The tax benefits of Portugal for US citizens with the golden visa

The US is just one of two countries in the world that applies citizenship-based taxation, with the other one being Eritrea. This framework means that any US citizen is liable to pay US income taxes, no matter where they live or work.

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This taxation process is regulated through the Foreign Account Tax Compliance Act (FATCA), and it makes tax planning for Americans abroad a complex matter, especially if they do not carefully draw it out before moving. 

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However, while there may be no way to become exempt of US taxes completely, various countries offer tax benefits that can alleviate the tax burden of US citizens, and among those countries stands Portugal.

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What makes all of this more interesting is the ease of getting a residence permit in Portugal through the golden visa, a residency by investment program through which investors can legally live, work, and study in Portugal as local residents if they invest in Portugal's economy, normally through the acquisition of property worth no less than 280,000 euros or investing 500,000 euros in mutual investment funds.

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The golden visa also has a simplified route to citizenship, as applicants ad their family members only need to spend 14 days each two years to qualify for citizenship after a total of five years, meaning they can plan ahead or set up tax residence as they see fit. 

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The ability to hold a residence permit in Portugal and decide whether or not to be a Portuguese tax resident (who is someone who spends at least 183 days a year in Portugal) makes the golden visa the optimal route to take advantage of all the tax benefits the EU country can offer Americans.

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Portuguese tax benefits for US citizens

Portugal offers a wide array of tax benefits to Americans due to the uniqueness of the US taxation system as well as a long-standing tax treaty between the two nations. 

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The benefits US citizens can take advantage of come in various shapes, but the most prominent amongst them is the Portuguese Non-Habitual Residency Tax Scheme (NHR).

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Non-Habitual Residency and income tax

The NHR scheme is an income tax relief scheme open to a niche of the population. It targets the Portuguese Income Tax (PIT) for high-value activities, with income derived within Portugal. 

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High-value activities are defined by the government, and the list it has produced is a very comprehensive one which includes:

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  • Various medical professionals
  • University teachers
  • A wide array of ICT professionals and programmers
  • Artists
  • Managers, directors, and other technical professionals
  • Life science professionals,
  • And many more professions that are too much to list here.

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NHR targets income from these activities and sets the PIT rate at a flat 20% instead of a bracketed framework that can reach a staggering 48%. However, if a person with NHR status decides that at any given time they want to file for income tax under the default regulations, they can do so without denouncing their NHR status. 

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The NHR status is valid for ten years, and the interesting thing is that the requirements to qualify for NHR align perfectly with the golden visa's route to citizenship. To qualify for NHR one must:

  • Become a tax resident under the Portuguese domestic legislation; and 
  • Not having been taxed as a Portuguese tax resident in the five years prior to taking up residence in Portugal

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Since the golden visa does not require investors to live in Portugal as tax residents for the five years prior to applying for citizenship, this will also qualify them for the NHR if they decide to move their tax residency to Portugal.

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Foreign income, double taxation, and other benefits

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Foreign income - be it salaries, dividends, or otherwise - derived from outside of Portugal can also be exempted from PIT if:

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  • It is taxed in the source State according to the applicable tax treaty.
  • It is not deemed derived in Portugal; and 
  • It is not deemed obtained in a tax haven. 

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US citizens who make more than 12,550 USD each year, or 400 USD in self-employed activities, will have to file a US tax return using Form 1040 by April 15th each year. However, tax residents in Portugal do have a benefit here. They can get an automatic filing extension up to June 15th, and they can even get another extension until October 15th through an online application. 

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US citizens living in Portugal can also apply for Foreign Tax Credit through Form 1116. This gives them one USD credit for each dollar they pay on tax within Portugal. 

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US citizens can also apply for Foreign Income Tax Exclusion, which lets them exclude the first 108,700 USD of foreign earned income from US tax but only if they are Portuguese tax residents. Coupled with the NHR regime, this could lead to massive savings. 

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The final benefit also aligns with the golden visa, especially if it is obtained through real estate investment. US citizens with overseas assets worth over 200,000 USD must declare them through form 8938, unless that asset happens to be their home if it is in their own name. Golden visa applicants who purchase a property and reside in it do not need to declare it come tax return season. 

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Various benefits, one place to start

The Portuguese golden visa is a fan favorite among many. However, it is its various tax benefits for US citizens that explain the increase in interest hailing from Northern America. The EU country is not only a lovely place to live, but offers Americans the chance to alleviate their tax burden at the same time. 

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To know more about how obtaining a residence permit in Portugal can help with your tax planning, contact us today to book a free, comprehensive consultation with one of our experts.

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