Why Americans Should Reconsider Moving to Portugal for Tax Benefits

Welcome back everyone. Michael here with Offshore Citizen. In this blog post, we’ll discuss why Portugal might not be the best destination for Americans seeking tax benefits, despite its increasing popularity as an expat destination. We’ll dive into the tax implications for Americans living in Portugal and suggest alternative destinations for those seeking tax advantages.

The Attraction of Portugal

Portugal has become one of the most popular places for expats, and there are plenty of reasons why it’s an attractive destination. The country offers a great lifestyle, beautiful weather, and excellent programs such as the Golden Visa. However, from a tax perspective, Portugal might not be the best fit for Americans.

The Tax Perspective: Mismatch of Benefits

One of the main issues for Americans considering Portugal is the mismatch between the tax benefits offered by the United States and Portugal. Let’s look at the advantages for Americans moving abroad:

1. Foreign Earned Income Exclusion (FEIE): This allows Americans to earn up to $110,000 tax-free per year, but only for earned income. Investment or unearned income is not applicable.
2. Setting up a foreign subsidiary: Easier to do when living abroad, this can potentially benefit from a lower guilty tax rate than the normal tax rate.

The problem arises when we examine Portugal’s tax incentives under the Non-Habitual Resident (NHR) regime:

1. 20% tax on earned income: With additional social contributions, the tax rate becomes significantly higher.
2. Tax-free dividends: Only applicable for dividends coming from non-blacklisted countries.
3. No tax on royalties: Can be beneficial but doesn’t overlap with the FEIE.
4. Lower taxes on pensions: 10% tax rate, which is generally beneficial.

The Problems for Americans in Portugal

For Americans moving to Portugal, there’s little to no tax advantage when it comes to earned income. With the 20% tax rate under the NHR, the FEIE becomes redundant, as Americans will have to pay the higher of the two taxes.

Furthermore, tax-free dividends in Portugal will still be taxed by the United States. Similarly, crypto, which is not taxed under certain circumstances in Portugal, will still be taxed by the U.S.

If an American in Portugal sets up a company in Malta (a common choice), they may benefit from a 5% tax rate. However, if it’s considered a controlled foreign company from the U.S. standpoint, an additional 10.5% tax will apply, rendering the tax advantage minimal.

Better Alternatives for Americans

From a tax perspective, Americans should consider moving to places with no tax on earned income to maximize the benefits of the FEIE. Although Portugal offers a great lifestyle and residency programs like the Golden Visa, the tax advantages for Americans are limited.

For those seeking tax benefits, there are several alternative destinations that might be a better fit. We’ve discussed these in other videos and may cover them again in the future. If you have questions or comments, please share them below, and don’t forget to follow me on Twitter at Michael Rosmer for more insights.

Weighing the Pros and Cons

While Portugal may not offer the most attractive tax incentives for Americans, it’s essential to weigh the pros and cons before making a decision. The lifestyle, culture, and residency programs, such as the Golden Visa, are worth considering when evaluating if Portugal is the right fit for you.

Pros of Living in Portugal

1. Golden Visa Program: This program offers an opportunity to gain residency and eventually citizenship in Portugal by investing in the country. The Golden Visa is one of the best programs in the EU and offers numerous advantages, including the potential for EU citizenship.
2. Lifestyle: Many expats find that the quality of life in Portugal is high, with excellent food, beautiful beaches, and a vibrant culture. The country also boasts a thriving expat community, which can make the transition to living abroad more manageable.
3. Climate: Portugal’s climate is generally mild and pleasant, with warm summers and mild winters, making it an attractive destination for those looking to escape harsher weather conditions.

Cons of Living in Portugal for Americans

1. Limited Tax Benefits: As discussed earlier, the tax incentives for Americans in Portugal may not be as advantageous as those in other countries. This could be a significant factor for those specifically looking to reduce their tax burden.
2. Language Barrier: While English is widely spoken in Portugal, learning Portuguese may be necessary to fully integrate into the local community and navigate day-to-day life effectively.
3. Bureaucracy: Portugal has a reputation for having slow and sometimes inefficient bureaucratic processes. This can make dealing with government offices and paperwork challenging for expats.

Conclusion

Portugal is undoubtedly an attractive destination for many expats, offering a high quality of life and excellent residency programs. However, for Americans specifically seeking tax benefits, it may not be the best choice. It’s crucial to weigh the pros and cons and consider other destinations that may provide better tax incentives alongside an appealing lifestyle.