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

Is rock planning to own the assets directly and hire the contractors directly, or are they going to own SPVs that do that? I think once you stick SPVs in as an intermediary youā€™re back to passive status. Besides, the rules are funny on this anyway.

ā€“snipā€“
ļ»æThe asset test is met if 50% or more of the foreign corporationā€™s average assets (as defined in the IR Code) produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income. The test is applied based on the foreign corporationā€™s adjusted basis, for U.S. tax purposes, of the assets, or at the election of the particular shareholder, fair market values of the assets.
ā€“snipā€“

So it doesnā€™t matter if they plan to rehab - they own all this property thatā€™s producing no income yet because theyā€™re re-habbing it but itā€™s a bunch of the total asset base so ping they meet the asset test and youā€™re done.

Itā€™s not as if being an active foreign corporation is such a blessing anyway. You still have a ton of forms and numbers to sort out. What you really need one way or the other is someone on their side to be aware of IRS rules and cook the numbers for you into a format that you can use to deal with the IRS in a sane manner, whether youā€™re active, passive, or a partnership.

When itā€™s realized by the foreign company and passed through. Itā€™s not fundamentally any different than any other situation. The key is thinking about it as a partnership not as a ā€œbuying stockā€. Basis matters in some tangential sense but mostly doesnā€™t.

I asked them the same question and they agreed to request a formal statement from their legal and accounting team.

Has anyone investigated this 280k option? Something to be said for the certainty of exit - or perhaps its an illusion. https://www.propertylisbon.com/lisbon-property-for-sale/280000-euro-golden-visa-portugal-cheapest-golden-visa-in-europe/

Iā€™ve spoken with Arton Capital about their 280K option. They guarantee buyback at the purchase price after the process is finished, and pay no dividends at all. The all-included administrative costs are about 10% higher than for the 350K options that also buy back at the original purchase price and pay 1% dividends.

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The problem with these guaranteed-buyback options is ā€¦ whoā€™s guaranteeing that buyback, anyway, and are they really going to be there to do it if the whole deal goes south. You have to look carefully at that - TANSTAAFL. I saw this project, but Sergio never really got back to me to give me enough details, which was annoying. It was like I was supposed to just buy in without asking questions.

There were also questions about when the project would start - if it takes 2 years to raise capital, then your money just sits there for all that time - no contractorā€™s going to start construction til all the money is there - of course also delaying the exit.

David, did you get a decent answer from Arton on where the money was supposed to come from?

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Thank you for the insight here. Such murky waters. I am looking for GVā€™s with a risk level that feels ā€œtolerableā€. I dont want to lose my money and would be nice to make a % or two since I would be pulling it out of funds that are doing well in the US. I know TANSTAAFL- just trying to be conservatively prudent. It is so difficult gathering enough information to make an informed decision. Which is probably why so many of you (that are much farther along in this process) have narrowed it down into 1-2 GV investment funds. I appreciate learning from all of you!

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Itā€™s definitely rough sailing. There are lots of people selling you answers but only some of them have your best interest in mind.

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Agreed, a guarantee depends on the financial health of the guarantor, and any smart GP is going to erect corporate firewalls to stem the bleeding if a project goes bust. If thereā€™s a rusting, half-finished concrete shell at the project site in five years, I donā€™t expect that the guarantee is going to be worth anything. COVID resolution and the future of the tourism economy are daunting unknowns.

Iā€™m still ramping up on all of this as I transition from curious lurker to active seeker. I spent most of the conversation with Arton Capital surveying their various CBI programs and inquiring about other programs under development. I only covered a brief, high level overview of the Portugal optionsā€“costs, fees, and locations.

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@tkrunning do we know of community members that have done the GV by investment? can we learn what funds they chose and how it is working out for them? Almost like a ā€œreferenceā€ā€¦

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another way you can think about this is ā€œyou want the visa, would you pay EUR280k for itā€, accept you might lose everything, and if you get your money back itā€™s a bonus. whatā€™s the visa worth to you? If it were just EUR280k, I might actually consider that. So the hotel thingā€¦ didnā€™t entirely bother me. I just need to somehow get to whoever the actual developer is to talk to them about it, versus whoeverā€™s retailing it.

Bonnie, keep in mind there have only been 46 GVs issued via section 7 VC funds, total, as of September. Itā€™s just that new. There just isnā€™t a lot to BE known at this point.

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This is right on and exactly how I suggest people think. ā€œIf I lost it all, or half of it, or 100k - would that be worth it for me to secure a visa/citizenship?ā€. We answered yes to that. clearly we hope to break even or even (gasp!) make some money but if we had to lose some, that is worth it to us. (Iā€™m totally inviting sketchy fund vultures to send me unsolicited emails now, I understand).

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HAHAHAHAHA

itā€™s not easy for most of us to make that choice of course. I can say I did but ā€¦ yeah, huh-huh.

I still find the 280k options are still tempting simply because they donā€™t tie up as much capital. But most of the straight-up properties seem awfully inflated in value, and that ā€œ4% yieldā€ clearly IMO just comes straight out of the money you gave them, and then you have the taxesā€¦ The hotels, I know what they say, but do YOU want to own a chunk of a Hilton Garden Inn? I donā€™t want to own one on my best days, why would I want to own one in Portugal? Who even goes to Hilton Garden Inns in Portugal when there have to be a ton of better options with local flair and flavor? (Which is why I think the Evora monastery one might fly - itā€™s moderately upscale, offbeat, and unique - catering to the sort of folks who will always travel and always have some money to do so.)

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@drlward you guys are totally right. I was hoping to find logic in an illogical proposition. Appreciate you!

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Understand completely, I have made the decision that finding a ā€œPlan Bā€ to spend some time is worth something, not sure how much $$. The fees seem high, realizing that some of them are for RE (i.e hotel investment transactions; taxes, IMT and such) and some are for legal services (which would be paid no matter the type of GV program I pursued). Appears that the 280k options dont provide any kind of return, although do come with a ā€œbuyback guaranteeā€ - not sure by whom or how that is guaranteed. So you are right - the question is how much $$ can one part with for the purposes of a GV, hoping to get some/most of it back in 5-6 years. Argh.

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The PFIC status is a big issue, but not a deal-breaker. Having said that, it adds to the continuing costs and uncertainty of the GV investment fund option. None of the advisors or funds bring up the PFIC issue (why would they?), but it makes the entire process seem more sketchy. If the Portugal lawyers are good, they donā€™t necessarily have to understand US tax law, but they should at the least raise the issues and suggest getting US tax advice. I think it would be advantageous for all involved to make the process transparent for Americans so the American investors have more confidence in the process and are more satisfied.

Getting hit with punitive taxes for not complying with regulations is not good for referrals or for business long term. It seems more like everyone is grasping for business/money and donā€™t necessarily care about the repercussions at this point.

I have seen some US based financial advisors trying scare tactics about PFIC. They said it costs as much as $4,000 per year to comply with PFIC and 39% tax rate. I donā€™t think the situation is that bad. But they want expats to invest in US funds, not foreign funds so they use FUD. Worst case scenario, you can file the 8621 yourself. Even if it is not 100% accurate, as long as you are honest and try your best to comply you may get audited but there wouldnā€™t be much if any penalty if you are paying the taxes that are owed. So i donā€™t buy the need to pay a CPA $4,000 to file the 8621 form. If the GV fund gives the documentation needed and you can use the QEF election, realistically, best case scenario you are making 5% dividends a year on 350,000 Euros is 17,500. At 39.6% tax rate, just pay the 6,930 per year in taxes and call it a day. If you are making more than that, you can afford to hire a CPA to do the work for you.
Additionally, it seems important that the GV fund pay out regular dividends. Otherwise, you will be taxed on the gains even though you donā€™t see any of the money. Also, I think it is important for the GV funds to offer the QEF option to make it easier to file the return.

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Iā€™ve made my peace with it. YOU declare a QEF and just need the fund to state whether they count as a PFIC and, if so, to supply you with the necessary form and information to make the proper calculations.

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larry
could i ask what fund you selected?
i have to agree with your analysis but be prepared for an audit and pay what you owe in taxes. The IRS will see your FACTA reporting come through from the funds so they know what you have invested and they can estimate a reasonable return.

i do wish there were some accountants that specialized in this type of work that arent the big 6 (big 5). I havent found anyone who knows about this. The GV funds should have someone on staff who can answer these types of questions and prepare the needed forms, but i havent found that to be the case either.

Funds are only starting to be used as the investment vehicle for GV. That the RE route through investment in popular areas will soon be restricted will only accelerate the move to fund investment. Add to the fact that Americans are only now starting to show interest in the GV. I have seen (and personally advocated strongly for) funds start to take note of the need to clearly state their PFIC status and give assurances that they will be able to provide the necessary information at years end. PT lawyers will be taking note very soon as this drips down to them, I assure you. Keep asking and it will spur them to take action!

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There are plenty of accountants that deal with the peculiarities of PFIC and such. Google will turn up a few.

As for the funds having someone on staffā€¦ IMO it really isnā€™t a surprise. As Larry said, the whole notion of Americans being interested in Portuguese GV is a very recent phenomenon, and the whole fund route itself is still shiny-new. Folks are all figuring this out on the fly. Then too, all of these funds are quite small, and the financial universe there almost certainly has very little history of dealing with the US because we arenā€™t their major trading partner nor are they a traditional retirement destination for AmCits. Itā€™s easy for us to see ourselves at the center of the universe, but we arenā€™t for everyone. I know at least one fund is literally scrambling around looking for the appropriate legal/tax advice.

Really, we need to be thankful that these funds are willing to deal with AmCits at all.

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