Portuguese Golden Visa Investment Funds and its treatment by the US as Non-US Mutual Fund (PFIC)
The Portuguese Golden Visa through Investment Funds.
- U.S. taxation of foreign mutual funds (PFICs) owned by U.S. taxpayers is punitive and complex.
- PFICs encompass a wide variety of non-U.S. investment products besides mutual funds and are commonly owned by Americans abroad.
- The Foreign Account Tax Compliance Act (FATCA) has greatly expanded the ability of the IRS to enforce PFIC rules.
US taxpayers and the Non-Us mutual funds (PFICs):
PFICs are taxed punitively by the U.S. Each PFIC must be reported annually on U.S. tax form 8621, which requires complex accounting and is very time consuming to complete. As a result of the 2010 FATCA law, a separate form 8621 must be filed every year for each PFIC (previously 8621 only had to be filed in years that the fund paid distributions to the fund holders).
Continued failure to properly report PFICs on a U.S. tax return exposes U.S. taxpayers to a high risk that the IRS will eventually uncover the lack of disclosure and impose tax, interest and penalty that can potentially consume most of the return on investment.
What are PFICs?
The Passive Foreign Investment Company (PFIC) rules are designed to prevent U.S. persons from deferring tax on passive income earned through non- U.S. corporations, or from converting this income into capital gains that are taxed at preferential rates.
Due to FATCA, the likelihood that the IRS will eventually identify unreported PFICs has increased dramatically. Finally, PFIC rules apply equally to Americans abroad as well as Americans living in the U.S., although the problem is much more common among American taxpayers living abroad.
The tax treatment of PFICs is extremely punitive compared to the tax treatment of similar investments that are incorporated in the U.S. For example, an American holder of a U.S. incorporated mutual fund invested in European stocks pays the low long-term capital gains rate of 0–20% if the fund is held for more than one year. The same American investor who buys a nearly identical fund listed in the UK or in Switzerland (or any place outside the U.S.) will find their investment subject to the PFIC taxation regime, which counts all income (including capital gains) as ordinary income and automatically taxes it at the top individual tax rate (37.0%). In some cases, the total tax on a PFIC investment may rise to well above 50% because of the complex rules regarding the timing of PFIC income recognition.
Golden Visa Portugal Investment Funds
In fact, US citizens are investing in PFIC (passive foreign investment company), which are companies located outside the US and meet at least one of the following two conditions:
i) 75% or more of its income is derived from passive sources (the income test), or
ii) 50% or more of the average fair market value of the assets it held during the year are passive income-producing assets (the asset test).
Thus, some of the Portuguese Golden Visa Funds are able to avoid higher tax rates through qualifying funds as QEF (Qualifying electing funds).
Under this regime, US taxpayer´s investment in a PFIC is generally subject to the same rate as domestic investments (except dividends that are not considered qualified dividends).
A PFIC is a QEF if a U.S. person who is a direct or indirect shareholder of the PFIC elects (under section 1295(b)) to treat the PFIC as a QEF and complies with the requirements described in section 1295(a)(2).
Essentially a Qualified Electing Fund looks like a partnership where the income retains its character and is reported by the shareholder each year whether they receive it or not and gains and losses on sales are treated as capital gains and losses- with some distinct differences.
Necessary documents for the Golden Visa application:
• Declaration from your portuguese bank attesting the effective transfer of the amount equal to or above the legally required.
• Supporting document attesting the ownership of the Participation units (shares) on your portuguese bank account.
• Declaration issued by the Investment Fund managers attesting the feasibility of the capitalization plan, the maturity of, at least, five years, and the application of at least 60% of the investment in commercial companies with head office in national territory.
STEPS:
1. The Management company will receive from the investor the KYC (Know Your Client) Form, subscription form and personal documents.
2. The Golden Visa investor will obtain his Portuguese tax identification number (NIF) as a non-resident and can then open a Portuguese bank account (checking and securities account).
3. The investor will transfer the money from his foreign account to his Portuguese bank account.
4. The investor orders the bank transfer to the bank account of the Fund chosen by the investor.
5. The Management company issues a declaration necessary for the Golden Visa application and the Portuguese bank issues two declarations (money transfer overseas and certificate of holding the Participation units (shares).
Note: “US Persons” (investors with American citizenship or being tax residents in the US) need to open their Portuguese bank account with a FATCA compliant bank account as for example:
Bison Bank; Banco Atlântico; Banco Carregosa.
For more information: Golden Visa Portugal Process
For more information: Available Investment Funds for the Portuguese Golden Visa
