The treatment of income from US LLCs in Portugal has for a long time been the subject of much debate.
Until now, the only decision by the tax authorities covering the subject was an old decision - processo 2360/2016, from 2016. We wrote about this decision in our earlier post about thetreatment of US LLCs in Portugal which we also plan to update now.
On the 14th of December 2023, the tax authorities responded to the request of a taxpayer and issued a new ruling,ruling number 26925, following the same conclusion of the earlier ruling, but providing significantly more details.
In the earlier ruling (the one from 2016), the person requesting the ruling did not have NHR status, the nature of the income was unknown and it was also unclear what was the exact makeup of the ownership of the company.
In the new decision, we have a lot more information - the subject is a US LLC incorporated in Delaware and taxed as a partnership. One of the members is a US citizen based in the US and the other member is based in Portugal and enjoys NHR status. The company is split 50:50 between the members. The nature of the work is IT services, with both members contributing to the profit.
The authorities repeated with agreement the conclusion in processo 2369/2016 that the transparent treatment if US LLCs cannot be replicated into Portugal unless it is a case of a professional society, that the nature of the income is capital income from a foreign source that is not a dividend but other income. The authorities further clarified that NHR status can be used to claim the full exemptionfrom tax in Portugal.
This decision provides much needed clarity to many taxpayers in Portugal who have been relying on a much older and imperfect precedent. The manner to report the income guided by the ruling is precisely the way we report LLC income in Portugal and have always been doing so.
Interestingly, the ruling does not address the issues of effective management or permanent establishment, but it should be read alongside the previous ruling which did address them, i.e. the income can only be considered income outside of Portugal if the management of the entity is outside Portugal.
At FRESH, we advise many US LLC owners on their tax treatment in Portugal and will continue doing so with this added assurance.
