[ Offshore Tax ] Americans investing in Funds for Portugal’s Golden Visa PFICs

DERREN JOSEPH:

I have questions regarding the taxation of US persons when they’re investing in a Portuguese fund for the Golden Visa. So, someone is a Golden Visa Investor from the US. What kind of taxes do they need to take into account? And while the rates, in most cases, would not be residents and they won’t be tax residents in Portugal, what’s the best way to declare income from these funds with dividends and cap gains, it would be great if you can talk about PFIC.

Okay. So, one of the upsides of the golden visa is that you get to enjoy Portugal, but there’s no minimum stay requirement. You can still live in the US or wherever in the world that you would like subject to the rules of the Golden Visa regime. But this is not a talk about immigration, right? So from a tax perspective, if it is you don’t trigger one of the two indicia’s that Augusto indicated in his presentation. So, you know, going to be here for 183 days or more, and you don’t have like your center of life here, then you’re correct in your session that you won’t be subject to Portugal tax, but you’re still American, right? So you’re still a US person. So as always, you’re subject to tax on your worldwide income. Now you’re asking specifically about the Golden Visa fund. So there are a number of ways of getting the Golden Visa. One of them is investing in certain funds now, as you indicated, or you suggested you’re right, some of them are given special treatment under the US tax rules called PFIC. So, Passive Foreign Investment Company, what does that mean? Well, they do a number of rules in the US tax code meant to address investors who invest outside of the US. So it was a big deal once upon a time to invest from Americans invest outside of the US and take advantage of the fact that they don’t need to pay taxes until there’s a liquidity event at the end of whatever the lifetime of their investment is, which is unfair, right? Because if you invest in US Situs funds, you get a 1099 every year, and you need to pay taxes on whatever the dividends earned, even though they may be reinvested, you still need to declare and pay taxes. So the domestic financial institutions within the US the complaint, the complaints of Congress and saying, hey, foreign financial institutions have an advantage on us. In the 1980s, under President Reagan, the PFIC rules were created. So I won’t get into the details of it, suffice it to say that it can be quite aggressive. If you have a foreign investment, for example, one of the golden visa investment funds, and they’re not properly declared. And you, so you need to, first of all, make sure that your tax team is familiar with international issues. And this is something we do. We are advisors of the advisor. So we often do speak to us tax teams that are very domestic-focused and doing, they don’t understand the international rules. So there are a number of ways of treating the fund. If indeed it is a PFIC. So basically a PFIC is any foreign mutual fund, just being very, very general. But if you have a foreign mutual fund, more or less, chances are, you need to check to see whether it’s a PFIC, the number of ways of treating it under Section 1291, 1293, and 1296, I think of the tax code.

What you are looking for? Some of the funds, the Golden Visa funds in Portugal, are designed for Americans. So what they do is they make an election called a QEF election or qualified elective fund, and they will give you a statement every year. So, that’s what you’re looking for. The ideal is to find a qualifying election fund. Now, if you don’t have that ability to work with a fund, and that will give you a US tax statement every year, then you will need to let your tax advisors know because then the tax advisor that you have will need to create a QEF a statement every year, and they need to work with the fund to get the data, to make it US tax ready. So the bottom line is that it’s not a showstopper, I’ve seen some stuff written online, and it could be a little bit doom and gloom and fear-mongering. Don’t worry, once your tax advisor knows what to do, they’ll be able to work with you and work with the fund to prepare the relevant statements, to make sure that they’re properly disclosed on the US tax forms, which is the Form 8621, and the relevant calculations done. If the right calculations are done, then the PFIC becomes what we call tainted and some really aggressive throwback rules are invoked. So that’s meant to be very punitive. So you want to completely avoid that. So hope that answers your question. I said if you’re considering the golden visa do not run away, because it may be perfect, just speak to your advisor and make sure that you’re prepared to deal with the US tax consequences. I hope that helps all right

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