Blog

One of the most frustrating revelations for people moving to other countries is the fact that the employment relationship that they have can rarely continue as such.

Why employment doesn't work?

The main reason that employment relationship rarely works is the sense that the common arrangement in tax treaties between countries is that people are liable to pay taxes (both income tax and social security) in the country where they reside. As a result, in order to legally employ someone in a different country, the employer needs to register with the authorities in that country and deduct taxes for the other country.

In addition to this practical difficulty, having an employee in another country risks the creation of a Permanent Establishment or in other words, risks that the country of residence of that employee will seek to attribute some of the profits of the company to the employee and tax such profit. 

EOR - a solution?

To resolve this problem, there are companies that act as a de-facto employer and take on the administrative tasks related to employment, including payroll processing, benefits administration, and compliance with labour laws. These are called "Employer of record" companies (EOR) and they allow companies to legally employ in other countries. 

Employers of record are a practical and compliant solution for employers seeking to employ in other countries but are, in our opinion, the worst possible option for people moving to Portugal.

The costs of an EOR in Portugal

EOR don't come free and incur some setup costs. The costs can vary between hundreds or thousands of Euros per employee per month. 

However, it is not the EOR costs as much as the it is the employment taxes that are the main issue.

Income tax

Employees who work for international companies in Portugal are often paid salaries that are considerably higher than the average salary in Portugal. The sliding scale of taxation in Portugal is designed around the local population and it therefore rapidly reaches 45% in addition to a potential further 2.5-5% solidarity tax.

Many people working in a high value activity under the NHR scheme enjoy a reduction to a 20% flat tax rate.

So far so good.

Social security

This is where the real trap is. Social security is levied at a 23.75% over employers in Portugal (including EORs). In addition, the employee pays 11%. The total social security burden is therefore 34.75% (!) There is no social security ceiling so any amount suffers the 34.75%.

Overall tax burden 

Together, the tax burden of employing via an EOR is approximately 50% taking into account the 20% preferential tax rate. 

For people not in high value activity, the tax rate could be as much as 70%.

For many companies, this is a prohibitive rate.

Self-employment

A reasonable alternative to using an EOR is creating a contract relationship and having the employee register as self-employed in Portugal.

Portugal encourages freelancers and the tax benefits under the NHR scheme work better for freelancers. 

Income tax

The 20% special tax rate is further reduced by the application of the simplified regime, allowing for taxation of only 75% (in most cases) of the income (and achieving approximately 15% tax rate).

Social security

Self-employed individuals pay 21% social security but this is further reduced by the application of a the simplified regime by taxing only 70% of the income, leading to an overall rate of approximately 15%. In addition, there is a waiver on social security for the first year and a cap of approximately 1,200 Euros a month.

Overall taxation

The overall taxation of high value activities of freelancers therefore starts at around 15% and doesn't go over 30%. This is a reasonable tax rate. 

Indeed, using the self-employment mechanism leaves employers exposed to a hypothetical risk of the creation of a PE, but this risk could be mitigated considerably by avoiding a physical office and not awarding the freelancer a signing authority. We are not aware of a single case in Portugal, ever, where the risk had been more than theoretical. 

Working via a company

Another option is for the employee to set up an entity - either in Portugal or outside of Portugal and bill the employer via said entity. This option reduces the risk of a PE further and could lead to varying taxation depending on the exact structure chosen. 

One of the side effects of the large rise of Americans moving to Portugal is also the considerable use of unique US structures. 

We have already written about the treatment of US LLCs in Portugal and it is now time to say a few words about S Corporations (S Corp / S-Corp) or LLCs that elect to be taxed as S-Corps.

S-Corps are a unique vehicle that is only available to US citizens. It is a desirable structure when living in the US because it shields some of the income that people have from social security payments, leading, mostly, to a reduced overall tax rate. S-Corps are also an efficient vehicle for various deductions.

However, for people living in Portugal, S-Corps (or LLC/SCorps) are not a recommended vehicle in our view, even for people with NHR status, for reasons explained below.

Income from S-Corp - US perspective

S-Corp must pay their shareholder-employees a reasonable salary. A reasonable salary needs to be a sensible market compensation. Most S-Corp shareholder-employees pay themselves approximately 40% of the profits as a salary. The IRS is cracking down on people trying to reduce the salaries below "reasonable".

Over and beyond the salary, the S-Corp can retain or distribute its profits. Distributed profits are not considered earned income and are therefore not subject to social security payments. They are, however, pass-through income, i.e. they are allocated to the owners regardless of whether they have been distributed or not. 

It is important to remember that whilst distributions are exempt from social security payments in the US, there is another side to the coin - since they are not earned income, they will not be benefiting from the Foreign Earned Income Exclusions and will be fully taxed in the US.

Income from S-Corp - the Portugal position

The salary

As we have seen, S-Corp owner-employees much pay themselves a salary. 

The double taxation treaty between the US and Portugal gives both countries taxation rights over salary income.

The default clause on salary income in the double taxation treaty sets out that salary is taxed at the country of residency unless the work is done in the other country. In other words, the default position is that work done from Portugal is taxed in Portugal regardless of where the employer is or where the clients are.

However, the saving clause gives the US taxation rights over all income by US citizens regardless of what other clauses say.

The bottom line is that both countries can tax the salary.

Many people mistakenly believe that the fact that the combined effect of the US's right to tax the salary, the effective taxation in the US that is deducted at source and the NHR regime that exempts foreign sourced employment income that is taxed at the source country leads to no taxation in Portugal.

This position may be on many tax returns but it is legally wrong. 

Since work done from Portugal, even for a US employer and US client is sourced in Portugal both in accordance with the double taxation treaty and in accordance with Portuguese domestic legislation, the NHR exemption does not apply as it only applies to foreign-sourced income.

The outcome is reverting to the default position - Portugal has the first right of taxation. 

S-Corp employment income should therefore be reported to the tax authorities in Portugal as Portuguese-sourced income and tax should be paid in Portugal first, claiming a refund on the US tax return, leading to a cash-flow problem. 

However, the problems do not end there. Employment income in Portugal is also subject to social security contributions in Portugal. Social security contributions in Portugal are paid BOTH by the employee AND by the employer. 

Therefore, employees in Portugal should be income tax and social security and their S-Corp employers should technically register with the Portuguese authorities and pay employers' social security. 

The combined effect of doing things "by the book" would be a tax rate of the salary portion of approximately 54% under the NHR regime with no social security cap.

The distributions

Distributions from an S-Corp that is genuinely a US entity would likely follow the rationale set out in processo 2360/2016 (covered here in relation to LLCs) and will be considered foreign-sourced capital income that is exempt from tax in Portugal under the NHR regime. 

However, the risks of partnership LLCs apply to this income in an equivalent manner. Particularly, if the S-Corp is managed from Portugal, it could be considered a tax resident in Portugal and thus not benefiting from the exemption.

When would S-Corps be a good structure?

When an S-Corp is very profitable, e.g. can legitimately pay a relatively small salary and relatively high distributions, it can be a better structure than a standard LLC. 

In such a specific scenario, the combined benefits on the US and the fact that it is slightly less likely that its status as a company will be questioned in Portugal, can give the S-Corp the edge.

However, these are rare occasions.

Bottom line

We believe that S-Corps are a ticking time bomb. 

There are many people not following the correct treatment who are under enormous risk of future audits in Portugal going 4 years backwards.

for those who have any flexibility, we generally do not favour S-Corps and recommend to sacrifice the social security benefits in exchange for a much more straight forward structure.

The day has arrived and our much anticipated tax calculator for expats is finally up and running. Our tax calculator is the first product to estimate taxes for expats under the NHR scheme. There is nothing quite like it.

But estimating taxes is not enough. Eventually, a tax return need to be filed and at Fresh we designed the best-in-class tax return filing service, designed around our calculator.

Early on in our journey, we consulted our clients and the expat community and a large majority told us that they would not feel comfortable self-filing their taxes. Further conversations have made it clear that nearly everyone filing their taxes in Portugal would want to consult a tax lawyer before doing so. We therefore made it a standard part of our service. 

Our tax filing package (500 Euros)

Our most common tax return and is meant for people with income streams that include income from work, profits and investments. 

Once you book our service, we will ask you to provide us your income information and personal details and will book a consultation with a tax attorney to discuss it. 

This will be followed by filing and reporting the tax return.

Our standard packages do not include responding to queries from the tax authorities, arguing with them or taking them to court.  

Fresh Membership  (125 Euros a month)

For people who have complex income, or people who need regular access to tax services, including people who are self-employed in Portugal and need to file VAT and social security reports, we designed a membership package that includes the tax return but also ongoing consultancy. 

Next steps

The next step would be to book a package with us. If you are not sure about which package you need, do not worry, you can change it later. 

One of the most important tools in the toolbox of the tax advisor is identifying income from intellectual property. Tax planning that takes advantage of intellectual property is very common at big corporate level, but unfortunately, rarely utilised when it comes to individual taxpayers due to the niche expertise needed in both tax and intellectual property. 

The two most important principles of taxation is tax residency and the source of the income. The NHR in Portugal exempts most types of foreign sourced income. This leads to a great deal of planning that focuses on using non Portuguese companies and taking dividends out of these companies as an alternative to incorporating in Portugal.

Such structures have risks that need to be mitigated as part of planning. These risks have to do with both the residency of the company and the sourcing of the income.

Companies that are managed from Portugal could be considered residents in Portugal. 

Income generated from work in Portugal could be considered Portuguese-sourced. 

Whilst foreign companies remain one of the most important pillars of tax planning, foreign-based structures that are not based on a genuine trade outside of Portugal require a high level of risk mitigation.

Intellectual property, however, can give rise to royalty income. Royalty income falls under the NHR and will not be taxed in Portugal if it is sourced in the other country and can be taxed in the other country. The vast majority of the double taxation treaties that Portugal is a party to provides for possible (very low) taxation of royalties so foreign royalties are almost always exempt from taxation in Portugal. 

However, the truly great benefit of royalties is that the typical clause in the double taxation treaty sets out that the location of the payer has preference in determining where the income was source. This is in sharp contrast to income from work, which is sourced where the work is physically done.

The outcome is that if someone living overseas pays a person to use their intellectual property, the income is genuinely foreign sourced and issues of sourcing and residency should not arise.

It is very common in the course of trade that businesses own intellectual property - this could be brands, websites, copyrighted materials, software etc. However, small businesses tend to ignore the existence of such intellectual property rather than charge for using it. It is often the case that income that is classified as self-employment or employment income is actually wrongly classified and in fact, some of the income relates to intellectual property owned by the taxpayer. Identifying such intellectual property and assigning an appropriate value to it can be extremely powerful and open up exciting tax planning opportunities.

A lot of confusion arises from the definition of "Foreign sourced income" and "Portuguese-sourced income". 

For our readers' benefit, the view of the Portuguese authorities of what constitutes Portuguese sourced income is defined in Article 18(1) of the IRS code which is brought hereby fully, followed by a machine translation to English.

It should be noted that the definition in Portuguese law of Portuguese sourced income is at times at odds with the double taxation treaty that Portugal is part of. In such an event, it is expected that the authorities will respect the double taxation treaty.

In Portuguese:

In English:

Article 18.
Income obtained in Portuguese territory

1 - The following are considered to be obtained in Portuguese territory:

a) Income from dependent work [employment - Fresh comment] arising from activities carried out there [in Portugal - Fresh comment], or when such income is owed by entities that have their residence, head office, effective management or permanent establishment to which the payment [in Portugal - Fresh comment];

b) Remunerations of members of statutory bodies of legal persons and other entities, owed by entities that have their residence, registered office, effective management or permanent establishment to which the payment must be attributed; [this relates for example to payment to directors of Portuguese companies, even if NOT located in Portuguese territory - Fresh comment]

c) Income from work provided on board ships and aircraft, provided that their beneficiaries are at the service of an entity with residence, head office or effective management in that territory [Portugal - Fresh comment];

d) Income from intellectual or industrial property, from the provision of information regarding experience acquired in the commercial, industrial or scientific sector, or from the use or concession of the use of agricultural, commercial or scientific equipment, when they do not constitute property income, as well as as the derivatives of technical assistance, owed by entities that have their residence, headquarters, effective management or permanent establishment [In Portugal - Fresh comment] to which the payment must be attributed;

e) Income from business and professional activities attributable to a permanent establishment located therein [in Portugal - Fresh comment];

f) Income that is not provided for in the previous paragraph arising from professional activities and other services, including those of a scientific, artistic, technical and intermediation nature in the celebration of any contracts, carried out or used in Portuguese territory, with the exception of those relating to transport, telecommunications and financial activities, provided that they are owed by entities that have their residence, head office, effective management or permanent establishment to which the payment must be attributed;

g) Other income from investing capital owed by entities that have their residence, head office, effective management or permanent establishment to which the payment must be attributed;

h) Income from real estate located therein, including capital gains resulting from their transfer;

i) Capital gains resulting from the onerous transfer of shares representing the capital of entities with head office or effective management in Portuguese territory, including their redemption and amortization with capital reduction, as well as the value attributed to associates as a result of the sharing that, under the terms of article 81 of the IRC Code, is considered as a surplus value, or of other securities issued by entities that have their registered office or effective management there, or even of shares of capital or other securities when, not if these conditions are met, the payment of the respective income is attributable to a permanent establishment located in the same territory;

j) Capital gains resulting from the sale of the assets referred to in subparagraph c) of paragraph 1 of article 10, when the registration has been made or an equivalent formality has been carried out;

l) Pensions owed by an entity that has its residence, head office, effective management or permanent establishment to which the payment must be attributed;

m) Income from isolated acts performed therein;

n) Equity increases not included in the preceding paragraphs, when the assets, rights or legal situations to which they relate are situated, including, in particular, income from operations relating to derivative financial instruments, due or paid by entities that have their residence there , head office, effective management or permanent establishment to which the payment must be attributed;

o) Income derived from the exercise, in Portuguese territory, of the activity of entertainment professionals or sportsmen, even if attributed to a different person.p) Capital gains resulting from the onerous transfer of shares of capital or similar rights in companies or other entities, not covered by subparagraph i), when, at any time during the previous 365 days, the value of those shares of capital or rights results, directly or indirectly, in more than 50%, of immovable property or rights in rem over immovable property located in Portuguese territory, with the exception of immovable property allocated to an agricultural, industrial or commercial activity that does not consist of the purchase and sale of real estate. ( Added by Law No. 114/2017, of December 29)

q) Capital gains resulting from the onerous assignment of rights, of any nature, over a fiduciary structure, provided that, at any time during the 365 days prior to the transfer, the value of this structure results, directly or indirectly, in more than 50 % of immovable property or rights in rem over immovable property located in Portuguese territory. (Writing of Law No. 12/2022, of June 27 )
2 - A permanent establishment is any fixed installation or permanent representation through which one of the activities provided for in article 3 is carried out
3
- The provisions of paragraphs 4 and 5 of article 4 are applicable to the IRS and in paragraphs 2 to 11 of article 5, both of the IRC Code, with the necessary adaptations. (Writing of Law No. 75-B/2020, of December 31)

Fresh Portugal, a Portuguese desk of an international law group specialising in taxation, has announced registration for early access to FreshReturns, a tax return product designed specifically for expats benefiting from the NHR scheme.

The service, now open for early access for a limited time, is the first of its kind and is meant to resolve the many confusions and inaccurate tax reporting in the expat community.

Everyone living in Portugal with foreign income needs to file a tax return at the end of each tax year in Portugal.

Due to the complexity of the NHR scheme, filing a correct tax return in Portugal is almost an impossible mission. Expats with income sources such as LLCs, limited companies or S-Corps often find themselves puzzled in front of the Portuguese annual statement wondering what to do and high streets accountants without deep understanding of corresponding systems are often unable to offer reliable help.

Fresh Portugal already helps hundreds of expats, primarily those on high income, to plan their taxation. To support all expats, Fresh has already Joana the tax bot, an automated chatbot that provides basic advice to expat on taxation in Portugal. With the launch of FreshReturns, Fresh Portugal is completing its offering to all expats in Portugal.

Portugal offers a lot of wonderful things - great weather, beaches, food, safety, golf, friendly culture, relaxed pace of life. Portugal has always been high on the list of choices of places to retire to, but in recent years, Portugal also became one of the trendiest place for many groups - digital nomads, remote workers, surfers, young families. Most recently, it was discovered by Americans who are moving to Portugal in masses.

Despite all of Portugal's many virtues, Portugal probably would not have had such success attracting expats if not for taxes. Two major issues woo money-savvy expats to come to Portugal - no tax on crypto gains, which is likely to change soon, and the NHR program. 

A google search of the NHR program will surface many articles. There is no shortage of information but even savvy readers will end up more confused after reading some of it. The information on the NHR system is inconsistent and often wrong. 

Things do not get better when seeking advice. Expats trying to understand how taxation truly works are often puzzled by the fact that different tax advisor tell them different things and some who have ventures into the tax authority offices to try and ask the officials were equally confused - even the tax authorities don't know how NHR really works.

So is Portugal a low tax country for expats? Yes, no and definitely maybe.

Why Yes?

The NHR framework differentiates between different streams of income. Generally, most types of foreign-sourced income are exempt from taxation so long as the income comes from a "legit" country (not black-listed) and so long as it is exposed to potential taxation in that country (even if no tax is charged).

Many people who come to Portugal own foreign companies or create them before coming to Portugal. The fact that "foreign-sourced" income is usually exempt from taxation in Portugal allows them to claim the exemption on their tax return. Theoretically, the tax authorities could challenge many of these tax returns but in reality, they do not. Most tax returns are accepted and so, income from foreign companies (including US LLCs) flows to their owners without taxation in Portugal. This could lead and often leads to a very tax-friendly environment.

Why not? 

Whilst some of the income that expats are generating and are paying themselves from companies is indeed genuine passive income, much of it is not and the foreign companies are in fact a channel to pay people money that they earned from work. Such income is not exempt from taxation under the NHR. 

There are multiple ways that the tax authorities could use to attack company structures, leading to taxation that is not particularly low. The fact that the Portuguese authorities are not conducting many audits and are not aggressively using the options afforded to them by the law is not a fact of nature. There is little enforcement now but this could change tomorrow, leading to huge potential exposure.

Definitely maybe

Perhaps the best way to answer the question above is by highlighting the uncertainty. Portugal's tax regime is complex, includes multiple grey areas, is applied inconsistently and is rarely enforced. Even the very few decisions implementing the NHR law are not binding on future courts or tax inspectors so "anything can happen" is the most correct answer. 

Navigating uncertainty

People who come from jurisdictions with relatively clear rules and binary answers find it rather overwhelming to try to navigate the uncertainty. 

Unfortunately, the local community of accountants and tax lawyers are completely overwhelmed by the amount, complexity and intensity of the new expat migration. The Portuguese legal and financial services industry is still mostly made primarily of generalists. Neighbourhood lawyers who deal with property, commercial matters and occasionally a tax issue are suddenly asked to understand what is an LLC or an S-Corp and suggest how it would be taxed. Accountants who have dealt primarily with domestic clients discover an influx of clients just because they can communicate well in English, but their questions are complex and nuanced and are truly, hard work.

The outcome is that many expats end up never receiving good advice, never having clarity and essentially, move to Portugal and assume considerable tax risks. 

----

The author is an international tax lawyer who advises expats on their move to Portugal. He is the creator of the Joana tax bot and offers a dedicated tax filing service designed specifically for expats.

Many people who are used to operating as employees or self-employed are sometimes worried about trading via a company, such as an LLC. 

In fact, trading as a company is really easy and has the benefits of a more organised way to conduct business.

Here are the tools we recommend for trading as a company:

Xero - we recommend creating an account with Xero (www.xero.com). Xero is a modern, award-winning accounting software. 

After creating an account, you could create invoices and send them to your clients.

Wise - Wise (previously Transferwise) offers bank-like and currency conversion services. Wise could be linked to Xero as a bank account (each currency is a separate account).

Dext - Dext simplifies and automates the process of converting paper receipts into bills that can later easily be reported as expenses. Dext can be linked to Xero as well.

That's it! This is all you need to run a successful business via a company!

Since Portugal does not tax dividend income and potentially other distributions under the NHR regime so long as it could be taxed in the other country (which is normally the case), it has been attractive for people benefitting from this regime to trade via foreign companies and extract distributions, as an alternative to incurring employment or self-employment income which is both taxed in Portugal and is subject to the list of high value professions. 

The risks of this approach have been the subject of much discussion. Essentially, a foreign company that incurs profits in Portugal could be taxed for these profits and this outcome can be achieved in a number of ways, including treating the company as Portuguese tax resident or concluding that the company has a permanent establishment in Portugal. 

It is generally true that the more substance the company has overseas, the lower these risks. One strategy which has been common in the past is appointing nominee directors overseas. These are people who act under direction of the owners without any true authority. In our mind,  appointing a person who knows nothing about the company can do more damage than good. In a thorough tax inspection, it is all but admission that the incorporation of the company is meant for tax reduction. 

In our mind, the best structures are real one. A company that includes true partners in other jurisdiction with real authority to make important decisions and with economic sense and history is the way to go.

Naturally, not all companies have foreign managers. 

At Fresh, we offer a management service through a separate company (FreshOps Limited) created for this purpose to support companies wishing to introduce a true, substantive, international element to their trade and improve their operations and compliance. 

Some people attempt to create an image of management overseas by "naming someone who lives in another country" as a manager, often a family member or a nominee lawyer who knows nothing about the company. In our view, trying to present an artificial and false image of management that carries no true substance will not survive scrutiny and could in fact make things worse. 

It is possible that a company will be managed from another country, but it needs to be a real structure. 

We call our management service Fresh Ops. We created a management consultancy that is run by one of our members in the UK and brings together some of the brightest minds, executives with decades of experience running companies, to create a "board for hire" for your company. 

FreshOps is given management powers and it is  responsible to identify people with the requisite experience in supporting your company, assemble regular meetings of the board of directors (or managers in the event of LLCs), identify the important decisions that need to be made in the company's life, vote on them and implement them. Board (or management) meetings are normally convened physically in our offices in the UK 4 times a year.

We also accept responsibility to negotiate and sign contracts on behalf of the company (one would note that managers retaining a right to sign contracts risk being seen as a permanent establishment). 

During board meetings, facts are presented, a discussion is had and decisions are made. 

Board meetings are documented and we produce minutes showing proper compliance and management. 

Whilst the shareholders/owners remain in ultimate control of the company, our involvement in a company is made to improve its management style, introduce proper decision-making mechanisms and improve the outcomes of company contracts. 

Although board meetings are minuted, the discussions between us and the company owners are confidential.

We do not believe in management without substance and therefore, the service offered by Fresh Ops is not a cheap service and we can only accept so many companies. It is also not designed just for people who want to shift tax residency. It is designed for people who want to improve their companies by introducing robust management and decision making strucutures. 

At the same time, we believe that Fresh Ops is defensible to any tax authority that considers place of effective management.

US LLCs are one of the most common and attractive tax planning structures in Portugal and particularly for benefiting from the NHR scheme. 

The extensive use of US LLCs as a tax planning vehicle in Portugal can be traced back to a binding ruling that was requested by a taxpayer quite some time ago (processo 2360/2016).

Case 2360/2016

It is important to remember that such a ruling is limited to the facts of the matter and that it can change in the future. However, the ruling provided important information on the manner in which the Portuguese tax authorities view US LLCs.

In that ruling, the relevant LLC was taxed as a partnership and it was a finding of fact that it was not managed or directed from Portugal.

The Portuguese tax authorities considered the fact that an LLC is a transparent entity in the United States and that income passes to the members but arrived in the conclusion that only companies that are professional societies or companies for simple administration of assets could be tax transparent in Portugal, as these are the type of companies that can be transparent under Portuguese law.

It follows that for companies that are not one of the above structures (not professional companies or holding companies), an LLC will not be considered transparent. 

Flowing from there, the income from the LLC was classified as "other income" that both countries have the right to tax and the taxpayer was charged at a 28% tax. Importantly, the taxpayer in that case have not benefit from the NHR scheme. Had the NHR scheme been applied, the outcome of the fact that both countries have the right to tax the income would have been zero tax in Portugal.

This case led to an avalanche of tax planning using US LLCs, taking advantage of the different tax treatment (transparent/pass-through in the US, opaque in Portugal) and taking full advantage of the Portuguese NHR regime.

It is important to remember, however, that the case has been limited to the specific circumstances and also carefully read the clues from this case. It is our view that LLCs that are used as a vehicle for income from work done in Portugal could be taxed in Portugal under a number of doctrines, but the risk profile of different cases is on a very wide spectrum.

How can Portugal tax LLC income?

Risk 1 - interpretation changing

One option is that the tax authorities will change their interpretation. "hard cases make bad law" and in the relevant case the taxpayer did not have NHR. It is possible that the authorities will change their view. We believe that it is less likely - a conclusion of transparency is not well-supported in Portuguese law. The finding that an LLC is not a transparent entity is a fairly common finding and the same finding has been reached in a number of other countries, including the UK. 

Risk 2 - different treatment for single person disregarded entities

The relevant case dealt with a partnership. Many LLCs are single-person pass-through entities. Whilst a single person pass-through entity is still an LLC, it is not required to have an EIN (employer identification number) and is not required to file a separate tax return. These factors could weigh against considering a single-person LLC as a company in a similar manner as a partnership was considered to be a company. However, hypothetically a single-person LLC that is not member-managed is more likely to be deemed a company than a member-managed LLC. 

Risk 3 - the LLC is a resident in Portugal

In the relevant case, there was a finding of fact that the company was neither managed not directed from Portugal. Accordingly, if a company is managed from Portugal it would be deemed a tax resident in Portugal. 

There is no single definition of the "place of effective management" but some guidance is offered in paragraph 24 in the Commentary on Article 4 which was included in the 2000 Update to the Model:

“24. …The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the enterprise’s business are in substance made. The place of effective management will ordinarily be where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the enterprise as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An enterprise may have more than one place of management, but it can have only one place of effective management at any one time.” 

Different factors that have been taken by courts over the world have been: 

− Place of incorporation.
− Place of residence of shareholders and directors.
− Where the business operations take place.
− Where financial dealings of the company occurred; and
− Where the seal and minute books of the company were kept.

Risk 4 - permanent establishment

Even if effective management of the company is not in Portugal, the income associated with a permanent establishment could be taxed in Portugal. Permanent establishment is often created when there is a permanent physical office in Portugal (an office will typically be seen as permanent if it exists for more than 6 months) or where a director with the ability to bind the company in contracts resides in Portuguese territory.

Risk 5 - Portuguese-sourced income

Even if a company is managed from outside of Portugal and does not have a permanent establishment in Portugal, there is still a path to taxation. A country can still tax income sourced in its territory. However, the burden of proof is on the tax authorities.

Defending LLCs from Portuguese taxation

As can be seen above, there are multiple ways for tax authorities to try and tax income. In practice, authorities would rarely carry out an FBI-style enquiry and would normally focus on relatively "low hanging fruit". 

For our clients who are considering LLC structures, we often offer the following advice:

- Partnerships are more defensible than single-person-disregarded entities.

- An overseas management reduces the risk dramatically. Management should be documented properly.

- An office in Portugal or a manager in Portugal with the right to bind the company in contracts increases the chances of a permanent establishment.

Many people trade from LLCs and are oblivious to the risks and to the ways to mitigate them. So far, the Portuguese tax authorities have not been cracking down on LLCs but we always prefer to be ready because things are good until they are not. 

It is important to remember that when a structure is created purely for tax optimisation, it often looks just like what it is, whilst genuine partnerships between people in different countries are much easier to defend. We therefore always advise on trying to work with real relationships.

To get a NIF, you need the following documents (in a Latin language or with a certified translation):

1. A photocopy of a valid passport. 

2. Proof of residential address, with the name on the address matching the name on the passport. This can be:

 (a) A valid driving license (both sides). For US citizens - issued within the last 12 months. 

 (b) First page of a bank statement, dated within the last 3 months. 

 (c) Utility bill from the last 3 months.

 3. Power of attorney.

We are often asked by people we advise who are under the NHR scheme whether capital gains would be taxable in Portugal.

Capital gains on property 

When the capital gains are a result of selling immovable property (like homes or commercial property), the answer is often fairly straight-forward. The double taxation treaties that Portugal is party to normally state clearly that capital gains from a sale of property are taxable in the country where the property is based. Therefore normally only people holding property in a country that does not have a double taxation treaty with Portugal should be worried about taxation from property gains. Such people are almost always better off selling their property before coming to Portugal or holding on to it as long as they are in Portugal. 

Capital gains on securities (such as shares) 

The question becomes more complex when it comes to capital gains from securities or other assets. The NHR law clearly includes capital gains as a category that could benefit from NHR (category G). The rule that is states in the law is that if the other country may tax the gain, Portugal will not tax it. To know whether a country may or may not tax the gain, we need to look at the relevant tax treaty between Portugal and the other country. 

There are three countries that we are aware of that currently may tax capital gains from securities: 

Brazil - Brazil presents an interesting case because the Brazilian government informed the Portuguese government that the DTT between the countries is terminated. However, it is unclear whether the Portuguese government treats the agreement as terminated and so far as it is in force from the Portuguese side, it awards Brazil the right to tax capital gains. 

United States - the United States has a unique tax policy of taxing citizens wherever they live and all the tax agreements that the US is party to allows the US government to tax its own citizens for all types of gain, including capital gains. This is called “the savings clause”. 

Canada - Canada has a specific provision (Article 13.6 of the double taxation treaty) allowing it to tax its citizens or people who were residents for at least 15 years in Canada prior to moving to Portugal, for capital gains occurring up to 5 years after the move. There may be other agreements allowing taxation of capital gains so it’s always best to check the specific agreement, but normally double taxation treaties set out that taxation of capital gains occurs in the country of residency. In a comment to this article, a Canadian CPA noted that Canada does not in fact apply such tax, but the exemption in Portugal should nevertheless trigger.

The law is therefore clear that there are circumstances where capital gains will not be taxed in Portugal, whilst in most circumstances it will be taxed. 

Declaring capital gains on tax returns 

Sadly, however, whoever created the online tax return form “didn’t get the memo”. Even if the taxpayer rightfully claims an exemption from capital gains, the automated calculation will not acknowledge it and will produce a tax assessment that includes full taxation on the gains. This leaves the taxpayer to choose between three bad choices: (1) pay the tax even through it isn’t due (2) choose different category and submit a wrong return (3) submit a correct return and dispute the wrong outcome. In one case, a US citizen taxpayer chose option 3 and successfully won in court, but that had not changed the form. 

Tax planning 

Whether tax is due or not, considerable capital gains offer a wide range of planning opportunities with the most common structure being incurring capital gains within an entity.