciled is a very specific definition that we can get into business interest. Then there's unlimited spousal gifting. But once one of your spouse is not a US person or not the US domiciled, then it's something you need to think about. Transfers of assets back and forth, mature trigger, gift tax return. Now, what I want you to take away from this is that your S International Tax is way different from US domestic taxes. And one important way or way is that when you end the US, the emphasis is on paying your taxes, you know, just get that money and pay them one day old. And everybody's going to be happy with international taxes. It's less an issue of paying taxes and more an issue of reporting, transactions, reporting assets by putting investments. How do, how do I know that? How on what basis am I telling you this? I'll tell you what the basis is. Just look at the penalties. If you do not report a gift, for example, the penalty could be up to 30% of the unreported gift. If you did not report a financial account, the penalty could be 50% of the balance of the maximum balance in that account per year plus jail time. So in other words, the penalties for not reporting a really aggressive and much more punitive than for not paying taxes on time. So please keep that in mind so that that's the framework. Do your best, consider these four things. And you're on the road to staying on the safe side of the IRS. And we're going to talk about anyone that's in the UK, and I have Weldon and have in London, and they deal they're the front line in dealing with UK exposed clients. Now, the UK is the, I mean, the granddaddy of tax havens, right? I mean, everyone thinks Switzerland, but when you really add a leg, the channel islands, you know, Jersey out of mind and you, the overseas dependencies like Cayman Bermuda, and you add all of those guys, BVI that's way more that's way, way more than Switzerland. So the UK through London has away, has a network of tax jurors of tax-friendly jurisdictions, which makes the UK super attractive. And one of the key tools in your arsenal, if it is that you are in the UK as the US exposed person to consider is trust. Remember, you know, according to folklore, England invented the concept of trust. 

It dates back to the crusades. When people of noble birth would go to fight wars on behalf of Christina, they don't want to end up like Robin hood. So when they returned back home, someone's stolen all their stuff, right? So the way around that was to make sure your assets are being managed, or you hand over your assets in the trust to someone else. And, and that's, that's, that's where the concept came up. So one of the key tools you have at your disposal would be trust structures. And then the UK has this very attractive concept of domicidal from a perspective. So you can be a tax resident in the UK, but not tax domiciled in the UK. What does that mean? It means that you only pay tax on income that is UK sourced, anything that is outside of the UK would not be taxed in the UK unless it's remitted to the UK. So in other words, you can elect to pay tax on a remittance basis. And that is a huge tax planning opportunity because when you look at the UK versus us, it depends on your situation. Yeah, I know one size doesn't fit all, but normally the UK is going to be the high attach jurisdiction. And that when you look at the ladders, you know, the tax brackets, you jump into the higher tax brackets, way more quickly than you would in the US so the average person, you pay tax bill is going to be higher. So in terms of the planning and strategizing, it's really around the UK side. So these, again, are some of the concepts that you want to think about. You have to think about the remittance basis versus the rising basis. And you want to think of ways of protecting your, your non-UK based income sources from UK taxation. So these are the key concepts to walk away from, to walk away with, and engage with your Procrit advisors, Mexico. We heard that there were some RSVPs from Mexico. So we do live streams on Mexico, and US taxes pretty regularly as well. We have one coming up next week with Carlos. So we have a lot of quite a few clients in Mexico that run their businesses, right? So they're running businesses remotely. They are entrepreneurs, the investors, and some of them are into crypto as well. So what I want you guys who may be business owners as well, and are living and working outside of the US, I want you to think about the CFC rules. What are those? Those are the controlled foreign corporals. The US has very specific control foreign corporate rules, and the deed back in the 1950s and sixties, where something called Subpart F and into the 1980s under president Reagan, we have Patrick rules. And as recently as 2017 under president Trump, we had the GILTY rules, but basically what it means. And we can get into that in detail, if there's an appetite for it, but essentially what that speaks to a rules that prevent you from differing, recognizing your corporate income on your personal tax return, because normally all things being equal, your company's a separate legal person from you with rights and responsibilities of its own. Steve jobs found out that your company can fire you, right? So it's separate from you. And typically you would only pay taxes, personal taxes on what is extracted from the company, whether it's in the form of wages or the form of rights. Once it comes into your personality, then you're going to declare that somewhere in your 10 40, and you gonna pay taxes on it, that's normal, right? But with those CFC rules, if that is triggered, then the IRS doesn't wait for there to be any distribution from the company. The IRS has certain mechanisms and calculations for assuming that, Hey, you're going to use that. You somehow benefit it, or there's a deemed distribution from the company on into, even though you didn't get it. So, in other words, it can create cash flow issues for some people, because you're going to be paying taxes on money that you didn't really get. So there's some planning that is possible, and that may be necessary if you find yourself in a situation like that. So let us know, of course, their management and control rules, which means that, Hey, you are running that company, even though it's incorporated in whatever jurisdiction back in the IS, LLC, C Corp S Corp, somewhere else offshore, bear in mind that many jurisdictions have management and control rules. What does that mean? It means that even though the company may be incorporated in the US if it is that you live in Mexico, that company may be deemed to be a Mexico company. Why? Because management and control have been exercised in Mexico, similarly in Portugal or whatever jurisdiction you're in. Keep in mind that even though your company is incorporated somewhere else, it may be deemed to be tax resident and the jurisdiction from which it's managed and controlled from. So that's, that's a conversation, each tablet, you prefer it, advisors France. We do live stream on Frances. Well, we have one with Arab, and next month you can join us for a deeper dive into those issues. But just, again, the key concept, quick wins, quick takeaways for you to reflect on and engage your preferred advisor. Everyone has asked your honesty, right? It is just such a popular planning tool from a French tax perspective, which is right, because when you're dealing with France versus the US, France is going to be the higher jurisdiction. 

So when you're optimizing, you're really keeping almost both eyes on France because France, French taxes can be so aggressive, pretty high. So, okay, fine. So there are task planning tools that are available but bear in mind that they may have consequences from US perspective. And one of the most common triggers is a lot of those savings plans and retirement plans, and some of the insurance policies and in France and other jurisdictions as well, not just France, I'm not picking on France, but in it's really popular in France is that it triggers one of those anti-deferral rules that I mentioned in the previous slide would Mexico. And that's the PFIC rules. So it's what is called a passive foreign investment company. And may or may not have heard that before, just to kind of keep it simple again, even though from a French perspective, it's tax-deferred and it's, again, it's not France. The UK has it with ISIS as well, ISA. So even though maybe tax-preferred in France, it is not tax-preferred from a US perspective. In fact, you may be hit with mark-to-market rules. So in other words, even though there's no distribution to you to take any money out, you may be required to report any gains in your structure and gains inside that policy and gains inside that fund need to be reported, even though there was no distribution and that's under the so-called PFIC group. 

So I, it gets pretty convoluted, but happy to take a deeper dive into it. If that's something you guys want to do when we get into the Q and a section, right? So it gets, you know, it's, it's pretty convoluted. We could talk about whether the PFIT is tainted and then it has to be cleansed and yeah, it's pretty involved. But the the takeaway is if it is, if it is that you have any sort of collective investment structure or the equivalent level of a mutual fund, or an insurance policy with cash in the policy, cash surrender value, and you sort of retirement, you need to check with your us advisor to see, Hey, is this because it has special reporting and special tax calculations that need to be done just for those vehicles. Another thing to think about is normally one of the huge benefits of being a US ex-pat is the section nine 11 foreign earned income exclusion, which is reported on your 2555. Right. But I mean, I usually, I know that's like the go-to, it moves up with inflation, but this year it's like 110,000 as you're doing your returns for this year. So for 2021, 2022 for 2021, it's like the first hundred and 10,000 or so, of your income is shielded from  US taxes. And that's it feels like a no brainer, right? But when you're in a high jurisdiction like France, you may want to second guess why? Because sometimes it may be better to actually just use your foreign tax credits because you'll have so many foreign tax credits from paying taxes in France that you don't want to waste, that you may be actually better off using foreign tax credits and not claiming the phone in and can exclusion. So just something to think about and, and, you know, to take away and engage your advisors on last but not least there are ports you go. And I know everyone is representing Portugal here today. So the Gastonia I have done so many live streams, we have spoken to thousands of people and feel hundreds of questions. So we were talking before this, this zoom call, we thinking, Hmm, do you think it's possible that someone can ask us a question, but we have not asked an answer before. So that's a challenge to you guys, fears. You could ask us something that, you know, just to kind of keep us on our toes and, you know, and, and, and we feel good about that because when you come at something hot and we able to help point you in the right direction, you know, we feel good. You know, it feels good that we've, we've, we've helped, we've helped people to learn and to, to save money on their taxes. Right. Which is all good. So some the NHR, there's a lot of confusing information online, as you know, and the, the, as to what is excluded and what is an excluded, I guess the take away is really that it is very, very nuanced, and it's not like a resonant dominant Ireland in the UK, or, you know, the backroom rule or the backroom law in Spain, or the 50% ruling in Holland where you can kind of like more or less say, well, all my foreign income is going to be excluded. I’m good. Only my Portugal. No, not exactly some, you know, depending on what your, your structure and what, and how you have invested over the years, some of your international or non-Portugal income can be pulled into the Portugal tax net. So again, planning is necessary. There are tools, there are structures to help you tax optimize, you know, quite common would be for those who have securities income. For example, we've seen some clients take advantage of Malta and Cyprus, so to legally avoid and to turn, minimize the tax, because right now you'd be paying 28% on that securities income to Portugal. You can bring that down by using certain structures. I've seen clients do the US returns first, and then hand them to the Portugal tax advisor. You know, once I hear that I'm thinking, oh, double tax, a double tax. Why? Because depending on the nature of your income rate, Portugal may not give a tax credit for what was paid in the US. So it makes sense to either consider the Portugal return first or even better, bring them under the same roof. So that advisors that know each other and talk to each other and are aware of the rules on both sides, when they're working together, that's how you get to tax optimize. But once you know, they're working in silos or one person's doing, then handing it to the other, I’ve really seen complications. This season's a result of that. So that's it that that's, you know, that's my general kind of like an introduction. So hold space. Now I saw Gary asked a question about what happens after 10 years, right? And we, you know, Áugusto and I were talking about this before. So Áugusto, do you want to give your perspective? because I've got still been a Portugal tax lawyer. He understands how things were when the NHL was first introduced and, and people are coming up to their 10-year anniversary right now. So do you want to comment on that? 

AUGUSTO PAULINO: 

Sure. They're just, I miss the the, the presentation. So just for completeness, I'm not actually a tax lawyer, I'm a tax advisor. So unfortunately we must be careful with the expression. A lawyer is not the case, but as you mentioned, so first, first I would just, of course, like to thank the American club, of Lisbon for organizing. And I think a special thanks to Derren for inviting me. And it's a pleasure to contribute, for this discussion. So as you, as Derren mentioned, we are now starting to see some situations where the 10-year period of the NHR regime is ending for some taxpayers that opted for this regime in the first years of its application. So, in, in general terms, we know that the regime is not renewed. So from the 11 years in Portugal, the taxpayer will be subject to the general rules applicable to what we call standard text players here. And it is what it is. So after the 10 years, it's up to the Tech's client to opted continue leaving in being a tax resident in Portugal, or should choose another jurisdiction. 

DERREN JOSEPH:

Okay. Fantastic. Thanks for that. And it is, you know, it, I've seen it. This is lively, that is an important question. I'm glad that Gary raised it because, you know, obviously we pay attention to some of the discussions in various forums, and in one particularly popular forum, I wouldn't say which one it is, but it's been a hot topic. Like what's going to happen in 10 years and people have different ideas, but, you know, to this point is non-renewable. So, you know, that kind of basically limits your options either you stay or you leave. So, but anyway, looking through, Julian is asking, will this live stream be shared online and already replied to? And the saying that she will it's being recorded already. She's going to edit the video and post it on YouTube and on all platforms. So watch this space and is gonna make it available. Okay. Next question again, if you, if you have questions, feel free to post them below. If I decide to lose my Americans, Juliana is asking if I decided to lose my American citizenship, do I continue to receive a pension and social security? Okay. That's an important question as well, because obviously, you know, we speak to a lot of American ex-pats in Portugal, and to be fair, that is their plan. That is their plan. They want to do their five years or six years or whatever it is, and they want to get a Portugal passport, and then they will renounce and remain either in Portugal or somewhere else within the EU. And, you know, even if you want to travel outside of the EU Portugal is a powerful travel document, and whenever you're looking at a list of the top 10 passports in the world, Portugal is going to be there. It's going to be there. So this is a pretty powerful travel document, right? So in terms of giving it up, let's talk about that a bit. Let's, let's talk through that process. Once you, we help probably three to four clients every month give up their US passport or green cards. So this is a process. So we're pretty familiar with you can be normally there is no exit tax. I know people ask a lot about the exit tax, assuming that you do not trigger what we call covered ex-pat status, you're not going to be subject to an exit tax. And you trigger a covered ex-pat status. If your net worth is an excess of $2 million, or if you'll need your tax liability for the five years proceeding, the expatriation or the surrender, the green card is access. The number moves up with inflation, but let's say 170, $175,000 per year. So you basically look at that high net worth high income earning individual that will be subject to the exit tax. Of course, we do pre expatriation planning with our clients because there are some ways that you can legally reduce that tax burden, if not eliminated completely. So it's worth having that conversation under the previous regime, you may have been subject to still being taxed by the US for eight or 10 years afterward, after surrendering, that is no longer the case. You would probably need to pay taxes on any us source income. So like, if you still have rental properties, or if you have any sort of deferred payments coming out of the US like deferred compensation plans, but otherwise that's it you're done. Okay. So will you consider receiving your pension? Yes, you can. Right. But of course, many people don't let the broker, or whoever's holding the pension fund, whichever platform using for the pension fund, you suppose, to actually let them know that you're no longer a US person, because then they make payments and they give you something called a form 1042 S and, you know, you may need to file a return to get a partial refund, etc. But, so the point is that, yes, you will still receive your pensions, but it may be subject to special withholding. So again, there's some planning around that because depending on the jurisdiction you're in, there may be some treaties that you can invoke to get a partial refund on that withholding or a full refund. So there's, you know, there's a conversation and there are some planning opportunities with that, but generally speaking, yes, you're going to get your pension, but it'd be subject to withholding as for social security. That may be a different case. Again, this is not something we deal with pretty often on the social security side, because most of our clients don't really depend on it, but you may be prepared. You should be prepared to lose your social security. So that's, you know, again, you'd probably just want to have a conversation with an advisor on that, but that is a distinct possibility that you may lose social security if it is that you surrender your passport and green card and over in card and you stay outside of the US so, okay, next question. Are there any changes to IRS form 5471 this year? So John is asking about 5471, but those are not familiar. So if it is, you have an interest in a foreign company. Also a company outside of the US that's reportable on a Form 5471. And if it's a foreign partnership, it'll be 65. It was a foreign trust. That's another one that the 3520, but the 5471 would be for foreign companies. Now, as to whether there've been any changes, not that we're aware of, there were some big changes in 2017 around the tax cut and jobs act under President Trump. 

So there are some huge changes under that, which I guess if you've been filing this for why you should be aware of, but as for now for 2022, looking at 2021 returns, no, there've been no changes, but that is a very important form because failure to report a 5471 or to report it late is a $10,000 per year. And we don't think they are as, as afraid to, to levy that penalty we have seen it. We've seen clients submitting it late or for forgetting in addition it makes the standard statute of limitations when you return. So those informational forms are super important, and they're a bit complex, depending on what jurisdiction you're in. So you'd want to pay particular attention and put it together, or you may want to seek advice. So, yeah, next question. So Kristen is asking, please address reporting of joint accounts and joint property, where one spouse is US and the other is non-US? I am American, but my partner is Austrian. We have joint accounts and joint property owners. We both report and pay very high taxes in Australia, but I do not know how to go about reporting and deductions. Unfortunately, we can't give you a step-by-step as to how to report deductions. 

When that some guys cutting the grass outside, so, okay. In terms of the foreign accounts now, depending on the thresholds, that's reportable on your FinCEN. 1, 1, 4 of the AF buyers, right? So, which we mentioned previously is very, very important because of course, failure to report those accounts, maybe up to 50% of the, of the value, the maximum value in those accounts. So that's really, really important. Okay. Now, as to whether it's joint. 

Yeah. And this is a question that I got, as recently as yesterday, you still need to report the full value of the account, even though it's jointly held, you still need to report the full value of the account. Unfortunately, now you, you would also be aware that in addition to defense and one, one for the F-bomb, you also have the 89, 38, or the factor four. So that has a different threshold. It's a higher threshold, but it's similar. It reports similarly and then people always ask, well, you know, that that's really confusing. Why am I filling out the same stuff on the AF bars as well as on the factor form 89, 38? And here's the reason. So the fin 1, 1, 4 doesn't actually go to the IRS. The IRS has responsibility for collecting it, but it actually goes to a department called FinCEN, the financial crimes enforcement network. They both sit under treasury. So within the treasury department, there are a number of units or divisions most popular, which is the IRS, but it's also a fencer. So FinCEN receives the bars. If the IRS wants to see it, they need to request it from FinCEN. So that's why around 2010, 2011, when the financial accounts tax compliance, foreign accounts tax appliance act, or Faco, when that was passed, then they took the opportunity to introduce 89, 38 so that they get a copy of the foreign accounts as well. 

Now, there are some slight differences. If it is a bank account, a regular bag absolutely is going to be reported on both, but there are some things that have better been reported that will not be reported on the 89,38. So, for example, again, as I mentioned, if you have signing authority over a corporate account, so you will not be UBO, you're not the ultimate beneficial owner, but you have control over it. So you can sign, even if it takes two signatures on a check or to initiate a transaction, the point is you can sign, that's going to be on the app boss, but it won't be on the 89,38. 

In addition to this, if you hold like some, an asset in a structure. So for example, you have shares and foreign companies that are below the threshold for the 54,71, or, you know, certain, for example, real estate. If you hold real estate in a structure, you may need to report that in the, on 89, 38 as well. So I just want you to be aware that you have two forms to consider not just the F bars, and if it is that it's jointly held, you still need to put the full amount on both now as to the joint real estate. 

If it's held in a structure, as I mentioned, then, yes, it's on the 89, 38, but if it's just an investment property then, and it's being rented out is Airbnb, whatever it is. And there's a yield as this rental income that comes from it, or maybe you guys sold it. And so their capital gains, then only your share. So let's assume it's 50-50, then only that 50% share will reflect on your returns, not the entire amount. 

So hope that helps as to your taxes paid in Austria on the let's assume it's an investment property. Then, of course, that's going to be deductible. So, you know, it depends on the nature of the taxes. It may be on the schedule E itself, or it will be on form 11, 16, depending on what it is, but definitely you're going to be deductible and you're not going to be taxed twice. That's an important thing to take away that double taxation only occurs if your tax team or the two sets situations, maybe the tax team's on coordinating with each other, and they're not speaking to each other, then things might get double taxed. 

Or there are very few transactions that may be double tax at the federal level, but it's more likely to happen at the state level. If it isn't, you still have residency, you still are a tax resident in a given state. And that state is going to attach any worldwide income that state may not recognize foreign tax credits. So some, for example, taxes paid in Austria. So then in those situations, yes, you may be double-check, but again, once you've done proper planning, you know, you should be able to legally avoid any double taxation issues form 11, 16 is the one would find tax credits, franchise credits 11, 16, and the other questions feel free to type in the box below. 

Happy to answer them. I have one. So, you know,  there were changes relatively recently. This one is for you. I've got still, it changes relatively recently with the NHR. So previously obviously, well, most popularly, everyone who speaks while the NHR talks about, Hey, big change recently, pensions used to be tax-free foreign pensions. You receive a foreign pension, all good tax-free to Portugal, but now it's taxed it at 10%. Can you, could you talk us through, can you talk about that, please? 

AUGUSTO PAULINO: 

Sure. Basically the change was introduced in the law to at least try to address the concern of other jurisdictions that were, I would say upset with Portugal because the patient income would be exempt either in the country of source or in Portugal. And, the the regime was adjusted and forces. Now that the pension income from a foreign source is subject to a flat rate of 10%, which is still a good tax rate. But anyway, it's no longer exempted or fully exempt. Just, just also an additional comment that has to do with the fact that this, this, this change in the law was introduced in a way that does not, well, it's not the application to those who are previously registered as a non resident in Portugal, meaning that those that were already in the 10 years, still F full exemption for patient income. And this is enforced since 2024 new texts residents since March 2020. And of course, this could be a, an additional tax leakage for pension income, namely for pension income deriving from private pensions, because those usually entered the double tax treaties would only be taxed in the jurisdictions where the taxpayer is resident, which in such case will be in Portugal and no taxation. 

Of course, the source, course, may have some specific situations in the case of  US nationals because there are always special rules. In this case, we may imagine that We have a specific case we respect or a specific question with respect to a pension from, patient income from the US.

DERREN JOSEPH: 

Thank you for those 

AUGUSTO PAULINO: 

The Q and a, we have some additional questions. 

DERREN JOSEPH:

All right. So let's, let's jump through. Let's go through them. I see 12 questions. So first one, Julietta is asking as a non-resident to the US would, can you still use a US address? Absolutely. Even though I'm in Portugal or Singapore on my tax return, I use my Florida address. So that's absolutely no problem. Basically, it's the address at which the IRS can easily reach you, should, they need to, that's the address that you're going to use in your 1040? 

How can they best get to you? Now. We've had issues with clients using the US address, even though they're abroad and depending on siblings or parents to follow and mail to them. And it doesn't always happen. So just remember that, whatever, Jess, you need needs to be reliable. You need to be able, this is like Virgin stuff. You do not keep the IRS waiting. So, yeah, next question. As a non-resident, I only need to pay federal taxes and non-state taxes. We answered that. So normally federal taxes only, but you know, most states are domicile states. 

So there are triggers that can lead, even though you're physically not there. You can still be subject to taxes under certain conditions. So what we propose and what we coach our clients with is, is think about Elon Musk. You use the Elon Musk approach. And what do I mean by that? Basically scorcher. When he left California to move to Texas, he sold everything. No, nothing, nothing, nothing, because California being one of those more aggressive states, you don't want to give them a basis for still taxing you. So we coach our clients on that. You know, you change your voter registration to whatever that new state is you know, your driver's license, your whole mail addresses everything. You switched that out into one of the eight states without an income tax. And you give your state of origin as little legal footing as possible to still tax you. So that's super important. You need to speak to your advisor, not to make it happen. Next question, you mentioned a Facebook group where the recording will be shared. Can you share the group link here? That's an ad mentioned that it's if you do, if you go to Facebook and you look for the American club of Lisbon and as a moderator, and she's the one that's going to make sure that's going to happen. So the American club of Lisbon, this is one for you, Áugusto, how does a regime simplified work for a personal tax and Portugal apparently up to 4%, only 4% up to 200 K Euro with many deductibles. 

Can you explain how to go about this? 

AUGUSTO PAULINO:

Okay. With respect to the simplified regime, well is no longer simplified, but anyway, I'll try to summarize. So the idea of this simplified regime means that as a professional or business, man, you don't need to prepare that individual-level accounting records as an entity or corporation, subject to generals. This means that the profits, the taxable profit would be calculated based on some assumptions with respect to the costs that are related to the activity. For example, in case of in general case for service providers, the profits would be only taxable all. The 75% of the profits would be subject to taxation because there is a deemed expense up to 25% of the turnover, which means that the techs would only apply to 75% of the turnover. And, but anyway, to have this 25% of deemed costs as a tax deduction, you need to have at least 15% of expenses with your text identification number that could be allocated to the professional activity. So that's why I mentioned this is no longer that simplified because we actually need some expenses to obtain the full deduction of in this case the service providers of the 25% of the expenses. So this is just a brief explanation, the professional income or, or their business income from an activity that is subject to this simplified regime is subject to the tax rates, which in the case of general or standard taxpayers are progressive rights up to 48% in case of NHR taxpayers. And in the case of what we call value-added activities, the tax rate would be a 20% flat rate of 20%. And I dunno if everything, this flat rate of 20% and only tax part of the profits, we achieved the 4%, but it's a method of doing maths. 

DERREN JOSEPH: 

Alright. Wonderful. Thanks for that. Augusto, just going through the questions again, you mentioned PFIC in the friend section, but that's applied elsewhere. You absolutely correct all of those anti-deferral mechanisms from the IRS. So whether it's PFIC or GILTY,, they apply in any part of the world where the circumstances are triggered. It's just that we've found that in Europe, in France, in particular, theres  Asteron suite is just so popular. And that's just always triggering PFICs. It happens sometimes in the UK, but ISIS, but if it is, you have cash, ICER it doesn't. So it depends on the ICER, but you know, in France is like any retirement savings plan is going to trigger PFICs. That's what I mentioned, which you're absolutely correct. It applies everywhere. The next question is then issued using a us traveling mailbox for bank and brokerage accounts. Absolutely not. That should, should be part of your state tax planning. You know, you're going to pick, as we mentioned before, you're going to pick one of those states without an income tax. And you, you probably want to sit with your advisor and make sure that it's complete and that you give, if it is that you come from a high tax state or state with a tax and you want to, Redamo sell to state without one, you just want to make sure that you don't give you former state any basis for still taxing you. But yeah, using, there are lots of services. I'm not going to mention any of them because I don't want to be seen as from watching any, but you do a Google and this is like a whole bunch of them come up and whatever works for you. That's your personal preference. Yeah. Next one. If after five years you opt for Portugal of citizenship and serenity, US you still pay taxes on retirement distributions. I think we mentioned that before as well. It depends, but you should look to yes. If, if it is you, you, if it is your retirement plan, is pre-tax money. If it is a traditional IRA or 401k, then yes, you're going to be looking at our taxes. Definitely. If it's a Roth, it's, it's kind of a gray area, but basically, once it is that you identify to your brokerage firm that, Hey, I'm no longer us person they supposed to withhold. And then you have a conversation with your us tax advisor as to how that's treated, right? So you can invoke a treaty position and you may be able to get a task-free depending on where you are, or at least you're going to get a partial refund on the withholding, from the IRS. Okay. I hope that helps move down. If you worked for a US employer while living in Portugal who withholds is federal, or do you W2, do you still have to pay taxes in Portugal? If so, what rate do you currently pay? Is there an offset between the two countries? So I'll answer part of that in hand over to AUGUSTO. So definitely there is an offset so that the countries, both jurisdictions, well, the US does recognize foreign tax credits. It's, it's a bit nuanced. So whatever is taxed in Portugal of all things being equal, you should be able to offset that against a US liability so that that's something to bear in mind. 

But again, the advisory team that's doing bullet, need to speak to each other and they need to coordinate, but a Augusto  remote worker in Portugal working as an employee. So it's a W2, which means this person's an employee for a US company. What are the implications of that? 

AUGUSTO PAULINO:

Okay. If the work is developing mean Portugal and the work are not developing in a, it's a permanent establishment of fixed place in the US,  it means that such income can only be, they can, can also at least be texting Portugal. So I would say in general cases, it would be an easier solution to try to claim a tax credit in the US, Yes. In general. 

DERREN JOSEPH:

Absolutely. There 

AUGUSTO PAULINO:

There Are some situations were under the double tax treaty, this can, can, can be specifically dealt with, but in general terms, I would say, 

DERREN JOSEPH: 

And I want to, I want to go back to a point that you made when you first began to answer that question, the idea of a permanent establishment. So again, just to kind of develop that, it depends on your, the person is asking because it pops up for us as an anonymous attendee. So anonymous attendee, if it is that you are a senior in your company, and you have the ability to complete contracts, you have strategic decision-making authority. Then you'd probably want to talk to Augusto or someone pretty quickly. Because as I got still mentioned, you may have triggered inadvertently or whatever criminal establishment. What does that mean? It means that that US company, that is your employer, your employer, I'm not talking about you, I'm talking about your employer may suddenly have a taxable presence in Portugal and then will be subject to Portugal income tax at the corporate level. 

AUGUSTO PAULINO:

Yeah. The management and control rules that you mentioned in the beginning. 

DERREN JOSEPH: 

Right. Exactly. So, you know if I were, you, I'd try to reach out to whoever, you know, we're not trying to push, but you know, you speak to Augusto as someone suitably qualified as soon as possible, just to make sure that, you know, you and your company on adversely affected, right. Hope that helps move on. If you're planning to restart, residing in Portugal, what is the deadline for dropping your current fiscal residents and what tax year does it impact on US tax return shopping? 

Okay. So if it is that you are us person in Portugal there, the point is that you are still the US, you're going to be taxing US income, your new worldwide income, even though you no longer live in the US. So you can't really drop your fiscal residence. You will always be a US  tax resident, unless, and until you surrender your green card and passport. So once you do that, then you can have a conversation. Okay. Am I free? Am I free? But until you take that as a huge step, and we know because we coach clients about three clients, three, maybe three or four clients every month and make that big decision. And huge I know it's huge, but that's the only way. That's the only way. So you want still a US tax resident, even though you live in Portugal for a really long time, I'm sorry to tell you that. Next question. Raymond is asking the  US taxes, 85% of social security with NHR. Will I pay a tax in Portugal on the other 15? So social security. So this is a government retirement payment Augusto. Is that, how is that taxed here in Portugal? 

AUGUSTO PAULINO:

Well, if it is a pension that there as from public services, it would be under the double tax treaty allowed tax session at sourcing in us, which means that in principle, we get relief in Portugal because such a, such a deficient income would be subject to tax session in the US only under the double tax rate. 

DERREN JOSEPH: 

Okay. Raymond, I hope that answers it. So the US only Portugal now, which is good news. Finally, we got to tell you guys some good news, right.

AUGUSTO PAULINO:

Independence is always on the nature of the pension. 

DERREN JOSEPH:

So government pensions are always different from private pension plans. Okay. Gotcha. So Pedro is asking how do America's in Portugal report US taxes on this sole proprietor put on sole proprietary Portugal companies. Okay. So how do you report your Portugal company on your US return? If it is incorporated, then it's on the 5471, which has been mentioned previously, if it's not incorporation, not a separate legal entity, it's not a legal person in law. You didn't incorporate a body and it's just, as you say, it's a sole proprietor, then that goes on your shed will see on your US tax return. So I hope that helps an anonymous is asking, please outline the marginal income tax rates in Portugal. I understand the capital gains are 28% Augusto module income tax rates in Portugal. 

AUGUSTO PAULINO:

Okay. So in the specific case of capital gains, which I believe it's the question, the tech in general, a tax rate applicable to capital gains is 28%, except in the case for example of capital gains derived from sales for your state, which would be subject to the progressive tax rates up to 48%, depending on the annual level of income of the text by it. But maybe I can, can just take this opportunity because we are talking about the capital gains too, to let, let you know that with respect to the specific case of capital gains and by US nationals, there was a real recent decision of arbitration of the amputation court here in Portugal that has to do with the fact that under the double tax treaty between Portugal and US, there is a residual clause or additional clause. According to each, as you, as there are not already mentioned, US nationals are always subject to a session on their worldwide income. Basic these, these rule supersedes all the other rules in the double tax treaty, because it mentions the possibility of us texting the worldwide income of  US nationals. And these, it has been the ground for some litigation processes that we at least some that we are aware of to sustain that capital gains, for example, foreign securities should be Texas exempt in Portugal under the NHR regime, because such a capital gain can be subject for example, in this case, in the US by the citizenship rule. 

And then, in this case, the court decided in favor of the taxpayer, and instead of the 28% personal income tax rate, that the tax authorities, the tax authorities assess in the capital gains, we came to the conclusion that those capital gains are exempt under the inertia, which is a good new, but anyway, this is definitely something that would end up in the text mitigation for now, because this is not the position of the tax authorities in Portugal. 

DERREN JOSEPH:

Okay. Well, fingers crossed, you know, that it continues to get decided in the taxpayer's favor because it'll be a huge win for all of the US. Right. Okay. The last question from Kristin, what happens if you didn't know what filing an 8938 is? Okay. So the 8938 is above the threshold of the half bar. So it depends on whether you're single or married or whatever, but if it is that you didn't report it and you were supposed to report it and your non-compliance was non-willful and non willfulness has no definition in code. So we rely on case law and case law tells the US, if there's an if you intentionally avoid a known legal duty, right? So, and we find it with our clients who have sophisticated structures to, you know, basically they knew what they were doing when they sort of it. But if it is that you genuinely did not know, Hey, oh my God, I need to do an 8930.  And I didn't know that I was supposed to do it to report my foreign investments in Portugal or France or wherever it is you are, then it's okay. There's something called the streamline compliance procedure, which is an amnesty in orbit name. And it allows you to go back three years. So the last three years, which Judy has already passed and you make the changes through the return and you submit that now it's the United 38 is just a reporting requirement. It doesn't impact the tax liability. So it should not trigger any additional taxes. But the great thing about streamlining is that, with any amnesty, you grew follower of the IRS before the IRS comes in and taps and knocks on your door and they agree to waive all penalties. That's a big news story, right? So what I suggest you do is reach out to your preferred tax team. If you don't have one, feel free to reach out to us and we'll be able to walk you through the streamlined compliance procedure. So in terms of how do you find us? Because I live in Portugal, okay. Somebody else is asking, I'm sorry, John, we have to wrap up right now, but in terms of how you reach out to us, you can find us. 

My name is Derren Joseph, an Augusto Paulino with both on LinkedIn. You can reach out to us on LinkedIn, or you can find me and I'm an HTJ.Tax. So just go to HTJ.tax super easy, and you can find out to reach me. And I can put you in touch with Augusto, or if you just want to reach out to Augusto directly, you don't need to talk to me then Augusto. How does someone find you directly? 

AUGUSTO PAULINO:

Okay. Through our site, of course, it's dfk.pt and my email address, which is the paulino@dfk.com.pt

DERREN JOSEPH:

Wonderful. Thank you very much to the association of American clubs for allowing us a chance to share our perspective and thanks to you guys for logging in and apologies for the noise in the background. Some guys doing some work outside, but thank you for logging in and for sharing some of your time, and asking interesting questions. So we challenged you guys at the beginning, to ask us something interesting. And you guys won. You asked us some really fun questions. We appreciate it. Please feel free to reach out if you want to have any further conversations, have a great evening. 

And I’ll see you next time. 

AUGUSTO PAULINO:

All right.

 

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