Advanced Tax Planning Guide for American Taxpayers in Portugal

An Outlook on the Future of the NHR / Golden Visa in Portugal

On October 10th, the Portuguese Government presented the 2024 Budget Bill. The draft foresees the termination of the current NHR for new applications from January 1, 2024. Current beneficiaries and those who register as NHR until its termination will maintain all benefits. Only new applicants becoming tax residents in Portugal still in 2023 or with a residence visa issued valid on the 31st of December will be able to apply.

From January 1, 2024, a “new NHR” regime is proposed for specific professionals: Higher education professors, scientific researchers, qualified employment within contractual benefits for productive investment, and R&D jobs for personnel with doctorate qualifications to the extent such costs are eligible. If eligible, they can access a 20% rate on professional income obtained in Portugal and an exemption on several categories of foreign-sourced income. The scope of this “new NHR” is narrower.

A new tax incentive is proposed for anyone who becomes a Portuguese tax resident from January 1, 2024 (without having been one in the past 5 years) – a 50% personal income tax exemption for employment and freelance income, regardless of the field of expertise will apply for 5 years, capped at 250,000 EUR per year.

Pre-Immigration Planning Tools for Portugal

Residents in Portugal for tax purposes are taxed on their worldwide income at progressive rates varying from 14.5% to 48% for 2023. Non-residents are liable to income tax only on Portuguese-source income. This includes not only that portion of remuneration that can be allocated to the activity carried out in Portugal, but also remuneration that is borne by a Portuguese company or permanent establishment (PE). Non-residents are taxed at a flat rate of 25% on their taxable remuneration in 2023.

In 2023, an additional solidarity rate, which varies between 2.5% and 5%, applies to taxpayers with a taxable income exceeding EUR 80,000.

Asset Protection Strategies in Portugal

In Portugal, the government introduced a reform to the personal income tax at the end of 2014. This reform means that income derived from foreign trust structures by Portuguese resident individuals or beneficiaries is subjected to a 28% tax. This includes income payments paid out of a trust and trusts that have been wound up with the assets distributed to the settlor. However, in this case, the 28% will only be applied to the “gain”, i.e., the difference between the value of the trust when it is wound up rather than the whole distribution.

If you have a trust while being a non-habitual resident in Portugal, it is important that you review your tax planning prior to any further distributions being made.

Trusts are typically structured on common law (countries with this structure law include England, the United States, and India) and have historically fallen outside of the civil law systems across Europe. In recent years, there has been a movement for civil law countries to legislate diversity against what could be considered tax avoidance schemes. Portugal has been following suit in closing loopholes.

Now, ordinary distributions during the lifetime of the fiduciary structure (trust) to resident individuals are qualified as investment income and subject to tax at a flat rate of 28%. Even if you are a non-habitual resident, you will not be exempt from this tax law.

Taxation of U.S. Pensions and Social Security in Portugal

Are you receiving Social Security from the US? Although this income is taxed at the source (in the US), Portugal allows foreign tax credits for taxes paid to the US.

Generally speaking, government pensions may be taxable in the US, and Portugal taxes them at a rate of 10%.

Private pensions may be taxable in both the US and Portugal.

Let’s Talk About Estate Planning Tools in Portugal.

Key Aspects of Portuguese Inheritance Law: Navigating the intricacies of inheritance law can be a daunting task. Here are some key aspects of Portuguese inheritance law that you should be aware of:

  1. Legal Heirs: Under Portuguese law, legal heirs are entitled to a portion of a deceased person’s estate. The legal heirs are the spouse, hildren, and parents of the deceased person. If there are no legal heirs, the estate goes to the deceased person’s siblings.
  2. Forced Heirship: Under Portuguese law, certain legal heirs, such as children and grandchildren, have a right to a mandatory portion of the estate, known as “forced heirship” or “legitimate share”. This means that they are entitled to a certain percentage of the estate regardless of any testamentary dispositions made by the deceased person.
  3. Will: A will is a legal document in which a person can specify how they would like their assets to be distributed after their death. A will can be used to leave assets to people who are not legal heirs, such as friends or charities.
  4. Inheritance Tax: Portugal levies an inheritance tax or stamp duty on the transfer of assets from a deceased person to their heirs. The tax rate varies depending on the value of the assets, the relationship between the deceased person and the heir, and the region where the assets are located.
  5. Probate: After a person dies, their estate must go through a legal process known as probate. This process involves the distribution of the deceased person’s assets, payment of debts and taxes, and the distribution of the remaining assets to the heirs.
  6. Intestate: If a person dies without a will, the estate will be distributed according to the laws of intestacy. This means that the assets will be distributed to the legal heirs as determined by the Portuguese Civil Code.

It’s important to note that Portuguese inheritance laws can be complex and it’s advisable to seek assistance from a lawyer who specializes in inheritance law to guide you through the process.

Summary of the New NHR VS the Old NHR

By analysing all this information, we can conclude that the new tax benefit in Article 58-A of the Tax Benefits Statute is notably more exclusive. It particularly focuses on education, R&D, and entrepreneurship activities. However, taxpayers who fall within this new tax benefit can get an exemption from foreign income derived from white-listed countries.

This means that, even though this new benefit has a stricter range of applications, it can be more advantageous for the individuals who can benefit from it. This is given the fact that there is no need for the income to be subjected to taxation or liable to taxation in the country of source, unlike the NHR regime.

These are still alternative paths for the Non-Habitual Resident (NHR) Tax Regime for those seeking favorable tax conditions in Portugal.

Portugal’s Tax Treatment of S Corps and US LLCs

Firstly, it’s important to note that the Portuguese legal and tax system does not provide specific treatment for opaque and transparent entities such as LLCs or LPs. This presents additional challenges when assessing the applicable tax treatment for capital income under the NHR regime. As a rule, LLCs and LPs, are limited liability partnerships deemed transparent under US legislation.

This means income flows to partners without taxation at the company level (known as ‘pass-through taxation’). Thus, the annual taxable income of an LLC allocated to the partners will be taxed at their level. This is particularly relevant for US-sourced income, where the partner will be liable for US federal taxes.

It’s also worth noting that LLCs and LPs are generally not eligible for the benefits granted under most of the Double Taxation Conventions (DTCs) entered into by Portugal. For instance, under Article 3 paragraph a) of the Protocol of the US/Portugal DTC, LLCs are only considered residents in the US if the income obtained by these corporate vehicles is effectively subject to tax in the US, either at the corporation level or at the partner level.

This topic has already been addressed by the Portuguese tax authorities, who have issued several binding rulings. Such as:

Under domestic legislation, income/profit allocation by an LLC is considered a distribution of dividends, generally subject to a 28% Personal Income Tax (PIT).

An LLC, being tax transparent, is not considered a resident in the US for the purpose of the DTC with Portugal. Therefore, income attributed to an LLC’s partners is not considered or treated as dividends for treaty purposes. Instead, it falls under the provisions of Article 24 of the DTC (‘other income’), which grants cumulative taxing rights to both source and residency contracting states.

The look-through approach adopted and disregard for the LLC when applying DTC provisions align well with NHR taxing principles. The Portuguese tax authorities focus on the nature of the income received by individual taxpayers rather than on the corporate vehicle.

Will Portugal Mandate Declaration of Offshore Assets by 2025?

Taxpayers who have assets in tax havens or income from national entities’ capital, which are normally subject to a 28% exemption rate, will only need to report these gains in their 2025 IRS declaration, even though this rule was approved in the State Budget for this year, according to an official source from the Tax Authority.

The mandatory reporting of this type of income, which currently does not need to be indicated in the IRS, applies to offshore assets or national capital gains. These gains can include dividends, interest on time deposits, or savings certificates, as long as they exceed 500 euros. This requirement was introduced by PS in the State Budget for 2024 as a measure to combat tax evasion.

Foreign Investment Income Under the New NHR.

Different procedures should be enacted in order to apply for the regime, depending on the activity performed or the criteria of eligibility.

The regime shall provide for:

  • A special 20% rate on net employment income (category A) and business and professional income (category 😎 from the activities identified in the applicable legislation.
  • An exemption on foreign-sourced employment income, business and professional income, investment income, rental income, and capital gains.

The New NHR’s Impact on Certified Start-Ups

Individuals moving to Portugal to work for certified start-ups can enjoy tax benefits. These start-ups are defined as companies with a staff of no more than 250 individuals, an annual income not exceeding 50 million euros, and a business history of fewer than ten years.

These benefits are provided on the condition that the company’s headquarters are established in Portugal or have representation in the country.

Alternatively, they must have at least 25 employees in Portugal. Moreover, these start-ups cannot be the result of a merger or division of a larger company.

Implications of Blacklisted Jurisdictions in the New NHR

Special provisions in Portugal govern transactions with entities located in offshore tax havens. These provisions provide for increased taxation and special anti-abuse measures.

The blacklisted jurisdictions include the following countries, territories, and regions:

Andorra, Anguilla, Antigua and Barbuda, Netherlands Antilles, Aruba, Ascension Island, Bahamas, Bahrain, Barbados, Belize, Bermuda, Bolivia, Brunei, Channel Islands, Cayman Islands, Christmas Island, Cocos (Keeling), Cook Islands, Costa Rica, Djibouti, Dominica, United Arab Emirates, Falkland Islands or Malvinas, Fiji Islands, Gambia, Grenada, Gibraltar, Guam, Guyana, Honduras, Hong Kong, Jamaica, Jordan, Queshm Island, Kiribati, Kuwait, Labuan, Lebanon, Liberia, Liechtenstein, The Maldives, Isle of Man, Marianas, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Niue Island, Norfolk Island, Sultanate of Oman, Pacific Islands (other Islands not listed), Palau Islands, Panama, Pitcairn Island, French Polynesia, Porto Rico, Qatar, Solomon Islands, American Samoa, Western Samoa, Saint Helena, Saint Lucia, Saint Kitts and Nevis, San Marino, Saint Pierre and Miquelon, St Vicente and the Grenadines, Seychelles, Swaziland, Svalbard, Tokelau, Kingdom of Tonga, Trinidad and Tobago, Tristan da Cunha, Turks and Caicos Islands, Tuvalu, Uruguay, Vanuatu, British Virgin Islands, United States Virgin Islands, Yemen Arab Republic.

Crypto Taxation under the New NHR

In 2023, Portugal’s crypto taxes underwent significant changes. A general short-term capital gains rate of 28% is now in effect on crypto owned for less than 365 days.

Portugal’s crypto tax rates generally fall into three categories: capital, capital gains, and self-employment income. Each category has its own specific implications for crypto owners.

It’s important to understand these distinctions when dealing with crypto transactions in Portugal.

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