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

Residencies & citizenships Portugal Golden Visa
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41

I talked to my accountant this week. He was not phased by having the PFIC. For his conservative mind, it was more a wow of trying something like this for an exit plan. For me, from a tax standpoint, this is ordinary income. If you’re aware that you need a PFIC statement and your account is competent, you should be covering your bases. FATCA is simply compliance for money laundering. From my understanding, the PFIC is to report income derived from overseas passive investments.

If we get visas and a passport in 5 years, we’ll be stoked for break even and elated for any money made on the venture. While I’d love to make money, it’s the non monetary returns for our retirement and kid’s opportunities in the future.

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42

On the subject of PFIC, here is what I was able to gather. This is simply my interpretation of what I have read.

Default treatment of PFIC is sec. 1291 tax treatment. ( you don’t want this.)
You can elect either QEF or MTM.
Of the two QEF is the most tax friendly and best case.
If QEF doesn’t work, then MTM is next best option.

**You must make the QEF election the first year of the GV fund, or you will have 1291 taint. You dont want this.
***To choose MTM method, the PFIC generally must be traded on a major international stock exchange and can only apply to the current and future tax years. Also, this election is independent of prior PFIC elections (i.e. QEF or Sect 1291 election).

If there is QEF election, I gather than the process of completing tax return isn’t that much different than a regular mutual fund.

Otherwise, for sec 1291 for an accountant doing for the first time, the process will likely be confusing and time consuming. The IRS states is can take up to 22 hours to complete the form. There are tools and software available that can help with this. Someone who does these regularly or using the tools can do the form in 1-2 hours but there will be some learning curve. After the first year, the process should be very similar in future years so your accountant should be better/faster, but the first year will be a b*#$@.

If I have misstated anything let me know.

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43

Yes, that seems right. Except I think under sec1291, every year is a b$&^# because you have to continually do look-back.

You can “fix” things if you forget to elect QEF by doing a “deemed sale”, which is pretty much “pretend you sold the fund as of now, pay under sec1291 rules for previous years and now we’ll start QEF rules”.

You still have to do form 8621 every year even if you elect QEF. But it’s not super painful.

IMO it’s worth paying one of those specialist firms their $200 to review the QEF form and fill out 8621, just to be sure that (a) the QEF form passes the “sniff” test - just because the fund provided the information return doesn’t mean it was done correctly (b) you don’t run afoul of any other sections of code you don’t know about - the GILTI stuff in particular. But once it’s been done once, it’ll probably be fine for the average person most of the time to do it themselves from there for QEF. This might be trickier with the regular-VC funds that are investing in businesses, versus the RE ones.

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Electing a fund as QEF would mean that I would have to pay taxes on unrealized gains each year. If one don’t elect it as QEF, then at the time funds profits are distributed there will be punitive taxes at the highest ordinary income tax rate and interest on it.

I am not a US citizen or green card holder but I am considered a residentent for tax purposes. If I exit US and become a non resident for tax purposes before funds start distributing the profits it may be better for me to not elect QEF but if I plan to stay in US beyond 5 years or get a green card before 5 years (typical investment period of funds) it maybe better to elect the fund as QEF.

I spoke to a tax consultant he quoted 3 to 5 thousand for filling taxes, which I thought was insane.

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I would agree with your assessment on the surface but without knowing more. Your situation definitely has special wrinkles.

Yes I would question that number but your tax situation may be complex too, it is hard to judge.

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46

Do you have to pay an exit tax if you end your USA tax residency before the GV gestation period is over?

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All,
I do have some news regarding PFIC. A few days ago I communicated with C2 Capital (Blackbull fund) about the PFIC issue. They were very responsive and have committed to issue a PFIC Annual Statement in order to allow US investors to make the QEF election. I think this speaks to the professionalism and resources of C2 Capital. Even if they might charge slightly more in fees than other funds, I am comforted that they will put in some effort to “accommodate” the US government regulatory mess. I will follow up further with them, but this makes me feel a little better.

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48

I believe exit tax would only apply to US citizen or green card holder. I am neither. If I did get my green card within the 5 year then yes I would think there would be an exit tax.

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49

I was contacted by a fund and I inquired about their position on PFIC. They told me that it does not apply to them; they said it may be an issue for the bank holding the investment shares but not them. I pressed them on this and said that it does apply to them in the sense that the investor is caught up in the PFIC reporting and therefore the fund needs to support the investor with an annual statement for the investor’s tax reporting requirements. Their response was that they have several other savvy US investors already subscribed who had done due diligence on the fund and none of them had raised any issue about PFIC. The implication is that I am wrong about PFIC? Any thoughts on this?

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The role of the fund with PFIC is to 1) determine if they qualify as a PFIC. If they don’t, then nothing more to do. However if they do qualify then 2) They need to supply you with the appropriate dividend and IU share appreciation information for the year. This needs to allow you to calculate a fractional share if you did not participate the whole year.
Then it is up to you to decide how you want to manage the PFIC with the IRS. Usually, it seems to me that designating a QEF is the best route but you should consult with a knowledgeable accountant on this.

51

I think they’re wrong, and it sounds like they aren’t open-minded about supporting this requirement. In that situation, my inclination would be to “go where you’re treated best”, as Nomad Capitalist says. I’ve reached a point in life where I’m not interested in fighting every little battle; I’d rather continue shopping for a provider that meets my needs, or at least listens attentively.

I wonder if those other “savvy US investors” have an unpleasant awakening ahead. In my experience, the California tax man waits until just before the statute of limitations expires to pounce, maximizing the take from penalties and interest. I don’t know if the IRS plays this trick too, but given the potential for >100% penalties on non-QEF PFICs even with zealous and timely compliance, I don’t plan to play with that fire.

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What’s the definition of a “savvy investor”? Certainly anyone that is investing in their fund must be savvy, since they’re smart enough to invest in their fund. :slight_smile:

Michael, I think a lot of people simply don’t know about the tax issues surrounding offshore investments for US tax residents. How many of you would have known about PFIC regs if it weren’t for these discussions? And it’s not just PFIC. A number of folks have gotten their asses handed to them over the CFC rules, just because certain countries have required folks to form a corporation to own their vacation house, and they decided to AirBnB it, and reported the income in a way that got it flagged or something. The number of average taxpayers that know about Section 988 rules around currency transactions is undoubtedly miniscule, but woe tide the poor sap who buys foreign bonds. How many people even know to file a FinCEN 114+Form8938? (Though tax s/w does normally flag that.) And how many people think “nah, I can get away with it?”

And in truth, most of these folks will go all their days in blissful ignorance because the IRS doesn’t catch them because the IRS can’t catch everyone. shrug

Heh. the board is flagging me for having written over 31% of the responses and thus caring too much about the topic. Call me a canary in the tax coal mine I guess.

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53

For the sake of easy archive and summary, is this a “complete” list of tax forms that GV investor needs to worry about at this point?

-FinCEN 114 - A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

-Form8938 - Use Form 8938 to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold

-Form8621 (PFIC) - Use Form 8621 to report gain or loss in a passive foreign investment company.

-Form 926. Use Form 926 to report certain transfers of tangible or intangible property to a foreign corporation, as required by section 6038B.
[Updated to add Form 926 based on input from @wkb ]

Update: I edited this to add another thought. If you hold a crypto account, you might not think much about it because it might just have a few hundred or thousand dollars in value. However, with FBAR and 8938 you must aggregate the value of all foreign accounts. If you convert funds to Euros for GV, most likely, your crypto account is now going to be reportable in some circumstances. Everyone may be differently situated so check with your accountant.
This is not intended to be and does not constitute legal or tax advice. Please consult your own lawyer or professional.

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54

Replying to help keep your post percentage down - some people (who lurk on this forum more than they post) enjoy getting the perspective of knowledgeable people! Speaking at least for myself, I appreciate the efforts of you and some of the other regular contributors in helping to educate us about these topics!

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(Disclaimer, I am not your accountant/lawyer. I’m just a poor sap who’s done offshore stuff and been through the wringer.)

Yessir, to the best of my knowledge that is all the forms that should apply to your GV fund investor investing in QEF-electable funds. Nice summary.

I will mention the Sec 988 rules briefly. I think it unlikely that they’ll apply to anyone here; I write this solely to be complete, and because I don’t know who “anyone here” is.

If you have a realized non-capital-gain/loss that arises either solely or partially as a result of a change in the value of the foreign currency versus USD, it’s taxed under section 988 of the IRC. There is no specific form you file for this; they’re reported under the “miscellaneous income” section of 1040 and are taxed as ordinary gain/loss. The primary case where this comes up is if you own bonds denominated in foreign currencies. The math is complex and beyond the scope of discussion here; I myself have a cheat-sheet I work through for every bond and it’s tedious as crap.

It’s likely to apply to someone who goes the EUR1mm brokerage account GV route, since you’re likely to end up owning at least some bonds in a balanced portfolio. If you are putting EUR1mm into a Portuguese brokerage, though… DO NOT BE A BLITHERING IDIOT. GO GET A KNOWLEDGEABLE ACCOUNTANT. NOW. Don’t think this jb4422 character is telling you all you need to know and that D-I-Y is your best option to save a few thousand bucks. I am not, it is not. I know whereof I speak. kthxbye.

The average GV investor going the fund route or real estate route IMO will never run across this. It doesn’t apply to dividends, ordinary interest, or to gain/loss on assets like stocks or real estate. The only case I’ve seen for it applying is to debt instruments. If it does end up applying (since it seems many of these funds do operate in terms of debt instruments and look-through might apply), the accountancy that the fund hires to do the PFIC statements should take care of it and it’ll just come through the wash of the PFIC-statement/8621 and it’ll just be another number your fill-in-8621-for-$200-firm will take care of for you and you don’t need to think about it and all of the above is merely FYI. Easy peasey.

If your fund is not QEF-eligible…I can’t and won’t help you, get an accountant.

(Those “savvy investors” may well have been savvy, and had accountants that knew how to deal with the situation. Non-QEF is not a death knell and may well be fine for certain funds and certain investors. But… then it’s complicated. Is that what you want? Nuff said.)

As for the rest of you, assuming I do get stuff sorted and go through the whole PFIC thing, I’ll find one of those “fill in your 8621 form for you for $200” firms and share. It’s mildly annoying but not hard.

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56

This section 988 of IRC appears to make it more compelling to have a QEF election. It gives some comfort that such income will get reported there and not be an issue elsewhere. In other words, the IRS can’t claim that you didnt report income if its reported on Form 8621.

To this point…
I am getting further information from one fund that claims that PFIC doesn’t apply to them. They are citing some IGA that appears to be FACTA related.

I advised that I believe this IGA applies to THEIR reporting requirements to US govt vis a vis FACTA. The PFIC rules apply to the INVESTOR obligations to the US govt/IRS. While the fund is not REQUIRED to comply with PFIC reporting (annual statement), it puts the investor in a difficult spot if they don’t.

That is my understanding. does anyone have another take on this?

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I think your understanding is basically correct.

  • the fund itself isn’t subject to FACTA because it’s deemed-compliant under sec 4 of annex 2 “Collective investment vehicle” (I think), the short summary being “the depository bank is the financial institution of record, we’re just managing the money”

  • the responsibility of determining that a fund is a PFIC or CFC or anything else ultimately falls to the taxpayer, not to the fund - the fund is regulated by Portugal not the US. And yeah if the fund doesn’t give you a statement that gives you the data necessary for you to safely make a QEF election - that’s your problem, not theirs.

I think the fund you’re dealing with simply doesn’t have a clue. Which isn’t super-surprising, really; if the fund hasn’t had to deal with US persons before, why would it? And if no one forces it to look hard at the rules and requirements, why would it? I had this kind of conversation with another fund as well. It just went better than the one you’re having appears to be going.

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I found this website that gives some more “color” on the PFIC question.
https://hodgen.com/is-my-investment-account-a-pfic/

Quoting from this article: “An investment account is not a corporation – it is an account that a financial institution maintains on your behalf. Therefore an investment account cannot be a passive foreign investment company. Your account is not a PFIC.”

It goes on to give some guidance on how to determine a PFIC.

Based on some of the examples (e.g., Nestle), I question whether funds like Rock Capital, BlueCrow and maybe others are perhaps not PFICs. In these cases specifically, they are funds which hold companies who are constructing buildings or farming. In the case of BlueCrow for example, if the two brothers are actually engaged in the work and generating income from farming business - for them it is not passive income.

If the fund is buying bonds, equities or just investing in other companies that are constructing things, then I think it is clearly a PFIC.

If the fund is buying a building and leasing it to a third party for rental income, this is more unclear to me but I suppose it depends on the level of involvement in management and operations of the lease.

Based on this, I believe if a fund believes they are not a PFIC, then they should get a legal opinion from a US tax lawyer that the fund is not a PFIC and this may help to resolve that issue.

59

The funds I have spoken with are all consulting with lawyers to determine if they qualify as a PFIC for US investors. I know that Rock Capital has stated they are a PFIC. Blue Crow, I am guessing will not be, for the reasons stated above but they are working to confirm that by year’s end.

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This is a question for JB4422, drlward, and any others who may have relevant information. I have been told by my Portuguese lawyer that one may not split their 350k GV investment across multiple funds. I have read through all the posts in this thread and it seems like drlward has received some conflicting advice on this topic, and JB4422 was also advised that it was not possible. I am curious if anyone will share what they have been told by their lawyers as to whether it is possible to split the investment. If they have been told it is possible, I would be grateful if they could direct me to the specific law, regulation, or guidance from SEF upon which this opinion is based.

It is not that I do not believe what my lawyers are telling me, but while they are well reviewed, they are clearly a GV mill and not a full-service law firm that will go to bat and try and work the refs over at SEF for me (I was aware that this would be the case for the extremely reasonable fees they are charging - 15k euros flat fee for 6 x applications from GV through citizenship and tax rep at 300 euros per year). Accordingly, I suspect that they may not be beating the bushes to find any loopholes.