The popularity of Golden Visa (“GV”) investments by U.S. citizens has skyrocketed in the last few years, fueled by the pandemic, remote work and recently by political division.
Just a few years ago, U.S. citizens were a small minority amongst investors, with investors from China, Turkey, Russia and other countries whose passports are limited in the mobility that they offer. The rise of U.S. investment has been welcomed by Portugal and other countries offering popular programs, but investors often don’t realize that the U.S. is a minefield of tax and regulation and the GV market has not yet matured to the level that all products are fully suitable to U.S. investors, despite promoters strongly arguing otherwise.
In this article, we will cover the most important things that U.S. investors should consider when contemplating a Golden Visa investment in Portugal and in general.
What U.S. investors should be thinking of when investing in a Golden Visa fund?
The most important part of investing in a Golden Visa fund in Portugal isunderstanding that Portugal is a different country with a different culture that does business in a different way.
This may sound obvious, but for the vast majority of U.S. investors, it is not. It is, in fact, very different.
In the U.S., most fiduciaries (fund managers, lawyers) are terrified of regulatory scrutiny. In Portugal, the fiduciary duties are very similar on paper, but the approach on the ground is a lot more relaxed.
In the U.S., investors expect competent advice and predictable bureaucratic timelines. In Portugal, there are a lot of grey area, with advice regularly being inconclusive and inconsistent and timelines constantly shifting.
In the U.S., investors are more litigious and will expect the legal system to intervene at relatively early stages. In Portugal, the court is often seen as a last resort and courts do not rush to intervene.
In the U.S., the society is rule-based and law-based. In Portugal, relationships are as important as rules.
We do not wish to deter anyone from making a GV investment. In fact, we believe that the GV program is so attractive that it is a no-brainer at a certain level of wealth. Most funds will provide a healthy return and residency and eventually citizenship in the EU are assets for generations.
However, investors considering this path must first understand that they are going to enter into a journey in a different culture. They will need to leave their typical expectations behind. Choosing lawyer, banks, and fund managers with real experience handling U.S. investors is not a luxury; it is a necessity.
Golden Visa routes – choosing a fund
General considerations in choosing a fund
There are a number of routes to Golden Visa in Portugal, including the creation of a business generating 10 jobs or more, a cultural donation, funding an existing business and others.
In practice, investors are overwhelmingly choosing the funds route – an investment of 500,000 Euros in a qualifying fund. The fund must invest at least 60% of its invested capital in Portugal. It cannot invest directly or indirectly in real estate (this option has been removed a few years ago).
Investors would normally consider:
- Investment thesis- there are many funds to choose from offering different investment profiles – from typical securities to old cars and alcohol and most recently – Bitcoin.
- Management fees and setup feesare normally considerably higher than in the U.S., since the funds have a compliance burden to deal with the Golden Visa program requirements.
- Introducer fees –nearly all Golden Visa funds pay introducer fees to promoters. This obviously hurts returns. Normally, 5% introducer fees (of the overall investment) are on the lower end and 10% are on the higher end. Many investors approach funds through promoters but don’t realize that the promoters collect significant introducer fees. Funds are required to disclose introducer fees but don’t always do.
Specific U.S. considerations in choosing a Golden Visa fund – banking, SEC, PFIC/QEF, Tax returns
I addition to these general considerations, U.S. investors should also consider U.S.-specific issues:
- Banking & Custodian accounts– the U.S. government requires reporting of all U.S.-owned bank account to be reported to the U.S. as a result, many European banks do not wish to work with U.S. citizens. Luckily, there are always exceptions and some banks, mostly specialist banks such as Bison Bank, accept U.S. clients. However, these banks are under pressure and compliance is heavy. The typical time frame for opening a bank account is a month.Some funds managers started offering custodian accountsthat are FATCA compliant. These remove the need for a bank account for the investors. The bank holds cash and later participation units in the fund for the investors, saving the time to open a bank account and considerable hassle on a yearly basis.
- SEC registration– funds in Portugal are generally exempt from U.S. SEC regulation, but they must go through a registration process with the SEC and inform the U.S. SEC of the exemption. Do not assume that funds are properly registered.
- PFIC Letters/ QEF Election– U.S. investors are generally discouraged from investing in foreign funds by the U.S. tax code. An investment that is primarily passive and is held by U.S. investment must be reported by the investors on an annual basis. Investors are normally facing a choice between two options – either report the gains when they are received by the fund and be taxed at thehighest rate under U.S. tax code, or make aQEF electionon the first year and pay tax in the normal progressive rate every year, whether profits have been distributed or not. U.S. investors are normally better off with a QEF election but if profits are not distributed, this could lead to a cashflow problem with closed funds. We normally advise U.S. investors to prioritize funds that distribute profits yearly to avoid the cashflow hit. Only very few funds do.
Importantly, to be able to benefit from the more beneficial PFIC treatment, investors must obtain a PFIC letter from the fund once a year that identifies the type of profits and can be submitted to the U.S. IRS. Many funds do not provide properly formatted PFIC letters.
NHR 2.0 (IFICI) Compliance
Some Golden Visa investors are investing for pure optionality and do not have any intentions of ever moving to Portugal. For those investors, tax benefits in Portugal are not important.
However, many Golden Visa investors either intend to move to Portugal within 2,3 or 5 years or at least see moving to Portugal as a plausible option.
For those investors, moving to Portugal and obtaining access to its new tax benefit scheme, NHR 2.0 (or as it is formally called – IFICI) is a game changer.
Portugal’s progressive tax rates can be higher than 50% with income tax and solidarity tax combined. However, NHR 2.0 fully exempts nearly all foreign sourced income from taxation (apart from retirement income and income from black-listed jurisdictions).
In the past, access to tax benefits has been automatic, but under the new program, an investor who moves to Portugal must meet a qualification criteria of contributing to the Portuguese real economy through a qualifying role.
Most Golden Visa funds have yet to understand the importance of providing a qualifying role for the purposes of achieving NHR 2.0 status, but such options do exist in the market, including in our own LXL Ventures.
Investing through retirement accounts (SDIRA)
A recent trend that has been promoted by multiple Portuguese Golden Visa funds is offering the opportunity to make a GV investment through a Self-Directed IRA (“SDIRA”). Self-Directed IRAs are retirement accounts holding pre-tax money that the investor controls and can direct the investment.
Since a GV investment should be made by the investor personally or by a fully owned Portuguese company, fund promoters mostly offer a complex structure whereby the SDIRA invests in a U.S. LLC that funds a Portuguese company that makes the GV investment. Some GV funds in Portugal are able to accept a direct SDIRA investment without creating this structure.
The appeal of making a GV investment through a pre-tax retirement account is almost impossible to resist. Most Americans have much of their net worth in their retirement accounts, with their liquidity outside of retirement accounts being limited. Investing through retirement accounts achieves the best of all worlds – uses money that has not yet suffered tax (and therefore less money), in accounts that do not need immediate liquidity. For many people, investing via a retirement account is the only viable option.
Unfortunately, U.S. law strictly prohibits self-dealing. Under [], investors are not allowed to use SDIRA money (or 401K or other retirement accounts) to make an investment that provides a “personal benefit”. Personal benefit is defined very broadly and is not restricted to financial benefit. Some fund promoters do not understand this prohibition whilst others suggest that it is not the Golden Visa investment but the later application for residency (that relies on the GV) that enables the benefit of residency.
Our view (and that of other U.S. tax professionals) on this matter is unfortunately unequivocal – a Golden Visa investment opens the door to residency and this is a personal benefit and in fact, the primary reason for the investment. We have no doubt that the U.S. regulator will see an investment from a retirement account as prohibited transaction and we are aware of CPAs refusing to submit tax returns referring to investments made this way without proper disclosure.
Many U.S. investors are perplexed by the fact that so many funds offer IRA investments and assume that if this option is offered, it must be legitimate, but this is precisely where the cultural difference leads to different behaviors. In Portugal, pushing the boundaries of the law is common behavior. In the U.S., people are usually more careful.
The legal outcome of a prohibited transaction can be considering the entire IRA as distributed with up to 100% excise tax. A tax that can potentially cost millions.
We therefore strongly advise avoiding funds and fund managers that offer this option unless they are able to produce a private ruling letter from the U.S. government supporting the structure they propose.
Processing time and backlog
The Golden Visa program has been running smoothly in its first few years.
However, things took a negative turn during the pandemic. At the time, the loss of many hours of work by SEF (the immigration service as it was called at the time), combined with the need to process hundreds of thousands of procedures by illegal migrants, handled by the same agency, led to processing delays of all immigration processes, including Golden Visa.
The previous Portuguese government attempted to reform the immigration ministry by shutting down the immigration agency as it was called and creating a new one (now called AIMA). This made things worse and processing delays have reached 3 years at their peak, leading to frustration and disappointment by many Golden Visa applicants that fairly felt cheated.
The newly elected government has been making steady process towards ending the backlog. The procedure that previously allowed illegal migrants to regulate their situation has been ended, most current cases have been processed and there has been a steady progress of processing GV applications. The current backlog is hard to estimate, but we believe that it stands at approximately 1.5-2 years on average. The most recent government announcement has been that all backlogs will be cleared by the end of the year. Whilst we are skeptical that this would happen, we do see consistent progress and are therefore advising our clients that we believe that expecting a 1 year processing time would be reasonable. However, as with everything else in Portugal, we advise caution and patience and must warn clients that Portugal is not a country to expect urgency.
Changes in the Golden Visa program – the impact of the immigration reform and the likelihood of grandfathering
The Portuguese Golden Visa has gone through many evolutions since its creation. The primary changes to the program involved the removal of the real estate path. The current government of Portugal supports the program, considers it helpful to the Portuguese economy and does not have any plans to end the program.
However, earlier this year, the Portuguese government announced some intended changes to the Portuguese nationality law that could impact all residencies, including Golden Visa holders.
Perhaps most importantly, the government intends to only allow applying for citizenship after 10 years of residency, as opposed to 5, as is the case now. The government’s original proposal did not include a grandfathering provision, suggesting that citizenship is a separate matter from residency.
Permanent residency still an option after 5 years -it is important to remember that it is only the timeline to citizenship that is impacted by the proposed reform. Permanent residency after 5 years continues to be an option, offering almost equal rights to citizenship, with the main differences being the inability to move to another EU country to live permanently and not being able to use the EU lines at the airport. Otherwise, permanent residency continues to be a path for GV applicants, and there is no requirement to move to Portugal to apply or use the permanent residency.
Grandfathering– the government has not proposed grandfathering people who already applied for GV, but we believe that the final legislation will likely include grandfathering provisions. There are opinions of constitutional experts that the absence of grandfathering would render the reform unconstitutional and indeed, the Portuguese constitutional court knocked out other parts of the reform, so the government is likely to be more careful with this part of the reform. For those investors who want to proceed with the GV program, we strongly recommend to move fast. Grandfathering is not guaranteed, but is likely.
Preferred treatment to GV applicants– it is also important to remember that the government supports the GV program and is not targeting GV applicants, but work migrants. The GV industry lobbies the government to exempt the GV applicants from as much of the immigration reform as possible, and the constitutional court recently confirmed that the government is allowed to offer preferred treatment to GV applicants. We believe that offering a 5 year path to citizenship to GV applicants whilst all other residents need to wait 10 years is unlikely, but the government will stop short just of that and will try to offer the best possible conditions to GV applicants within its powers.
LXL Ventures – A Golden Visa Fund for Americans
We have set out to design a fund specifically for U.S. investors in mind and are proud to announce LXL Ventures.
LXL Ventures offers a low risk investment strategy, tailored to U.S. preferences, full cross-border compliance, tax planning and advisory and NHR 2.0 enablement.
The fund is a product of a collaboration betweenCeltis, one of Portugal’s most reputable fund managers, with a history of hundreds of millions of Euros under management;Fresh Portugal, Portugal’s leading expat legal advisory; andLX Launch, a Lisbon-based venture-builder.
More information about LXL Ventures is availablehere.
