Retiring Abroad? Financial Tips to Keep in Mind

Published April 5th, 2023
Reading Time: 6 minutes
retiring abroad

Written by:

Kevin Ostergaard, CFP®, CIMA® & Mishkin Santa, J.D., LL.M, TEP
Zoe Financial Services Partner

Retiring Abroad? Financial Tips to Keep in Mind

Published April 5th, 2023 

Reading Time: 6 minutes

retiring abroad

Written by:

Kevin Ostergaard, CFP®, CIMA® & Mishkin Santa, J.D., LL.M, TEP
Zoe Financial Services Partner

From sandy beaches to bustling cities, there are no limits to the retirement of your dreams as long as you know how to plan for it. With a solid financial foundation, you can have the freedom to choose from various options when selecting a foreign retirement destination.

Retiring abroad can be a thrilling adventure, especially for those looking for a change of scenery in retirement. With a solid financial foundation, you can have the freedom to choose from various options when selecting a foreign retirement destination. The world is in your hands, and the choices are endless! 

If you are ready to start planning retirement abroad, make sure the place you’ll soon call home meets your expectations regarding climate, safety, quality of life, cultural enrichment, and other priorities. Above all else, ensure it matches your financial plan and that you know the tax responsibilities of the move. Don’t know where to start? We have just what you need. 

Let’s Choose a Destination

From the beautiful beaches of Mexico to the stunning landscapes of Europe, the world is full of possibilities. However, with so many choices available, figuring out where to begin can take time and effort. For this blog, we’ve chosen Portugal as an example of all you must consider when looking to retire abroad. 

From a Summer Destination to a Home

Whether through the “Golden Visa” or a Portugal permanent residence card, retiring in Portugal is an attractive location for United States expats. 

To obtain a permanent residence card, you must first acquire a temporary residence permit for five years, and then apply for a permanent residence card. The most common route for U.S. expats to obtain a permanent residence is through investments, such as: 

  1. Purchase of Real Estate
  2. Purchase of Investment Fund Units
  3. Investments in Culture and Art
  4. Investments in Science
  5. Investments in Business
  6. Capital Transfer
  7. Opening a Business Entity and Creating at least ten jobs

Remember that US expats that retain their U.S. Citizenship or Lawful Permanent Residence (Green Card) will continue to be subject to worldwide taxation regardless of where they live and reside.  Therefore, these individuals should carefully examine these options and their impact on the U.S. Income Tax Return and International Informational Reports.  

Purchase of Real Estate

Purchasing foreign real estate might not impact U.S. tax filings. However, if the foreign real estate is rented out, keeps a separate set of books, or utilizes a management company, then the individual owner will be required to report the rental income on: Schedule E, Part I, and Forms 4562/8582. In addition, they will also need to report the rental property as a “qualified business unit” foreign branch on IRS Form 8858, which is subject to the IRC 987 currency gain/loss regulations. 

Purchase of Investment Fund Units

From a U.S. standpoint, purchasing investment fund units will generally be classified as purchasing “passive foreign investment company or PFIC” holdings.  

PFICs can carry very punitive taxation and information reporting requirements. Therefore, inform your investment provider that you are a US citizen subject to the PFIC regime and intend to make a “Qualified Electing Fund or QEF” election under IRC 1295 on Form 8621 during the first year of asset reporting. 

This information is crucial as it alerts the investment provider to prepare and provide you with the “annual QEF statement” required for U.S. income tax returns and Form 8621 reporting. Failure to make this election in the first year and complete annual reporting, can trigger punitive treatment under IRC 1291, which is known as the excess distribution regime. 

Protect your investments by communicating with your investment provider and ensuring compliance with all necessary reporting requirements.

Investments in Culture and Art, Science, and Business

Investing in culture, art, and science is no different from investing in traditional financial assets like fund units or business openings. The key is determining whether these investments are made in a specific fund, unit trust, or business entity that entitles the investor to an ownership interest. 

There may be PFICs, foreign corporations, foreign trusts, and/or FATCA reporting requirements. These regulations necessitate filing certain forms and disclosures, which we will discuss further below. Failure to file these international reports with the IRS can result in a penalty of up to $10,000, making it crucial to be mindful of the necessary reporting requirements. By conducting due diligence and adhering to reporting obligations, investors can confidently invest in cultural, artistic, and scientific assets while minimizing compliance risks.

Capital Transfer

The capital transfer option typically involves the transfer of several hundred thousand euros to a Portuguese bank. Doing so allows for the purchase of securities and/or bank account investment. The same considerations with PFIC apply in this situation and Form 8938. This option will trigger the requirement to annually file the FBAR (Report of Foreign Bank Accounts), FinCEN Form 114. Failure to file the FBAR can trigger a $10,000 penalty.  

Opening a Business Entity and Creating at Least Ten Jobs

Lastly, opening a business entity in a foreign country will require significant planning and thought. For example, in the case of retiring in Portugal, if the entity has limited liability and an individual is the sole owner, it will default to a Controlled Foreign Corporation or CFC for US tax purposes. This will require filing IRS Forms 926 (initially), 5471, and 8992.  

If the entity is not “per se” an entity, then one can make a “check the box” election within 75 days of opening the entity to have it treated as a Foreign Disregarded Entity. Consequently, you’d be able to reduce the paperwork filing requirements listed above to just having to file IRS Form 8858. This will also simplify the foreign tax credit reporting of the entity with the individual. 

You’ve Invested, Now What?

Now that you know the investments required to make this dream a reality, you must wonder, what happens after you obtain permanent residence and start living in Portugal?

The first thing to note is that the non-habitual residence (NHR) tax status is desirable. NHR status confers a special tax status for ten years. The special tax status has the following attributes:

  1. Residency-based taxation, i.e., no worldwide taxation except for pensions.
  2. Flat rate of 20% tax on all Portuguese source earned income.
  3. Flat rate of 28% tax on all Portuguese source capital gains income
  4. Flat rate of 10% tax on all Pension (worldwide) income
  5. No inheritance taxes.
  6. No wealth taxes.

US citizens or lawful permanent residents (green card holders) who retain their status and are under the Non-Habitual Resident (NHR) regime while residing in Portugal should engage a US international tax professional to conduct outbound income tax planning. This planning should encompass all sources of income and how they will be taxed for US purposes while living abroad. 

Additionally, consider how certain sources of income will be taxed, reported, and credited for foreign tax purposes in both the U.S. and your chosen destination (in this case, Portugal). Finally, be sure to be mindful of the US-Portugal tax treaty and its exceptions to the savings clause, which can be found in the treaty’s protocol. Article 25, particularly, can be critical in determining relief from double taxation and crediting resource income for the foreign tax credit. 

You’re Ready to Move! 

Let the adventure begin. Before packing all the boxes and settling into Cascais’ beautiful coast, ensure you have all your finances and taxes prepared. Work with a professional who will support you with the move and avoid retiring abroad as a trade-off. 

Review foreign financial assets created or incurred while in your new country and file the necessary annual information reports to avoid costly penalties. Through proper planning and minimization of required international informational forms, taxpayers and tax preparers can have clear expectations for annual filing purposes. In addition, with a knowledgeable U.S. international tax professional, expats can optimize their tax situation and avoid potential compliance issues.

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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