Investment fund vs. real estate for Portugal golden visa; PFIC for US citizens

Hi folks,
I had been leaning toward the investment fund option for pursuing a Portuguese Golden Visa. Yesterday, in another thread, I learned about PFICs and the obscenely punitive taxation and tax compliance burden they impose on US citizens. It looks like certain funds may produce the necessary documentation to reduce the suffering, but certainly not eliminate it.

I’m so impressed with the wealth of knowledge and experience on this forum! I’d love to hear your perspectives on the challenge of PFIC tax compliance for Portugal GV investment funds, and how you feel about the investment fund vs. real estate decision–potential yield, legal complications, tax issues, prospects of capital preservation, compliance costs, etc.

If anyone in the audience is already dealing with PFIC compliance, esp. with regard to a Portugal GV program, I’d love to hear insights from your experiences.

Many thanks and good wishes to all!

2 Likes

I won’t speak to the rest, but with respect to taxes, I wouldn’t think about it that hard. Just avoid any fund that won’t give you a PFIC statement.

You’ve got tax issues either way. Fund means PFIC rules, and an accountant - though I’m told there’s a specialist firm that does just the PFIC work for cheap. Owning property and trying to rent it means Portuguese income, therefore a Portuguese tax return, a Portuguese accountant unless you’re suicidal (I’m guessing), probably keeping your Portuguese lawyer on speed dial in case something comes up, then a Sched E for rental income plus probably 1116 for tax credit for tax paid to Portugal. Aside from whatever’s involved in buying the property, I’ve no idea. I’d rather face PFIC. But that’s me.

Some advice from the folks that taught me about the PFIC stuff - don’t let it stop you, it’s just a thing. The biggest risk point is simply in knowing there’s a hurdle in the first place. This is what trips people up the most, like folks who bought property in Costa Rica in the '00s using CR corporations (because foreign citizens couldn’t own land in CR) then rented out their properties, not realizing they’d run afoul of the IRS Controlled Foreign Corporation rules, then getting b-slapped by the IRS ex post facto. If you knew about CFC rules, you could have dealt with it, it’s not hideous, it’s just a thing. Like FINCEN 116 or 8938 (don’t forget those for your depository account!) or anything else. Have a beverage, dot the Is and cross the Ts, and move on.

1 Like

Great advice, thank you!!

Hello there,

We too have been looking at the GV Investment Fund options but it is the first time that we are running into the PFIC topic and frankly it stopped us in our tracks :slight_smile: A few questions/clarifications on this front please for those of you who are US persons and may be further along with the GV Investment Fund process and more knowledgable about the PFIC ramifications/details:

1- Would we be subject to the higher PFIC taxes regardless of the fund that we choose? Another way of asking this would be: Are any of the GV Investment Funds exempt from PFIC taxes?

2- We would also need to make sure that the fund we choose can provide us with the PFIC paperwork for our tax filings. Correct?

3- Can you recommend a CPA/accountant to speak with about PFIC?

4- Our very basic understanding of PFIC is that for the gains from the GV Investment Funds, we would end up paying US taxes based on our ordinary income tax rates instead of the capital gains tax rates and that we may also pay higher accounting fees due to the complexity PFIC . Are there any additional taxes, fees, potential penalties, or gotchas that we should be aware of with regards to PFIC?

5- Should we favor GV Investment Funds that pay an annual yield rather than a lump sum gain at the end of the fund’s life (usually 6-10 years) due to PFIC since the lump sum at the end of the 6-10 year period would cause higher ordinary income tax rates to kick in?

Please also include any additional insights or information that we may have omitted asking about.

Many thanks and we hope that the answers to these questions will also help other US persons who may be looking into the GV Investment Fund route!

4 Likes

Arton Capital has a 280K Euro hotel property purchase option that buys back at the exact original price after ~6 years, with total fees adding up to around 1/6th of the property cost. I didn’t understand the attraction until I learned about this PFIC situation. I like earning returns on my investments, but my recent experience with unwittingly buying an exchange-traded master limited partnership (Brookfield Energy Partners) taught me that I don’t like overcomplicating my taxes. From a tax standpoint, it’s attractive to strand less capital, collect exactly 0 dividends, and notch capital gains of exactly 0.

Arton markets another 350K option with marginally lower fees, 1% fixed dividend, and mandatory buyback at exactly the original price after the passport is secured. I wonder if they could structure a different vehicle with lower fees and an ROI of zero (in essence, the reduced dividend offsets fees). I will inquire about that. It’s puzzling that the fees are higher and yields lower for the 280K option; I speculate that this is value-based pricing that caters to people with limited working capital.

1 Like

Sorry David. It’s in another currency. So there’s going to be a capital gain/loss at the end if for no other reason than FX, unless whatever investment it is, unless they’re also going to hedge your currency exposure too, and if it’s at all structured like a corporation or partnership or anything else, it’s still a “foreign financial asset” and you get to file 8939 and FINCEN-116. Section 988 might apply, but probably not for a straight buy/sell.

The IRS does not want normal people doing any of this. You might try to hide income or something. Therefore it’s difficult and involves extra reporting. The IRS really does not want you owning foreign corporations, so that’s especially difficult.

If you really want out of the taxes, buy a house in your name without forming a corporation, then don’t rent it and don’t sell it (thereby avoiding sched-E income and portuguese income and cap gains on sale). That IME is your one and only option. Otherwise, it sounds like you will want an accountant.

I want to say “it’s really not that hard” but I might just be a masochist.

(MLPs ARE a pain, yes. But as long as it’s not in size, and you get most of the fields correct, you’ll be fine. No one’s going to quibble about whether you got the entry for 20Z oil field depletion exactly correct unless you have $250k of shares; the “I genuinely tried to do the right thing” defense will work just fine. It’s like school - “show your work”. It’s when you lie or pretend or ignore that you’re in deep shit, not when you merely make a mistake.)

(*) section 988 is another byzantine part of the tax code that addresses foreign currency transactions. Some transactions fall under it, and are taxed as ordinary gain/loss. This is occasionally advantageous, as a sec988 loss is pure ordinary income and applies immediately with no limit and full carryback/forward - so if you lose your shirt trading currrencies, you can offset all your income. on the other hand, for bonds, you get to do this byzantine calculation to determine your cap gain/loss vs sec988. Best I can say: don’t buy foreign bonds without help. OK, I do it, and I do the math by myself, but I clearly am a masochist, on reflection.

1 Like

Your expertise is amazing! Thank you for sharing!

Excellent points indeed. I’ve considered owning non-rental property, but I think that has the unfortunate catch of qualifying me as a tax resident of Portugal, and subjecting my worldwide income to Portuguese taxation if I’m, not mistaken. Urgh. That certainly isn’t desirable for the next year or two. I haven’t completely absorbed the essence of the NHR option; I’ll have to read up on that.

I’m not overly worried about dealing with capital gains and losses on my taxes. It’s the PFIC and CFC stuff that scares me. That said, if investment funds can confidently support a QEF election, that doesn’t seem hopelessly intimidating either. And I still hold a wisp of aspirational hope that I can do this whole affair with tax-deferred 401K money, which might negate the problem altogether. But that does seem too good to be true.

Wow, impressive level of knowledge on this! Our compliments! For us, being newbies, it is rather overwhelming and certainly makes investing in GV Funds for US citizens complicated and tax-heavy. Would applying for GV through buying a property instead (€350K or €500K option) be still exposed to PFIC if you (a) rent the property for income or (b) sell the property after a few years for gains? We realize that we would face taxes in Portugal/US for the rental income/gains from such a property, but just wondering if it would be PFIC or regular income/capital gains tax from a filing perspective.

David, as far as I know, you would either need to spend 183 days or longer in Portugal or have your primary residence in Portugal for you to qualify as a tax resident of Portugal. If the property you buy is a second home or an investment property, it should not affect your tax residency in PT. Of course, best to check with a pro but so far, that is our understanding. Once you become a resident in Portugal i.e. starting living in Portugal on a permanent basis, you can apply for NHR which would protect your income outside of Portugal from Portuguese taxes for a period of 10 years, but there are some exceptions like capital gains from investments which is taxed at 28% in Portugal though I believe it can help you offset US taxes on the gains due to the tax treaty.

Thanks again!

1 Like

Note: I’m not an expert, I’m a casual observer. I’m sure a real accountant could provide better answers. We just don’t seem to have any here.

  1. No.
  2. Correct.
  3. Not I.
  4. Whether you pay cap gains or ordinary depends on your PFIC election and the nature of the income - if a fund only generates interest/dividend income, you’re not going to get cap gains no matter what. QEF AFAICT means passing through the income in whatever form it’s characterized as, it’s just that you have to elect it and the fund has to provide you that information and some other crap that, for the simple case of “buy fund, wait 6 years, sell”, isn’t going to be that much of a pain.
  5. Not necessarily. Again it depends on the nature of the income, and the election you make. IMO none of this should be the basis of your investment decisions. If there’s income, win. Try to avoid losing.

There just isn’t a one size fits all answer here.

1 Like

Get a lawyer to verify, but merely owning property does not make you a tax resident anywhere in and of itself.

I’m sure you can do it with 401k money. It’s just paying for the foreign corporation and doing the corporation’s paperwork. I’ve said my piece on that.

1 Like

Thank you jb4422! If anyone knows of an accountant that has expertise around PFIC, please let us know.

If there is no foreign corporation, then there is no passive income coming from a corporation, therefore PFIC does not apply, unless you structure it that way, and from what I’ve seen, there’s no reason to form a corporation. you’ll have a little bit to think about in terms of 1116 for foreign tax credit but meh.

Doing a fast learn about this recently since it came to my attention.

  • it seems that the biggest danger is not being aware of the PFIC in the first place. If you do not submit the required forms (IRS form 8621 https://www.irs.gov/forms-pubs/about-form-8621) on an annual basis (for each fund you invest in if you have more than one), beginning at the start of the investment, then you can have a large tax bill that includes interest penalties. Not hard to avoid, you just need to be aware.
  • Most of the funds are not on top of this because the flow of US investors really only began in earnest this year. I am making them aware, as everyone else should as well. I am confident they all qualify as a PFIC and just need to provide the pro-rata share of earned income and net capital gains each year for US investors. No reason they should not be able to do this as they all recalculate NAV and PU value on usually a semi-annual basis.
  • Of the 3 choices given for how to manage investments in a PFIC, it seems that declaring it a QEF for yourself seems the best option. It means you pay the tax owed on an annual basis, as you would a US-based investment, which is what the IRS wants you to do. Here is a great summary of the implications of each choice: https://www.neiinvestments.com/documents/PFIC/PFIC%20FAQ.pdf
  • It seems these are taxed at the highest tax bracket no matter what you do and NOT as capital gains. Is that correct?
  • would love to speak to a US lawyer/accountant who has expertise in this if anyone has a referral.
1 Like

I’ve been informed that if you elect QEF, then the income flows through as whatever it actually is, and I imagine that’s part of the point of the PFIC statement, to get the fund to give you the exact characterization of the income so that it can be reported correctly.

Having just had a look at a PFIC statement, the equiv here is probably your sched K-1 that you had to do for your MLPs, only not so bad because you aren’t going to be dealing in abstract stuff like depletion or tax credits. Hopefully.

Another difficulty you might have is that it’s mark-to-market in the sense that it doesn’t matter if you actually received the cash/income in your account, you still owe the tax. If the fund realized a gain, you owe tax on it. It’s up to you to request a distribution on whatever terms the fund is willing to do so - or if you can’t, pay it yourself. If you contractually tied up the money in the fund such that you can’t get at it, that’s your problem, not the IRS’s. This is another factor you might want to consider - if your fund goes way up in value, but there’s no provisions for you to receive those gains because they’re tied up for 6 years, you better plan to have the cash handy to pay the taxes.

So thinking this through, the net of it is nothing more than that the IRS is making your foreign fund conform to US tax accounting norms if you want regular US tax treatment, and if the foreign fund won’t do the accounting in the way the US expects, the IRS assumes the worst on your behalf. Not that unreasonable, really. What you’re dealing with here is not much different than if you invested in a VC fund in the US, besides semantics. It really isn’t.

In further thinking about this, therefore, the biggest difficulty here for most of you may well be simply that it’s not the same as buying stocks or bonds in your brokerage account like you’re used to. These are not retail investments, and the moment you step outside that sphere, and definitely the moment you step offshore, the rules get complicated.

None of it bothers me because, while I haven’t done THIS investment, I’ve done stuff like it before, and yeah, I have a friendly tax lawyer who, while I still do my own taxes and don’t need him for much, gives me a level of comfort because if something goes wrong or there’s something I don’t understand and can’t figure out on my own research, I know I can turn to him for help. (And sorry, no, I can’t share his name/number, he does corporate work, I’m a special case.) Those are just the rules of the game.

I’m not trying to scare anyone off here. I’m really not. I’m just suggesting that it’s a different game and there’s different rules. It’s not something to be scared of, but it isn’t free either. It’s like getting the visa itself. You can DIY but most people most of the time hire a lawyer to help, and the rules are such that maybe these funds aren’t necessarily for everyone.

1 Like

JB you seem really knowledgeable about this topic so I figured I would ask. You mentioned that the QEF election allows foreign-source income to retain its character (vis-a-vis income vs capital gain) and that was my understanding as well for income that gets distributed.

However, do you know if appreciation in the value of the shares (which of course can’t be distributed by a fund) will also flow through as capital gain on the PFIC statement, resulting in a US tax liability in that year? From what I understand this would increase my basis in the shares but I would still owe capital gains taxes on the appreciation as it happens year-by-year correct? And I would also not be able to claim a deductible loss if the shares were to lose value (unless I’m misunderstanding the rule there). Thanks in advance if you’re able to provide any clarity on this.

1 Like

I really can’t give very good answers because I’ve not studied it a lot, and even if I had, there’s too many “it-depends”. How is the given fund structured - is it a partnership or a corporation? What’s the makeup of the assets and what does its income look like? Then there’s some crap around excess distributions and cases where basis changes can generate ordinary income, it looks like.

I’ve really only glanced at 8621 enough to decide that (a) it’s byzantine (b) QEF solves the most glaring problems in a way I can tolerate © as long as I elect QEF up front, most of the byzantine should disappear, and I’ll be presented with some mix of cap gain/loss and ordinary income/loss (d) and that’s good enough. I’m not really planning to look at it much more than that; it’s going to hurt my brain terribly, and clearly the right answer is to hire it out to one of these specialist firms to crank out the 8621 for me to make sure all the right boxes are checked the right way.

The thing with these kinds of investments is that you just CAN’T make any general statements, because it just changes from year to year depending on what the manager does and what happens in the fund. I have one fund where one year everything hit as dividend - and the next year it was mostly cap-gain with the dividend netting out against investment interest, just because that’s how the business went. I’ve had one fund where my entire yearly cap gain got netted out by a sec988 loss, meaning almost that I made money on the taxes. Now add onto this that you’re dealing with a manager in a foreign country who probably has more clients from other countries than yours; thus there’s just no way s/he can possibly think in terms of tax efficiency because tax efficiency for who?

My point is, thinking too hard about how the gain/loss is going to be characterized is probably a pointless exercise ; QEF means you won’t be taxed incredibly stupidly, which is the important bit, and everything else will just be what it ends up being.

To take a stab at your question - I suspect most funds are going to be treated as a partnership, in which case all income/loss should flow through, basis gets adjusted accordingly, and it all just nets out, except in some really odd instance. I really doubt there’ll be a case where you can’t claim a loss, where appropriate to do so, and I’d imagine basis change gets dealt with at sale/close instead of yearly, in the same way that it’s handled with anything else. But that’s just guesswork.

1 Like

I am not an accountant or a lawyer but I came to the same conclusions. I am not entirely sure when you can get credit for a loss however.

I think a lot of the questions are answered with @jb4422’s response. In talking to BlueCrow, they are issuing a PFIC since they’re acquiring US investors. It sounds like the PFIC is basically a foreign translation of a 1099. If you choose the QEF route for the first year, you’re locked in for the years going forward so as long as PFICs are issued, your returns should look the same going forward.

I am planning on talking to my accountant this week to clarify what this looks like from a tax standpoint, but compared to owning a rental property, I think it’ll far simpler. It seems as long as you know about PFIC ahead of time is the most difficult thing (at least from my standpoint of having had fairly complicated taxes for almost 20 years).

2 Likes

Yeah I think that as long as they commit to providing the QEF paperwork, it’s probably not too bad. It’s great to know that Blue Crow is on board.

Also, if the “self-directed IRA with offshore LLC” approach comes together, it becomes irrelevant. I’ve seen convincing guidance that form 8621 is not required for investments in tax-advantaged retirement accounts. Obviously I would get expert help before proceeding with that solution.

Blue Crow is likely a PFIC. This is because most of their income will be passive from income via leases on their properties.
Rock Capital believes they will not be a PFIC, until their divestment phase in 6+ years. This is because they will be actively rehabbing properties and not earning either interest income or realizing value gains over that period. They are speaking with their team to formalize whether they are or not.

2 Likes