In recent years, partially thanks to great visa and tax break programs, Portugal has become a leading destination in Europe for US citizens seeking to move abroad. By 2022, nearly 10,000 Americans were residing in the country, representing a 239% increase since 2017, according to data from the Portuguese government.
Portugal offers a rich culture and stunning cities, countryside and coastlines, providing American expats with opportunities for personal growth and cultural immersion. However, these benefits come with particular financial challenges relating to investment decisions. In this article, we outline some strategies for American expat investors in Portugal.
- Investment challenges and tax rules for US expats in Portugal
- Foreign mutual funds (PFICs)
- Where to invest
- Real estate
- US tax advantaged accounts
- Minimizing currency exposure
Investment challenges and tax rules for US expats in Portugal
Investing as a US citizen or green card holder in Portugal brings new challenges compared to living in the United States. A key reason for this complexity is the requirement for US citizens to adhere to US reporting and taxation rules despite living abroad as well as EU and Portuguese rules. As a result, certain types of investments in Portugal may trigger US tax or reporting liabilities, while some investments and brokerage accounts in the US aren’t available to Americans living in the EU.
To overcome these challenges, seek guidance from specialized expat financial advisors who can provide tailored solutions to construct investment portfolios aligned with your objectives that won’t trigger unnecessary or unexpected taxable events. Additionally, there are IRS provisions in place such as the US Foreign Tax Credit that you can leverage to mitigate the possibility of double taxation from both the US and Portugal. By maximizing tax benefits and making well-informed investment choices, you can optimize your financial outcomes and mitigate risks while residing in Portugal.
Foreign mutual funds (PFICs)
American expats in Portugal should exercise particular caution when considering investing in foreign mutual funds, known as Passive Foreign Investment Companies (PFICs) to the IRS. These investments can lead to complex US tax implications and potentially result in new high US tax liabilities.
To mitigate US tax implications associated with foreign mutual funds, you can opt for US-based investments, or investments in Portugal such as individual stocks, bonds, or other assets that are not PFICs. A US expat-specialist investment advisor can guide you in selecting the best options based on your risk tolerance, preferences and goals.
Where to invest
As an American in Portugal, there are several considerations that will influence where you invest. These include the tax and other regulations in the US, EU and Portugal, minimizing fees and losses from currency transfer both when investing and when drawing on investments, diversification considerations, and personal preferences. Discuss your situation with an expat-specialist financial advisor to ascertain the best path forward.
Real estate
Real estate can be a great investment both in the US and in Portugal, whether as a home or base with a view to capital appreciation, or as a rental for passive income. Real estate can be part of a balanced, diversified overall investment portfolio, however it’s not always beneficial to buy a property abroad rather than rent one. Again, a conversation with a financial advisor with cross-border expertize will help you find your best option.
US tax advantaged accounts
The benefits of US tax advantaged accounts such as IRAs, Roth IRAs, or 401(k)s aren’t necessarily recognized by Portugal despite the tax treaty between the US and Portugal. As such, always consult with a US expat tax specialist who is familiar with the US-Portuguese tax treaty. Americans who are registered for the recently discontinued NHR Tax Regime however may still benefit from a flat 10% tax on foreign pension income, as well as not pay Portuguese capital gains tax.
Minimizing currency exposure
Navigating various currencies is a key consideration for American expats in Portugal. Minimizing currency conversion fees is key when making investments or accessing existing funds. Additionally, the value of investments in different currencies can fluctuate relative to your base currency due to exchange rate changes.
To minimize fees and exchange related losses and mitigate exchange rate fluctuations as an expat, consider:
- Utilizing multi-currency accounts: Some banks and providers such as Wise allow you to hold and transact in multiple currencies. This can help reduce conversion fees and provide flexibility in managing currency exposure. At EAFA, our broker also has a multicurrency account which offers a low conversation rate.
- Use a currency broker: When transferring larger amounts, speak to a currency broker such as Moneycorp who can advise as to the most cost-effective way to transfer, perhaps locking in rates or utilizing hedging.
- Diversification: Diversify your investments across different currencies and asset classes to spread currency risk. By holding assets denominated in various currencies, you can offset potential losses in one currency with gains in another, and receive income from your investments in the currency that you need it in.
Always remember that each individual’s situation is unique, and it’s important to tailor your investment strategy to your income, long-term plans, risk tolerance, and goals. Whereas investing as an expat in Portugal undoubtedly has challenges, with an informed and balanced approach and the right advice, it’s possible to continue investing in a tax efficient and diversified way while minimizing currency loss exposure.
If you have any questions about financial planning or investing as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
