What to Consider as an American Expat Moving to Portugal
Portugal offers many benefits for American expats, and it’s especially attractive because of its non-habitual resident (NHR) program that offers unique tax advantages. As with any move abroad, however, it’s important to consider the financial ramifications. Americans living abroad in Portugal should be aware of these nine items:
1. Investing as an American expat living in Portugal may be more difficult than you’re accustomed to.
It’s important to know that American citizens and permanent residents are uniquely subject to citizenship-based taxation. In other words, no matter where you live, you’ll be required to file taxes on an annual basis and stay compliant with U.S. tax regulations.
You’ll also want to become familiar with regulations around Passive Foreign Investment Companies (PFICs). PFICs, like foreign mutual funds, are taxed very harshly under U.S. law. You could see tax rates of up to 50% on gains and annual tax filings that take over 36 hours each year to complete.
For this reason, you’ll want to avoid buying Portuguese or other European mutual funds (which are all considered PFICs). Generally speaking, you’ll want to buy U.S.-based funds that are exempt from PFIC rules. We strongly believe that American expats should avoid owning shares in non-U.S. mutual funds.
Finally, working with a Portuguese financial advisor may incur Portugal’s 23% value-added tax (VAT). American financial advisors are exempt from VAT, which can save you a bundle.
2. You likely can’t simply invest with U.S. brokerage house.
Because of European Union (EU) laws, most notably MiFID II, many U.S. financial institutions have stopped working with EU residents such as U.S. expats living in Portugal and will not accept new clients living in the EU. Many firms will even proactively close your accounts when they find out you are living overseas.
MiFID II does contain a clause that allows American expats and others to buy U.S.-based investment funds as long as they work with an experienced non-EU registered investment advisor who purchases U.S. funds on their behalf.
3. Portugal has unique tax policies that you’ll need to plan around to avoid excessive taxation.
Portugal has some unique tax regulations that require planning, such as their non-habitual resident (NHR) program, their tax treatment of capital gains and Roth IRA accounts, and their gift and inheritance tax regulation.
The U.S. and Portugal are party to two separate treaties/agreements around income taxes and Social Security that are intended to help residents avoid double taxation and other penalties. While these treaties help coordinate taxing authority between the two countries and reduce the potential for double taxation, properly interpreting these treaties and correctly applying their provisions requires training and experience. Additionally, the treaties do not eliminate all complications that can result in double taxation. It’s in your best interests to consult with a international wealth manager with experience advising American expats in Portugal to help avoid double taxation.
4. Portugal’s non-habitual resident (NHR) program can offer significant financial benefits.
The non-habitual resident (NHR) tax regime offers a variety of tax benefits to new residents in Portugal for the first ten years of their stay. Key benefits include the following:
- A 10% tax rate on foreign pension payments (including IRA and 401k withdrawals) and a 20% tax rate on Portuguese income, instead of the country’s standard tax rates that can run as high as 48%.
- No tax on dividend and interest payments from foreign investments.
- No tax on foreign earned income assuming the income is taxed in the source country.
Taxes paid to Portugal should qualify for U.S. tax credits (and vice versa), thereby avoiding double taxation. After ten years as a NHR, the individual is taxed as usual under Portuguese law.
5. Capital gains should not be taxed in Portugal under the NHR program.
One of the most contentious topics for Americans in Portugal with NHR status is whether Portugal’s 28% capital gains tax applies to them. Some tax professionals argue that Americans are subject to the same Portuguese taxation that applies to other countries’ NHR expats. Others claim that Americans are exempt from Portuguese capital gains taxation per the U.S.-Portugal tax treaty. Thankfully, a recent court ruling on this topic offered some clarity.
In brief, the panel of arbitrators ruled that Portugal cannot impose capital gains tax on NHR Americans. Because the U.S., unlike almost all other countries, has citizenship-based taxation and because the U.S. continues to tax its citizens’ capital gains (under the terms of the “Saving Clause” in the treaty), Portugal does not have the right to do so based on how the NHR legislation is phrased.
This is good news for Americans, but as the firm who won the case notes, the court ruling is not binding as court cases do not establish precedents in Portugal. Regardless, the ruling can be a good foundation for asking your tax preparer to take a similar stance.
6. The Portuguese Golden Visa program can offer a “fast track” to residency and citizenship, but it may not be necessary.
Portugal offers a “Golden Visa” program that allows foreign investors to quickly establish Portuguese residency and citizenship. The program offers several options to do so, but the most common one is buying a property worth more than €500,000 in inland regions.
While the Golden Visa program may sound attractive, making a large investment or real estate purchase is generally unnecessary for Americans and other developed country expats to receive residency given the ease of obtaining a visa for Portugal and receiving NHR status.
7. Gifting and estate planning as an American expat in Portugal can be tricky—and may result in double taxation if you’re not careful.
Portugal eliminated their inheritance tax in 2004, but does apply a 10% “stamp duty”, or Imposto do Selo, when assets are gifted or passed on at death. There are two key exemptions to the stamp duty:
- Spouses, civil partners, descendants (children, grandchildren, etc.), and ascendants (parents, etc.) are exempt. A 0.8% tax still applies to gifts of real estate.
- The stamp duty tax only applies to Portuguese assets regardless of where the donor or beneficiary is resident. Assets in the U.S. are exempt.
Notably, the U.S. and Portugal do not have an estate, inheritance, or gift tax treaty, creating the possibility of double taxation on these types of transfers.
Portugal also has a separate Property Transfer Tax that is applied to Portuguese real estate regardless of how the property is transferred. This tax varies between 5% and 10% depending on the circumstances.
8. The trust you set up in the U.S. may help protect my assets—but you may need to consult with a Portuguese estate planning attorney.
A U.S. trust may expedite the transfer of your U.S. assets outside of U.S. probate and circumventing the need for an IRS transfer certificate.
The benefit on the Portuguese side is less certain. As a civil law country, Portugal historically did not acknowledge trusts. Portugal passed legislation in 2015 that provided some clarification of trusts and their taxation but still left gray areas. We have seen different experts reach different conclusions depending on their experience and the unique circumstances of each case. Generally, the use of a U.S. trust in such circumstances should be seen as a compliment to, rather than a substitute for, formal Portuguese probate procedures. This would be a matter to discuss with a competent Portuguese estate attorney conversant in cross-border issues.
9. It’s unlikely that Portugal will assess taxes if you inherit money from an American citizen while you are living in Portugal.
As noted above, Portugal’s stamp duty offers two key exemptions that will usually allow U.S. citizens to avoid Portuguese taxes on any inheritance. Request a meeting with a wealth manager from Creative Planning International to discuss your unique situation as an American expat in Portugal, and get the comprehensive wealth management solutions you deserve.