LIVESTREAM – U.S/Portugal Taxes for Expats (5th October 2022)

 

VOICEOVER:

We invite you to attend the January 2023 Nomad Offshore Summit here in Lisbon, Portugal.

This podcast channel is about you. Successful international entrepreneurs, successful ex-pats, successful investors. Sponsored by HTJ.tax.

DERREN JOSEPH

So I know people are gonna be popping in and out. We had a large number of RSVs to this one, nearly 200. It’s been a while since we’ve gone into triple digits. Normally it’s like mid to high double digits, so that’s good. So, you know, we do these live streams small, less every week. And the two most popular ones are Spain (Searching for top-notch US tax consulting in Spain? Reach out to our skilled professionals). and Portugal, for several reasons. Anyway, thank you for joining us. HTJ.tax, and as I mentioned, we do this every week. If you wanna see what’s coming up next, you go to HTJ.tax/events As easy as that, we’re gonna be doing a live event. So we’re gonna do a live event in person in Portugal at the end of January 2023. So feel free to check that out. We get an opportunity to meet each other as well as to take a deeper dive into some of these issues, which is always a good thing. Right now we have an online discussion, right? One, important thing we like people to understand is that this should not be construed as tax advice. We’re having a general conversation about general principles. If you want what we call actionable intelligence, you need to engage a professional who knows your situation inside out. So there’s a limit to what we can understand about your situation and therefore a bunch of questions in a few minutes or a few seconds. So therefore what we are hoping that you’ll do is take the responses as an indication of the key concepts you need to take to your preferred advisor. But general conversation, general principles, you can consider it education or even entertainment. So, we are, both Augusto and I are both licensed tax professionals, so we need to be respectful of the terms of our license. So as people still trickle in, thank you, and get to see you. If you have any problems hearing us, just let me know. So typically what we do for those who’ve been on before and I’m seeing some familiar names, is that Augusto will go through a PowerPoint presentation. But we’ve done this like 10, 15 times. So we’ve done this quite several times. And from what we can see on the Youtube channel anyway, many people have been enjoying that video where he goes through the, you know, the general principles, especially around NHR, which is where a lot of the questions come. So we are not going to go through the PowerPoint presentation again. Again, if it is that you want to see that overview, just go to YouTube, go to YouTube and look for HTJ.tax. You can plug that in and when you get to the YouTube channel, you can just put it search in for NHR nonhabitual residents and Augusto will pop up and he will walk you through the basics of NHR. So what we’re gonna do this time, you guys are really excited, You guys have sent in a lot of questions, which is good. So we’re gonna go through those questions from now, right? If you did not get a chance, because we got, I got an email up to like 15, 20 minutes ago asking if it’s too late. No, it’s not too late. If you wanna ask a question, you could just go to the box below. If you’re on Zoom or if you’re on Facebook, you can just type in the comments below, just type it and we get to them in the order in which they received. But we have quite a few questions, so please forgive us if we are not able to answer everybody’s questions today. Augusto, it’s a public holiday for those of you in Portugal, Happy Republic Day. I, if that’s the right way to say it, but it’s a public holiday. So Augusto is only with us for half an hour and then I’ll take us to the end of the hour. So without further due, a couple of you sent me a link to an article in Entrepreneur Magazine. It basically looks at the US and talked about the top 10 countries that Americans are looking to retire for those who wanna retire overseas. Number one is Mexico. Well, that kind is easy, It’s right next door number two is Portugal. So there you go. It’s the number two jurisdiction for the entire United States for retirees, those who wanna retire overseas. Number two is, is, is Portugal, just to round up. Number three is the Philippines for Italy. Five, five, Thailand, six Spain, seven Canada, eight France, nine Costa, and number 10, the United Kingdom. So quite topical. The first question is about retirement income. So this is a question from, so Paula’s asking, Hello everybody. Portuguese and I’ve lived in the US since she’s lived in the US a long time. Okay, I am planning to retire and return to Portugal in two years with my husband who’s also retired. I have a number of questions related to the non-habitual residents tax regime in the nr. So she has four questions for us, right? So the first question is, if the tax we have to pay on our retirement in the US is greater than the 10% of the NHR and Portugal and in bracket she has that, this includes social security, 401k, IRAs, will we have to pay any additional tax in Portugal or according to the double tax agreements in this case we’d only have to pay US tax and no Portugal tax. We get this question every single time. So Augusto,

AUGUSTO PAULINO:

So first of all, thank you Derren for and all the participants. So with respect to the pension income, so for those that move now to Portugal, the NR regime foresee tax of 10% of pension income from foreign source. There are some, some exceptions for example, in case of benefits to from social security or regime for public servants. But in general terms, those cases of social security benefits and other pension products would be subject to 10% flat rate here in

DERREN JOSEPH:

Right. So then from, again, from Paula’s point of view, I, I can tell she’s been doing some research, so she’s been doing some reading, so she’s aware of the double tax agreement. So what we have to do from a US point of view is take that 10% assuming that she has worked in the private sector. So as Augusto has pointed out, and it, it comes back to the definition of pension. So in the US we have a wider definition of pension, but in in Portugal there’s a specific definition of pension, right? Which means that for the purposes of enjoying that tax free, so no Portugal tax, no no 10% tax, that pension has to rise from public service. So you must have worked with the government, whether it be states or federal. Then that pension, the social security and the IRA and the 401k, then it would be free of tax, otherwise it’s gonna be tax. Now you will not be double taxed, don’t worry about that. And the reason why is that whoever’s doing the US side, Portugal gets first bite. Assuming that you worked in the private sector, Portugal do its 10%, then you can recategorize that income. It’s some tax alchemy that we do on form 1116 for the US return that allows you to take that 10% tax as a deduction against any Taxes to the the US and to the IRS in the US. So you are not gonna be taxed double, you’re not gonna be double taxed. So don’t worry about that. But please bear in mind the Portugal has a very specific treatment and definition and concept of a pension and it is not as wide as the US and it does not include pension that’s derived from work in the private sector. So I, I know this causes a lot of misunderstanding and controversy, but that’s, that’s what it is. So Paula has three more questions. So let’s jump onto the question number two. So our social security 401K and IRA income received in the US taxed entirely at 10% or portions of this type of income tax differently? Augusto, I think you answered that before.

AUGUSTO PAULINO:

Okay, so just, just one remark that has to do with own contributions or text, text contributions to these products because the idea is that in case the pension derives from own contributions at the surrender or the moment that you receive the pension, only the income would be subject to taxation and not the full amount of the pension. Because once the contributions have been made directly but in this case taxpayer, the capital included in the pension income should be excluded from text station.

DERREN JOSEPH:

Thats great point. So typically that’s, it becomes important that the, the taxpayer has kept detailed records because as tax professionals what we have to do is bifurcate the income. So we have to divide it into, as Augusto says, between what was your contribution asan employee, what was your employee contribution and what was the growth in the fund? Because that 10% applies to the growth in the fund. Again, we’re assuming that you work for the private sector, which obviously many people do. So just that growth in the fund becomes tactical to Portugal, not the entire amount, but again, but just to reemphasize, it’s important that you get the distinction between work done for public service and work done for private sector. Okay, question three in Paula’s four-part questions. Question three. During the 10 years of the nr, are there any deductions allowed on the amount of social security IRA and 401k?So basically US retirement income, if yes, which ones? So I think Augusta, I think we, you already kind of touched on that. So the only deduction typically would be the bifurcation of the income to determine the pension income to determine what was, what part was the employee contribution that you originally made versus what part is the return on the investment. Am I correct? Is there any other deduction aside from that?

AUGUSTO PAULINO:

No, unless we are talking about general deductions, the, to the taxpayers that are applicable in Portugal to any taxpayer with the NR regime or not? I dunno if the question would, would, would be in that respect because we can have different tax deductions by the year end whyear-endle the tax return, basically depend on the, some expenses that taxpayers may have waited to help.

DERREN JOSEPH:

That’s a good point. Typically what would be like the top three deductions on a typical Portugal tax return? Just ballpark

AUGUSTO PAULINO:

Average. I would say the health expenses would be most relevant that are expenses related with rented houses for example. And also expenses for general, general personal expenses that have a cap of 250 euros by per year. But it’s

DERREN JOSEPH:

What it’s ok, so it’s kinda low. So it’s really health and rental so that this is if you have rental, right?

AUGUSTO PAULINO:

So two examples. Rental, no, if you pay rent for rent house.

DERREN JOSEPH:

Right, okay. So it’ll be the big two. Okay, great. Thank you for that. And the fourth part

AUGUSTO PAULINO:

And of course and of course for we have also deductions for, for children and education expenses, it’s also

DERREN JOSEPH:

Okay relevant point. So hell rent rental accommodation and kids’ education. So that might be, could be three big ones. Okay, hopefully that answers Paula’s question.

AUGUSTO PAULINO:

Last and there is also a fixed deduction for pension income. It’s 4,000 euros that is applicable.

DERREN JOSEPH:

So it’s like deduction counseling.

AUGUSTO PAULINO:

Yeah, yeah, yeah.

DERREN JOSEPH:

Okay, gotcha. Paul’s last question to 10 years of the nr, what are the deductions allowed under the normal tax? I think we’ve answered that question. She’s asking the normal deductions and regular Portugal tax regime after the HR is done. And where can we find more detail informed this subject?

AUGUSTO PAULINO:

Well I don’t think that the deductions are summarized in a specific document.

DERREN JOSEPH:

So are they, would you recommend someone doing a consult? You know, do you, is that something your team will be, you know, could they, could Paula, anyone in a similar situation who’s kind of planning, I want to get a sense for what happens after 10 years. Can they reach out to you, a member of your team to do a paid consult? Yeah. Okay, sure. So we’ve given you, so, unfortunately, Paula, there’s no, we are not aware of any place online that summarizes the key deductions that happen after 10 years. But you can reach out to Augusta directly or to me and I’ll introduce you to Augusta via email and you can set up a,paid consult with the right member of his team to go through that if you wanna do that kind of forward planning post N hr. Ok. Okay, great. And of course seeing that you, you planning ahead as I mentioned before, we are doing that summit in January next year and it gives the chance to meet up with, with us and Augusto as well and have further conversations on the topic. Next question, this is from Cindy. So Cindy just has two questions, not for, Cindy has two questions. So first question is for Portuguese income tax, does the 85 15 rule apply to distributions from the following types of US retirement accounts? And she gives three US retirement accounts, 401k, traditional IRAs on Roth IRAs? Augusto we spoke about this earlier.

AUGUSTO PAULINO:

Yeah. Okay. So we spoke about the rule that says that we not tax pension income the amount that we receive that corresponds to the capital contributions that we made in the past, right? As individuals. So when the tax law also foresees a simplification rule, meaning that if you are not able to demonstrate which part of the pension corresponds to capital and which part responds to income, then in such case the rule says that 50% corresponds to income and the 85 corresponds to capital. So this is the, I believe the 85 15% rule that is mentioned in the question. Well in respect to which, which pension income benefits from this. So we need to prove that the contributions were made by the taxpayer itself or such contributions or text subject to text. So for example, if we have a product that was the contributions were tax exams, in such case the full amount of the pension income would be subject to Taxes. That’s the idea.

DERREN JOSEPH:

Okay. So that’s an important point. So this the 85, so the rule that you get to the, you get to not tax the initial capital contribution by the taxpayer only applies to pension contributions that were from after tax income. So the money has already been taxed. So for example, after tax would be like a Roth in the US of a Roth, right? If it is you have like maybe a traditional IRA where it’s pre-tax money that goes in, then the entire amount will be subject to 10% tax.

AUGUSTO PAULINO:

Yeah, that’s right

DERREN JOSEPH:

Okay, gotcha. Understood. Okay, Cindy, I hope that answers your question very comprehensively. The second question from Cindy is how is income from US based LLCs taxed in Portugal? Yeah, this is another one that we get pretty often. So essentially this has to do with the nature of the llc, specifically if this real economic substance in the US as opposed to just being a shell company and management and control is exercise from Portugal. So basically it’s a single member llc, you are the only person working for with this LLC and you’re sitting in Portugal. So that fact the facts and circumstances will drive its treatment. August0, am I correct in saying that?

AUGUSTO PAULINO:

Yeah, so the situation would be different depending on those factors.

DERREN JOSEPH:

Exactly, yeah. And it is, it is quite a, you know, a, a widely discussed topic because some people they, you know, they are aware of this, so we explain it to them and they’re perfectly aware of this, of the dynamics of the situation, but they con they continue to file or represent themselves to the tax authority in Portugal as if there’s real substance in the LLC US and therefore these, the distribution is treated as dividends, so it’s tax-free. But you know, I guess they, they counting on the i the fact that as one person told me is the tax agent in or the tax officer and the Portugal tax office is gonna check, are they gonna really investigate? Are they really gonna ask, you know, I guess chances are no, but it could happen and if it could happen then you might be in some problems if you misrepresented the the situation. So it is, you know, it’s just, just one of those things that you’d wanna be careful about. Yeah. Okay. Thank you Cindy. I hope that answers your question. Okay. There’s someone else asking now. And for those who have come who just come in, they see people coming in, you can type your question in the box below and I’ll get to them in the order, which we get it, right? So someone is asking, I have questions about n HR status and crypto income, if it’s the main source of income, I read that crypto isn’t tax and Portugal except if it’s your main source of income. I also saw that n HR status was a bit different, some, a bit confused. That will be all. Thank you very much. Okay, so crypto again, one of those questions we get every time, Augusta, how, how is crypto being treated?

AUGUSTO PAULINO:

Okay, so in Portugal at least currently there is no specific tax rules applicable to income deriving from crypto. And based on that lack of specific regulation, the understanding also from the tax authorities is that the income deriving from crypto would only be taxed in those cases where the activity is the main or a business activity developed by the taxpayer. So, and this is very difficult to, to assess in practical times also because the definition of a business activity in this respect is not that, that clear. So if, if we have someone to give a an extreme example, if we have someone that only trade crypto and also as others income deriving from activities related to crypto, this person in theory can be catched by this rule of the income deriving from crib to being considered as business income.On the opposite side, someone that only has a transaction and decided to cash out those in any games would not be subjected to tax are the two extreme example. But in the middle there is some gray areas.

DERREN JOSEPH:

Yeah, it is a very gray, and I guess that’s an important point to mention that it’s not that crypto is tax-free, is that Portugal doesn’t have a specific law to tax crypto at this point in time and that can change. So as a result it is, for the want of a better word, it’s a loophole for the want of a better word, right? In other jurisdictions that distinction between your main source of income and others, it’s, it’s, it is quite contentious in, in terms of law. So in other common law jurisdictions, like in uk, Canada, Australia, New Zealand, Singapore, Hong Kong, you talk about Malaysia, you talk about badges of trade. So there are like nine or 12 indicators derive from the, that rich history of common law and cases, court cases that has given rights to, okay, if you have these characteristics, then you are a trader, therefore you are deriving profit, so be taxable as profit. Whereas if you don’t have those, then you are maybe you’re an investor and it’s gonna be treated as capital gains. So it it, and in the US again, there’s that distinction again derived not from British but from US case law, task law as well. So they, so it’s really a test of facts and circumstances and it, it’s hard, it’s hard to really nail it down, but in your case, you didn’t give you a name, but in your case, if it is that it is your main income and you do it on a regular basis, so I’m just being extreme now. So you get up every morning, you know, you put in your t-shirt or whatever, you sit in front of your laptop and you are trading and you are doing on a regular, continuous basis. This is what you do from nine to five Monday to Friday every week. Then it sounds as if you’re a trader and therefore this is profit to you and perhaps this is taxable to Portugal. Whereas on the other extreme, maybe it’s your main income, but you are an investor. So you invested 10 years ago, you got in Bitcoin early and you did nothing, you know, you’ve, you’ve, you know, you’ve seen the ups and downs and you decide, you know what, I’m gonna cash out some of that investment now to, to live on for the next year or so. And so you, you cash some out and you sell some tokens and now you have the, and that’s it. You just did it once for the entire year. That’s it. And you have money and you can pay your rent, you can travel around then that sounds like you’re an investor and therefore it’s capital gains. Of course it’d be taxable to the US but it may not be taxable to Portugal. So I use two extreme examples, but obviously for most people it’s somewhere in between. And if you want some guidance specific to your situation, then you probably need to reach out to Augusta directly, which, which you can just reach to shoot me an email. You can get us on our website if you need our text and I’ll introduce you to Augusto or to the right member of a team that could really walk you through your unique circumstances and see how it’ll be treated from a Portugal task point of view from the US is gonna be easy. It’s tough no matter what you do, right? It’s, it’s really Portugal where you have some opportunity to think things through carefully before you make a decision. Okay. Guess Augusto, do you have time for one more or are you about to head

AUGUSTO PAULINO:

Out? Yeah. Okay. One more. Sure. Okay,

DERREN JOSEPH:

Let’s see.

AUGUSTO PAULINO:

A couple of minutes.

DERREN JOSEPH:

So this, I’m just scrolling down. Okay. Right. So I’m getting to Keith, I think Keith has asked another question, has those two questions anyway, so Keith sent these three questions. Hello. If it’s not too late, I have a few basic questions. I’m from the US and I worked for the state of Florida my entire career. I have state government pension. Is that taxable and Portugal? No. So this is the first guy.

It’s so long that’s come on. Who’s actually worked in public service? So you get to give yourself a round of applause tax-free and Portugal, you are the guy. So the second question just key in.

AUGUSTO PAULINO:

For completeness, just because under the double tax treaty concluded between Portugal and us, such pension income can only be tax in the US.

DERREN JOSEPH:

Right? Perfect. It’s clean, it’s clear. No doubts. Okay, great. This one is a bit, there’s a bit of doubt in this one. So question two, we moved here to Portugal on June the 8th of June of this year, we received a D seven approval and had our passport stamped. We then flew back to the US on July 29th and then returned to Portugal on August 16th for tax purposes. Which of these dates is considered the day we became Portugal tax residents? Augusto.

AUGUSTO PAULINO:

So if the first day that that in Portugal was with intention and you have a permanent house that you can stay here in Portugal, that in principle would trigger the tax residency from that date. On the opposite, if it was a first visit to deal with some administrative issues and you stay in an auto or, or similar, you do not have your own property yet you are not decided, to move on a permanent basis. There may be grants to sustain that only in August you made that decision and you came here with the intention to stay on a permanent basis from that moment on. So that would be both could be, could be applicable, but I think that there may be regards to sustain that only in August. I don’t know. In this case we do not have information about, for example, having a property or not already

DERREN JOSEPH:

Yeah. When they were staying in a hotel or did they fall in love with a house and they a house in cash or whatever. And so it really, the fastened circumstances, so it could go either way. So it really a test of intent. So the tax residents are driven by, so did you intend to make Portugal in your home, your base and center of life

AUGUSTO PAULINO:

And a place to live.

DERREN JOSEPH:

Yeah. So yeah that place of a place of habitual abode could demonstrate that Portugal has become your center of life.

AUGUSTO PAULINO:

It could be rented property

DERREN JOSEPH:

Or long-term rent. Yeah, long-term rental contract. So it, it could swing either way key, it really depends on your facts and circumstances. So it happened this year, so next year when you’re ready to do this year’s return, you can reach out to Augusto and him and right member of his team will be able to guide you through that, that that process and make the right choice. Yeah.

AUGUSTO PAULINO:

And just for completeness also from a formal perspective, the registration with the text authorities as a tax resident, it is also relevant because tax authorities require that you show some kind of document with the Portugese address and also the documentation regarding the immigration process. So this is all relevant for the formal registration with the text authorities and the date to consider. For example,you cannot reside it without a Portuguese address,

DERREN JOSEPH:

Right? Yes. Yeah, because you need to provide an address Exactly, even for whether it’s for the D seven or for N or whatever, you must have provided some sort of address. So that will also be indicative. Okay. All right. I have a question just popped up there and I I wanna give you this one before you, cause I know you have to leave now, what are the Taxes for capital gains that does geography matter? This is from Paul. So yeah, so capital gains from, from a Portugal point of view, what are the Taxes for, I guess for an asset within Portugal versus an asset outside of Portugal maybe,

AUGUSTO PAULINO:

But the question is any as some assets in specific.

DERREN JOSPEH:

So no, Paul didn’t mention any particular asset stocks. Okay, yes, stocks

AUGUSTO PAULINO:

Okay. Security. Okay. So in general, the general rule would be that in the case of securities stocks, for example in Portugal, the capital gains deriving from the sale of stocks abroad would be subject to tax at, for now at least at the flat rate of 28%. And, those capital gains, for example, stocks in US would not benefit from exemption under  NHR regime. Okay.

DERREN JOSEPH:

And stocks from within a traded company within Portugal.

AUGUSTO PAULINO:

Okay. The same rule applies. So text at may specific companies that are treated as small companies that we can get the relief of 50% of the capital gain.

DERREN JOSEPH:

Okay. That’s fantastic. And just as kind like a health warning for those who plan, there is a discussion with policymakers in Portugal to raise that 28%. So basically 20% is a concessionary rate and so capital gains will be taxed like ordinary income, which would move up to 40 something percent, correct?

AUGUSTO PAULINO:

Yes. So, the rule, the sale of securities held for less than one year. So trading in similar transactions would be subject not to the flat rate of 28%, but to, to the progressive tax rates applicable to the overall income of the taxpayer. And this will enter into force 2023.

DERREN JOSEPH:

So as in this year, so next year we’ll be doing our tax change for this year we are gonna be hit by, for short-term capital gains, we’re gonna be hit

AUGUSTO PAULINO:

By only capital gains. Yeah. After the 1st of January, 2000

DERREN JOSEPH:

2023, okay, gotcha. Right. So it’ll be 22 Paul looking back in 2023. Gotcha, gotcha.

AUGUSTO PAULINO:

So until the end of the year transaction would, would be subject to,

DERREN JOSEPH:

Yeah, it’s similar to the US we have this concept of short-term long-term gains as well, in which short-term capital gains are taxed at ordinary rates. But long-term capital enjoys a reduced tax rate.

AUGUSTO PAULINO:

In fact, there are two criteria, the first one is to be considered short term and then the second one is the annual income of the taxpayer above 80,000. So, if we met these two criteria, the capital would be subject to progressive tax rights again.

DERREN JOSEPH:

Okay. Wonderful. Augusto, I’ll let you go and thank you. I’ll deal with the other question to the best of my ability. Augusto, thank you very much. Appreciate your,

AUGUSTO PAULINO:

Thank you. I apologize for leaving earlier

DERREN JOSEPH:

No problem at all. Drive safely. Bye

AUGUSTO PAULINO:

Bye.

DERREN JOSEPH:

Okay, bye. All right, so I, we still have some questions and Keith, I’ve seen your question as well as, so you ask an additional question. So continue to put your questions below and we’ll use remaining time to go through them. So someone is asking, is NHR tax free? Well, as, as you would’ve appreciated by now, it’s quite nuance. So I know it’s sometimes put in a simplistic way in some forms, but no, it’s definitely not tax rate. Some of your income may be tax rate, some of your income may be subject to reduce tax rate, but it would be disingenuous to say that it’s all tax-free. I think it’s, it’s helpful to put it within a global context. There is a global movement and, and not just talking about it in the European union level, but at the OECD or the organization for Economic Cooperation and development, there’s a movement at that level to move to ensure that there’s, that someone’s money is taxed somewhere, money has to be taxed somewhere. And this is a global movement. So, you know, even where people have traditionally looked at, for example, loopholes, as we say, those loopholes are being addressed not just by fixing the legislation within jurisdiction, but just by having sweeping concepts.For example, there’s the principle purpose test. So when, you know, there’s been a habit of setting up shell companies and certain jurisdictions to get preferential treatment in another jurisdiction, that that, you know, for the most part in the developed world, any tax agent, any tax officer taking a look at such a structure that has a structure that has no commercial purpose, that has solely been established for tax benefit, it will be disallowed, it’ll be disallowed, you know, whether there are lots of avoidance directives, principal purpose tests, you know, economic substance test. So those, those those things are really a, a relic of the past. And yeah, so I, I think if your intention is to pay no tax, Portugal first of all is not potentially the right place for you. There are the jurisdictions and even those are the jurisdictions, for example, like you Dubai or whatever, their days are probably numbered sweet. They are, you know, their movements of what they’ve been put on a gray list as is Hong Kong. They Offshore companies in Hong Kong, they’ve been put on a gray list as the richer countries put pressure on these jurisdictions to step up to tax everything. So no, it’s not tax free. Moving on, let’s see, scrolling down. Yeah, so that, that, yeah, so somebody else is asking a question. So we spoke about that 28% tax on stocks from the usc have you shares in Tesla, Amazon, or Microsoft or Apple or whatever it is in your portfolio, or maybe you have some sort of etf, whatever, and you move to Portugal and then you discover, oh my goodness, if I sell anything, it’s gonna be taxed 20% in Portugal, right? Which is actually higher than in long term capital gains rate in the us. So my goodness, what have I got myself into? So there are other professionals, or there are other forms I’ve seen and I’ve heard about where people are talking about using structures like in Malta or Cypress. So in other words, you, you hold the shares, the US shares through a separate company or through a malt company and then you receive, you sell their shares when you need to, and then the money comes to you in Portugal as dividends. So again, the, if the tax office is not taking a look, it may, it may work in the sense that you got away with it, but technically that’s wrong. Again, as I mentioned earlier, the bunch of anti-avoidance directives and principle purpose tests that won’t stand up to scrutiny, that simply will not send it to scrutiny. And you know, when, when I talked to the professionals who advocate this, their response is, well who’s gonna find out, you know, once, once a, once a tax professional is talking about who’s gonna find out, you know, it’s probably not the, the most legal thing and it’s not long term, it’s not a long term strategy unfortunately. So yeah, run, run very far, run, run, run very fast. And one thing that tax officers do is that, you know, they’re smart. There’s a concept called an enabler. They’ll explain how it works like in the us which is something, you know, jurisdiction most familiar to me. If it is they find someone who set up what they call a sham structure structure that is not technically correct. The first thing the agent is gonna ask who helped you? And that person is labeled an enabler and then they go to that person and they see who else have they worked with and then they audit every single client that they have. So my point is, if you work with a task team that takes shortcuts, they may not catch you, but they may catch another client. And that other client leads the tassel agents to the enabler and the enabler, that whole client book that their whole list of clients will be subject to an audit, which would include you so by association. Yeah. So you’d wanna avoid that. Next, here’s my question. Payment is asking, I reside in California, which means in addition to federal income tax, I must also pay a state income tax to state of California every year. If I obtain the D seven visa and start living in Portugal long term, will I still have to pay state income tax in California? That’s a great question. So what we do with our clients is we always advise them to be conscious of this state domicile because we’ve had so many clients, it’s ridiculous who they may have been outside of the US on assignment. So they may have had a short term assignment just a couple years or maybe 10 or 15 years. And then at some point they returned to their return to the returns in us and you know, understand that the federal government speaks the state and vice versa, there’s a relationship. So you may not have told the state that you went back, but on your tax return, suddenly it indicates that you’re back on US soil and the federal government tells the state and then you get a big bill from the state say, Hey, welcome back. Here’s a big bill for all that time you’ve been working out in France, in uk, or whatever. So the important thing is to avoid that the que the point to answer question directly, Yes, it can happen even though you’re physically not in California, even though you’re physically not in New York, most states are DHA states. So even though you’ve physically not in the state living, you still are deemed to be taxed domicile in that state and therefore under some certain circumstances your worldwide income can still be subject to state tax even though you do not live there. So what we advise clients is pick one of like the seven states without an income tax. So you, Nevada, Wyoming, Texas, Florida, Alaska, you know, just pick one and remic south to that state. So how you do that is function of practicing circumstances. You know, you would wanna get a driver’s license, your whole mail address, you know, voter registration, basically look at ways of going to that state and of basically proving that your domicile has shifted. I’d like to give the example of Elon Musk, right? So when he left California for Texas, he put, he had like, well, like 30 properties or so and he put every single one of them for sale. It was like scorched, it all ties to, to the state of California burns. He put everything up for sale and it was pretty clear that his center of life had moved to Texas. So anyway, so bottom line, sit with your advisor, get advice and make sure that you sell to another state before moving to Portugal because you don’t want any problems with California of all the franchise tax boards in the us, the ones that seem to give the most problems of California and Virginia for different reasons. But anyway, yeah, well that helps payment. Next question. Okay. Oh, this is payment again, right? So you sent in more than one, more than one email. This question, Hi, this question is regarding the timing. If the cryptocurrency is purchased while living in the US and then you move to Portugal and sell it two years later while being a resident of Portugal, which country will tax me? The country where I bought it or the country where I sold it? So we spoke about that earlier with someone else who asked about crypto. So the US is gonna tax any worldwide income. The only way to stop that is if you give up your US citizenship, which a lot of people do. We help three or four clients every month give up their US passport green card. So people do do it. So unless you do that, you will be subject to capital green tax on that crypto. So the US that’s, that’s indeed that’s done for Portugal. If it’s not considered profit or trading income, Portugal will not tax it at this point in time. So, so I see that you’ve held it for two years and you you’re gonna sell it potentially the US will tax it, Portugal will not. Okay. Hope that works. And again, we gonna get, have an opportunity to not just meet in person, but get into a lot of these topics and in great to detail at the in person summit that we’re doing in Portugal at the end of January. So just go to, to task bot slash event and you can see the, the run up for, for that, that conference. And you guys are more than welcome to attend. All right, moving down the list of questions. Okay, Keith had another question. Keith had three questions. So Augusto answered the first two before he left and the one which I don’t think was answered was, how are income and capital gains earned during the same tax year but before we became Portugal tax residents having, It’s a good question. It’s typical, right? So both Portugal in the US work on a calendar year for Taxes, which is helpful cause some countries do not. So it makes it kind of tricky. So both work on a calendar year. The good thing about Portugal is that they have, they have like a split year treatment or like a dual status. So the US and the US we call it a dual status. So basically for the calendar year, potentially the transactions that ha that happened before you relocated to Portugal, before you can became tax resident in Portugal will not be taxed by Portugal. But from the time that you became tax resident on once to the end of the year will be taxed. So there’s, there’s a planning opportunity there. I know people are, want to conclude big deals. Some are selling their companies to go into retirement or making a, you know, an exit from their business. So you’d wanna speak to an advisor and make sure that the timing is right so that you’re correct, it would happen, it’s gonna be tasked by the us there’s nothing you can do about that. But make sure you’re not gonna be caught by the tax net of Portugal. So you’re gonna get that done before. So I just wanna pick up this one off of Facebook. Okay, this is Keith. I dunno if it’s the same Keith, but one the key, but okay, is Portugal tax paid in deduction against US Taxes or credit against us? Taxes the question, the, the important principle is that the federal level, there should be no double taxation. So when you, whoever your preferred tax team is, they need to understand both and they need to understand the tax free. So to answer your question, yes, once things are done right, regardless of the type of income, it should not be taxed twice between the federal, the IRS, and the Portugal tax authority.

It will not be tasked twice. And in order to make that happen, to your point, yes, the Taxes that you paid to Portugal under many circumstances would be a credit against the Taxes or to the US federal government. And notice have been very, very specific. I’m talking about the federal government. So there can be double tax at the state level unfortunately. So if you remember in, in response to one of the earlier questions I spoke about the importance of shifting your state domicile from one state.

As you know, if your home state does have Taxes to one of the seven or so state that does not have Taxes like your Wyoming, Nevada, Texas, Florida, Alaska, whatever. By doing that you avoid hopefully state income Taxes. Otherwise, states don’t recognize foreign tax credits. Generally speaking they do not recognize it. So from a state point of view, if you are stuck being taxed on the side, one of the most of the states do tax, then yes, you can be double taxed.

So to answer your question at the federal level, no you should not be double taxed once your tax team knows what they’re doing. It can happen at the state level, but it can be avoided legally with proper tax planning. So get your tax planning done before you get trapped. Okay, I hope that answers your question key. All right, next question John. Is the NHL really valuable to US citizens since whatever is paid 10% or higher would end up being a credit towards us Taxes?

It sounds to me that the only difference is that you do pay Portugal more or less Taxes than the amount that is deducted from the us. The net effect is that you’re paying the same amount. That is a fair observation and assessment John, in that you know, you will always pay the higher of the two. So for example, you know, we, yeah, so you’ll always pay the high of the two. I don’t need to get into it, you’re right, you’ll always pay the high of the two. Now, as to whether N HR is valuable, it really depends on your circumstances.

So because people, everybody’s different, some people are living on investment income, they, you know, they have substantial shares in a company that throws off a lot of revenue for them in terms of dividends. It works for them because dividends are tax free under the nr. Whereas, you know, some, we, we spoke about pensions, we spoke about if, if you’re still working well under the N hr, if you’re still working the the NR can allow you to be taxed at a lower rate. If you have one of those high value added high value skills and activities or, or whatever, you can be taxed at a flat 20% as opposed to the marginal tax rate, which goes up to 40 odd percent.

So it really depends. But here’s what we tell our clients. It’s better to have the N HR and not use it then to not have the NR need it because at the end of every year you may have the nr, think of it like a card, like a Trump card. I’m not gonna get into politics, but it’s like a Trump card. You can hold on it. You decide if you wanna play that card, have it, keep it in your back pocket, look at your tax situation, look at your tax and financial situation at the end of the year. If it is to your advantage, if you’re gonna be better off by playing the NR card, you’re gonna play it.

But if it is, you’re gonna be better off by not playing it. And if you have a tax team, like, like we do, we’ll run both scenarios for you. We’ll see are you gonna be better off with or without it And we’ll advise you. So choose a tax team that can help you that way. But generally speaking, get the nr even if you’re not going to use it, get it, keep it in your back pocket just in case you need, think of it like a nice insurance policy. Oh, okay.

Paul is asking how would dividends tax on the NR dividends, foreign dividends or US dividends on the NR would be tax free. So you can receive them tax free to Portugal. So yeah, and that, that is where all the controversy that we mentioned earlier where people were, if you, you can have capital gains like from an ETF or shares or whatever cuz you sell it and you use a structure, for example the multi cypress in order to receive it into Portugal as dividends.

But obviously you know, there’s a spirit and letter of the law, you know, it’s, it’s, you know, it’s, it’s up to me it’s obvious that that is not the right thing to do but hey people do it. So, but generally speaking dividends are task free under the HR once they’re genuine dividends and not anything that has been recategorized as dividends. Okay, let me see more questions in the side. Again, if you have questions feel free to type it in the box below just going through to see whether, cause some of the questions are quite similar.

So if we answered something on it before, gonna talk about it again, right? Again, we spoke about the timing, we spoke about no, somebody’s asking whether we seeing any trends so, so yeah, we do it I guess by nature the content that we put up on our website and when we have these, these live streams, we get the, the highest number of RSVs that I think I mentioned for Spain, number one and Portugal is number two.

So Spain and Portugal are definitely popular and we mentioned the, the article from Entrepreneur magazine that like Portugal is like number two in Spain is where they’re down. So they’re both in the top 10 for us. Most of the work we do for Portugal is tax planning. So these are people that are planning to move and want advisory. We also spend a lot of time running scenarios. So if I were to move without structuring anything, this is what you Portugal.

So we can run a mo Portugal tax return, a mo Portugal plus US tax return and we can say okay this is your combined tax burden and therefore here’s the planning opportunity. If you structured this, if you can do this, you can do this, you can do that, then you can bring down your, your tax rate across both jurisdictions. We also help clients that don’t know where to move. Like it’s, we probably every month we have someone, I can’t decide between Spain and Portugal, can you help me with both from a tax point of view. So we help them, again, we run tax returns for Spain and for Portugal.

So they can see side by side what the impact is of, of their move. So that, that’s kind of like the trends we sing. But definitely Spain and Portugal super popular and yeah, don’t need me to tell you that. Sorry, I’m just scrolling down, looking through comments and questions again. Okay, so John is asking another John, so spelled John is spelled differently.

So what is, what is needed to know about taxing and S corp from the US with just one employee? My wife is a hypnotherapist and registered as an S corp but runs much like an llc. Now this, that’s a great question and it’s one in which we, we encounter all the time as actually speaking to someone about this yesterday in another European country. But it’s the same principle. Europe has a problem with US entities that are passed throughs.

So this is ES and which are more or less pass throughs and especially when it’s a single member LLC or single employee or single person escorp, it creates an issue. Now on the surface it would be, well you know, it’s tax in the US and whatever comes out, let’s treat it as dividends and well in this case under the NHL be tax free. But as we mentioned before, we’ll know, you know like LLCs and scopes don’t do dividends, they do distributions, right?

And then so, and management and control there, there’s this thing about a management and control test. If it is a new, or in this case your wife is running that company, she’s running the company from within Portugal, then management and control is being exercised from within Portugal. And so therefore Portugal shouldn’t have, should be able to tax that company even though it’s incorporated in another jurisdiction technically is gonna be subject to task to corporate task in, in Portugal.

So yeah, so it is, it is, it can be quite a complex problem. It I’d recommend that you guys seek advice on how to treat it. But basically you have two options as I told the client yesterday. You have essentially two options in most of European countries. Don’t rely on hiding. I know there are people that say hide, hide, hide, hide, hide. Hiding is never a long term solution. You know, I believe in sleeping well and not having to worry that I’m gonna get caught like certain celebrities got caught in Spain and facing, I dunno if you heard about Shakira, don’t hide deal with things the right way up front, right?

So basically you have two, you have two options. One, make sure you have real economic substance in the us So hire ceo, you know, get someone to run the business so your wife can continue to be an employee of the pastor of the corporation but let it be seen that there’s a real, like real decisions, there’s somebody else in control. And the real key strategic decisions have been made in the us That’s the option one. Option two, incorporate a company in Portugal.

If Portugal is gonna be your center of life, and this is where you guys are gonna call home, do things the right way. Let’s, you know, start off your, your time being a resident on your pathway to citizenship in Portugal. Let’s do things the right way from day one. So set up a company in Portugal and invoice your clients via a company. Just, just do things, right. So those are essentially two options for a pass through, whether it be an LLC and S school. I know that’s probably not what you wanted to hear, especially because you know, it could be the, the tax rate depending on what and how you structure it.

It can put you in a situation where Taxes gonna be higher or the cost basis for the company is gonna be higher. So therefore your profit margin is gonna be reduced. But you know, again, it’s best to do things the right way. Hope that helps. All right. Okay. Okay, you’re welcome. All right, looking up, we are at the top of the hour so thank you very much for joining us. This is being recorded as you know when you entered this.

So it’s gonna be, we put it on, obviously it’s on YouTube cause it’s livestream there, it’s gonna be on Facebook. There’s gonna be on about 22, 23 podcast platforms, iTune, SoundCloud, Spotify, Amazon. Basically wherever you get, your favorite podcast is gonna be there. If, if you wanna look at it again, it’s available for viewing. If you wanna share it with friends or colleagues, you can do so during using any one of those platforms. And again, we encourage you if you know you’re serious about Portugal or if you’re just serious about that international lifestyle, you don’t need to be in one country.

You can enjoy the benefits of being residents in multiple countries because you know, one country is not per, no country is perfect. So you can enjoy the best that each country has to offer. We can talk about multiple residencies, you can talk about offshore international life. So we’re gonna have that Offshore Nomads Summit, that’s next January. You can find out more at HTJ.tax power slash events. Thank you very much guys, and we’ll see you next time. Have a good evening or day. Bye-bye.

VOICEOVER:

So if you’re a six, seven, or eight-figure investor, entrepreneur, or business owner who needs a tailor-made solution from a qualified team of professionals, we can help you achieve the international lifestyle, the freedom, and even the tax savings you’re looking for. Visit us at HTJ.tax and live that international.

Table of Contents: LIVESTREAM – U.S/Portugal Taxes for Expats (5th October 2022)

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