Americans Living in Portugal Face a Financial Puzzle

Americans living in Portugal often encounter complex questions as they plan for long-term life abroad. From tax obligations in both countries to dual-citizenship considerations, to currency exchange considerations and banking logistics, there are many factors Americans moving to Portugal must consider to protect their financial well-being. (1)

In the following article, we explore the financial hurdles in-depth and provide insights on efficient cross-border money management for Americans living in Portugal.

For any outstanding questions related to financial planning as an American in Portugal, we invite you to schedule directly with our fiduciary advisor based in the Algarve, Ricardo.

Why are Americans moving to Portugal?

Historically, Portugal has been more popular with British expats and vacationers compared with Americans. In recent years, however, there’s been an increase in Americans flocking to Portugal. (2) The reasons why aren’t particularly complex. The country:

is beautiful, offering a warm and temperate climate (if a bit wet in the northern areas)
Has many potential immigration pathways (e.g., for retirement, remote work, and business ventures)
Is generally considered to be quite friendly to foreigners
Has an affordable housing market relative to the U.S. (It is worth noting that this is an extremely sensitive subject for the Portuguese, particularly those who have experienced housing inflation firsthand in popular expat cities such as Lisbon and Porto.)

Other benefits of living in Portugal

Due to Portugal’s popularity as a vacation destination within Europe, Americans moving to Portugal don’t typically struggle to meet fellow expats and form connections. Portugal accommodates retirees and business-minded expats, with the former gravitating to the seaside and rugged rural areas and the latter contributing to Lisbon’s developing reputation as a remote work-friendly environment and technology and business hub within Europe. (3)

Financial considerations of living in Portugal as an American

In this section, we discuss Portugal's tax system, how living abroad affects Social Security distributions, how being a Portuguese tax resident implicates your investment strategy and other financial hurdles.

Portugal taxes for U.S. expats

Taxes in Portugal are run by the Autoridade Tributária e Aduaneira (AT) – think of them as the IRS in Portugal. Portugal’s tax system differs significantly from the U.S., although the tax year does line up with the US’ running from January 1 to December 31, with returns filed in the spring.

A tax treaty exists between the U.S. and Portugal, designed to prevent double taxation on income earned in both countries. (4) However, U.S. expats must still file U.S. taxes annually and claim the correct credits or exemptions in order to reduce or exonerate their U.S. tax liability. In many cases, a U.S. tax expert specializing in filing expat returns is the most efficient way to ensure filing compliance and tax efficiency.

Does Portugal tax U.S. Social Security benefits?

Yes, Portugal does tax U.S. Social Security benefits for American expats living in the country.

However, under the U.S.-Portugal tax treaty, U.S. Social Security benefits are only taxable in Portugal, meaning that while they are not taxed by the U.S., they are subject to Portuguese income tax.

These benefits are generally taxed at Portugal's progressive income tax rates. Expats should consult with a tax professional to understand their specific obligations under the treaty and optimize their tax strategy.

Dual citizenship: U.S. and Portugal Taxes

Americans living in Portugal who apply for and receive Portuguese citizenship become dual U.S.-Portuguese citizens.

This change of status does not absolve the dual citizen from continuing to file U.S. tax returns; that can only be done by renouncing U.S. citizenship. (It’s worth noting that this process involves filing up-to-date returns for the past three years.) Dual citizenship may change the calculus of how you file, but it will not change your obligation to do so in both countries if you qualify as a tax resident in Portugal.

Does Portugal have a wealth tax?

Portugal does not have a specific national wealth tax. However, there are related taxes that can impact high-net-worth individuals:

IMI (Imposto Municipal sobre Imóveis): This is a municipal property tax on real estate, which varies based on the property's value and location. (5)
AIMI (Adicional ao IMI): This is an additional property tax targeting high-value real estate holdings. It applies to individuals and companies with property holdings exceeding a certain threshold. (6)
Inheritance and Gift Tax: Portugal does not have a direct inheritance or gift tax but does levy a Stamp Duty (Imposto do Selo) on these transfers. The amount varies depending on various factors including the relationship between the giver and the beneficiary, but is typically around 10 percent of the value of the inheritance or gift.

Investing as a U.S. citizen in Portugal is complicated

Investing as a U.S. citizen in Portugal can be quite complex due to U.S. tax regulations, particularly for high-net-worth individuals and families. One of the main challenges involves Passive Foreign Investment Companies (PFICs), which include many non-U.S. mutual funds and ETFs. (7)

The U.S. IRS imposes strict tax and reporting requirements on PFICs, often leading to higher taxes and more complex filing obligations. For U.S. expats, investing in Portuguese or European mutual funds can trigger these burdensome PFIC rules. As a result, we encourage our clients to maintain their U.S.-based investments rather than opting for local financial products, despite living abroad.

High net worth investors should be wary of reporting tripwires

U.S. expats must comply with strict IRS reporting requirements under the Controlled Foreign Corporation (CFC) rules. A CFC is a foreign corporation where more than 50% of the shares are owned by U.S. shareholders. (8) Income from a CFC may be subject to U.S. taxation, even if it's not distributed, under Subpart F rules and the Global Intangible Low-Taxed Income (GILTI) provisions.

Additionally, U.S. expats must file IRS Form 5471, an informational return that reports ownership in foreign corporations, a complex and time-consuming process. (9) Failure to report properly can lead to severe penalties. It’s critical to consult with an expat tax advisor before investing or holding ownership in a foreign company.

Living in Portugal long-term requires careful retirement and estate planning

For Americans living in Portugal long-term, careful retirement and estate planning is essential. Complex issues such as gifting, estate planning, inheritance rules, and potential wealth taxes require thorough consideration.

For example, trusts, often used in U.S. estate planning, may be treated differently in Portugal. Additionally, inheriting from abroad can trigger specific tax obligations in Portugal, making cross-border wealth management more challenging.

To learn more about the particularities you should be aware of when living in Portugal long-term as an American,

today.

Financial advice in Portugal for Americans - FAQ

Portugal vs. Spain as a tax haven for U.S. expats?

In 2024, we wouldn’t classify either Portugal or Spain as a tax haven for U.S. expats per se, particularly in light of the long-term planning complexities associated with establishing tax residency in either country. Broadly speaking, however, Spain may be a tax-efficient fit for certain high-income earners, while Portugal is likely preferable of the two when it comes to retiring as a high net-worth individual. For a personalized recommendation on which country would be the most tax-efficient fit for you, don’t hesitate to reach out to our team.

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Disclaimer

This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.