- 1 U.S. Tax of Portugal Income & Reporting
- 2 U.S. Tax of Portugal Income
- 3 Portugal and U.S. Tax Law
- 4 U.S. Tax Treaty with Portugal
- 5 Worldwide Income
- 6 Portugal and FATCA
- 7 Foreign Account Reporting – Bank, Investment & Retirement
- 8 FBAR vs. FATCA
- 9 FBAR (Treasury Department Form FinCEN 114)
- 10 FATCA (IRS Form 8938)
- 11 Estate Tax Treaty
- 12 Foreign Insurance – U.S. Tax
- 13 Portuguese Retirement Funds
- 14 Foreign Trusts
- 15 Common Corporate Structures – De Facto
- 16 Foreign Real Estate
- 17 Profit vs. income
- 18 Did You Recently Give Up Green Card?
- 19 Are You Out of Compliance with the IRS?
- 20 About our International Tax Law Firm
U.S. Tax of Portugal Income & Reporting
There are many US Persons located across the globe who have foreign assets, accounts, investments, and income generated in Portugal. And, even if income may be exempt under Portugal law — taxpayers who are US Persons are still subject to US tax on the Portugal-sourced income unless an exception or exclusion applies — and/or the taxpayer can claim a treaty position under the U.S.-Portugal Tax Treaty, using Form 8833. Our International Tax Law Specialist Team represents numerous clients each year, with unreported income, accounts, assets, and investments from Portugal.
U.S. Tax of Portugal Income
Common Questions involving Portugal and U.S. Tax/Reporting:
Are Pension Funds Taxable in the U.S.?
Is there a Tax Treaty with Portugal?
Is there a FATCA Agreement with Portugal?
Do I report interest income or dividends from Portugal?
Do I report Rental Income from Portugal?
Is my Portuguese Company Reportable in the U.S.?
Portugal and U.S. Tax Law
With the implementation of FATCA (and the signing of the FATCA Agreement by Portugal), the U.S. government is taking a deeper interest in ensuring reporting and disclosure compliance of individuals and businesses involving Portugal.
Specifically, as to Portugal, the FATCA agreement was signed in 8/2015.
U.S. Tax Treaty with Portugal
The United States and Portugal have an income tax treaty in place. The main purpose of a tax treaty is to ensure proper tax treatment of monies earned by US citizens, Portuguese citizens, ex-pats, and residents of each other’s country. It allows for tax-deferred treatment and tax preferences based on various factors, such as the type of income, source of income, etc.
You can access the U.S. and Portugal dual-tax treaty here.
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.
That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a U.S. tax return, report the income, and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).
Portugal and FATCA
FATCA is the Foreign Account Tax Compliance Act. It is a global law developed by the United States for the purpose of cracking down on international tax fraud in offshore tax evasion. More than 110 countries have agreed to enforce FATCA and many thousands of foreign financial institutions have agreed to report US account holders to the United States. For more information on FATCA, Click Here.
Portugal was one of the earlier countries to sign the FATCA Agreement.
As a result of the signing of this agreement, the window of opportunity to get into compliance before it is too late is closing fast. If a Foreign Financial Institution reports your information to the United States and you are audited or examined before you have an opportunity to get into compliance, penalties can be very steep…reaching upwards of 100% value of your foreign account.
Foreign Account Reporting – Bank, Investment & Retirement
There is a lot of misinformation and confusion online regarding requirements to report foreign bank accounts, foreign retirement accounts, foreign investment accounts, and the interplay between foreign account reporting for individuals and FATCA.
FBAR vs. FATCA
FBAR (report of foreign bank and financial account) and FATCA are two acronyms that are used synonymously, but they are different.
FBAR (Treasury Department Form FinCEN 114)
The FBAR aka FinCEN 114 is a form, which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total of all your foreign accounts.
*Whether or not a Country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.
The following is a brief summary of FBAR Reporting, in general:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance.
There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOJ) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
Foreign Bank Accounts
Foreign Savings Accounts
Foreign Investment Accounts
Foreign Securities Accounts
Foreign Mutual Funds
Foreign Retirement Plans
Foreign Business and/or Corporate Accounts
Foreign Life Insurance Policies
Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
FATCA (IRS Form 8938)
As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether a FATCA form 8938 has to be filed. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is form 8938. Unlike the FBAR, the threshold requirements for an 8938 vary and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States
Estate Tax Treaty
The United States and Portugal do not yet have an Estate Tax Treaty in place. Therefore, if you are a citizen or resident of the Country and/or the United States and have assets in one or both countries is important to speak with an experienced international estate planning attorney to determine what potential tax liabilities there may be.
Foreign Insurance – U.S. Tax
Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).
In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus or dividends than that income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.
Portuguese Retirement Funds
Retirement plans from overseas countries is another bone of contention for many individuals required to file and/or pay US tax. Why? Because there may be both FBAR and FATCA Reporting requirements if the retirement fund has an individual account number. Depending on the type of retirement, there might also be an 8621 (PFIC) reporting requirement that is beyond the scope of this article.
More than just reporting the account information, taxpayers may also have to pay current tax on earnings of the retirement fund even though none of the money has been distributed, and even though the fund is growing tax-free overseas.
In other words, even though a foreign retirement fund may obtain tax deferment status until distributed in the foreign country of origin, from the US tax perspective it may not receive that same tax-deferred treatment such as a 401(k). Therefore, the individual with a retirement account is required to pay current tax on earnings that were not distributed.
If a person is required to pay current tax on the undistributed earnings they will generally receive a tax credit against any US tax due in the future once the money is distributed.
If you are a foreign national or US person with a foreign trust that is based in Portugal, it is important to ensure you have had your state tax plan reviewed by US international tax attorney.
Depending on whether the trust is a grantor trust and if it is currently funded, there could be immediate tax consequences and liabilities to the owner/grantor of the trust and/or the beneficiaries as well.
Common Corporate Structures – De Facto
The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary to get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”
On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.
When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single-member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain business structures to be disregarded.
At the current time, Portugal is listed in IRC (Internal Revenue Code) as having a De Facto Corporate Status for all “Sociedad Anonimas.”
We deal with the issue of Sociedad Anonimas often, and you can read more here.
Foreign Real Estate
If a person is a “U.S. Person” and is required to file a tax return (1040) in that they are either considered to be a US taxpayer for income tax purposes and/or meet the threshold requirements for filing, then the United States taxes individuals on their worldwide income.
As such, it does not matter if the money is earned in a Country that under Portuguese law the earnings may be below the threshold reporting requirements for filing and paying taxes in Portugal.
As a US person, the United States taxes individuals on their worldwide income — including foreign rental income
Profit vs. income
Another very important distinction that is common is when a taxpayer has a foreign property that earns rent income, but at the end of the day once expenses and foreign taxes are factored in there is no “profit.” Just because there is no profit does not mean there is no tax reporting requirement.
Rather, a person is required to report the gross income as well as the expenses on a Schedule E. Moreover, it is important to keep in mind that under US law the deductions and exclusions a person takes for their rental property may be different than in the country in which the property is located (for better or worse) – so just because there is no profit under foreign tax law does not mean there is no profit under US tax law.
Did You Recently Give Up Green Card?
Unfortunately, that does not mean you are out of the clear just yet…
Just because you recently gave up your Green Card does not mean you are automatically exempt from filing U.S. Tax Returns. If you are a Long-term Green Card Holders may still have tax filing, reporting and liability to the U.S. Whether a person meets the definition of “Covered Expatriate” is a complex analysis that requires the assistance of an experienced International Tax Lawyer.
Are You Out of Compliance with the IRS?
If you are out of compliance with the IRS, you may consider getting into compliance by using one of the approved Voluntary Disclosure/Tax Amnesty programs.
About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.