Treatment of US LLCs in Portugal

Firstly, it must be noted that the Portuguese legal and tax system does not provide for specific treatment for opaque and transparent entities such as the LLCs or LPs. This poses some additional challenges when assessing the applicable tax treatment to capital income perceived under the NHR regime.

As a rule, LLCs and LPs are limited liability partnerships deemed transparent under US legislation, whereas income flows to partners without taxation at the level of the company (‘pass through taxation’). Given the above, the LLC’s annual taxable income allocable to the partners shall be taxed at the hands of the later – notably for US sourced income, whereby the partner shall be liable to US federal taxes.

It must be noted that LLCs and LPs are not generally eligible for the application of the benefits granted under most of the DTCs entered by Portugal. For instance, under Article 3 paragraph a) of the Protocol of the US/Portugal DTC, LLCs shall only be deemed resident in the US provided that income obtained by said corporate vehicles are effectively subject to tax in the US, either at the level of the corporation or at the hands of its partners.
This topic has already been brought to the attention of the Portuguese tax authorities, who have already issued several binding rulings, whereas it is stated that:

• Pursuant to domestic legislation, the allocation of income/profits by an LLC shall be deemed as a distribution of dividends, generally subject to 28% PIT in Portugal;
• An LLC, being tax transparent, is not deemed resident in the US for the purpose of the DTC with Portugal, and as such, income attributed to LLC’s partners shall not be deemed or treated as dividends for treaty purposes, but rather shall be subject to the provisions of Article 24 of the DTC (‘other income’), which attributes cumulative taxing rights to the source and residency contracting states.

The look-through approach adopted and disregard of the LLC for the purpose of applying the DTC provisions, does fit entirely with the NHR taxing principles, as the Portuguese tax authorities shall be looking to the nature of the income received by the individual taxpayer, rather than the corporate vehicle.

Ultimately, even if the Portuguese tax authorities would deem the LLC/LP eligible for the DTC with the US, the LLC gains could be assimilated to dividends, which pursuant to Article 10 of the treaty are also taxable in the US, allowing, thus, to operate the exemption under the Portuguese legislation.

Now, in other sections, I have written alot on US LLCs. Please do a search on htj.tax to see everything we have written about the entity which can be quite complex

In this article however, I am going to post both in Portuguese and English a ruling from the Portugal authority. I am told that there were similar findings in other EU jurisdictions such as Germany and Spain. Please note that in this example the LLC was a partnership with just one partner in Portugal. The Portugal authorities found that the LLC had a headquarters and no direction from Portugal. Obviously single member LLCs with the only member in Portugal should be interpreted differently

 

A) If the “transfer” of the year’s results is subject to the payment of taxes in Portugal?
B) If this “transfer” of results is taxed by applying the general rates contained in article 68 of the IRS Code or by applying a release rate ?
C) Whether such transfer can be qualified as capital gains?
D) If the transaction can be taxed in Portugal and the USA?

Having analyzed the questions and consulted the AT’s Tax and Customs Studies Center, the following information is provided:

1. From the above facts, it appears that the income obtained was produced by a Limited Liability Company (LLC) which, according to the Applicant, is treated for tax purposes in the USA as a “partnership”.
2. Under American law, income produced by partnerships is taxed through the application of the fiscal transparency mechanism, ie in the sphere of the partner, as income derived from a commercial activity. However, that fiscal transparency of US law cannot, in terms of comparative law , be translated into the fiscal transparency of Portuguese tax law.
3. Thus, unless the LLC in the specific case can qualify, in view of its purpose and function, as a professional society or as a company of simple administration of assets, for the purposes of the tax transparency regime in Portugal, it will have – It should be considered that the US tax regime for LLCs is clearly different in nature from the nature of the Portuguese tax transparency regime (limited, strict and well defined). Process: 2360/2016 2
4. In this way, the income described in the request for binding information constitutes, in light of the Portuguese legal system, income derived from the distribution of profits of a company, which implies its taxation under IRS as capital income (cf. article 5 of the IRS Code), given the principle of universality of the tax, since the holder of the income is resident in Portuguese territory (cf. no. 1 of article 15 of the IRS Code).
5. In view of the facts set out, and the provisions of paragraph g) of paragraph 1 of article 18 of the IRS Code, the income in question is not considered to have been earned in Portugal since the paying entity has no registered office or direction. effective in Portugal. Even so, this income will be taxable in Portugal by applying the special rate of 28%, taking into account the provisions of paragraph d) of paragraph 1 of article 72 of the IRS Code, without prejudice to the possibility of their being covered by option of its holder, residing in Portuguese territory.
6. However, and for this income to be effectively taxed in  Portugal, it is necessary to take into account the effective attribution of tax jurisdiction considering the existence of a Protocol to the Convention to avoid Double Taxation between Portugal and the USA (CDT), given that the income are obtained in that State.
7. Analyzing the situation, it is considered that the income produced by this type of company (LLC) is covered by the exclusion provided for in no. 3 of the Protocol to the CDT signed between Portugal and the USA, and, as such, this income is not treated , for the purposes of attributing tax jurisdiction, under the terms defined for “dividends”, but according to the provisions of article 24 of the CDT, which presupposes a shared tax jurisdiction, ie both States can tax this income. Consequently, this income is eligible for the application of the mechanism for the elimination of international legal double taxation contained in paragraphs 1 and 3 of article 81 of the IRS Code.
8. Thus, in conclusion, the “transfer” of this income to the applicant, income holder , residing in Portuguese territory, qualified as capital income , is subject to taxation in Portugal by applying the special rate of 28%, as provided for in subparagraph d) of paragraph 1 of article 72 of the IRS Code , without prejudice to the exercise of the right to opt for its aggregation, in which case the income is taxed with the application of the general IRS rates.

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Process: 2360/2016
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DOCUMENT DOCUMENT

Diploma: CIRS
Article:
5, 15, 72 and 81

Subject: Taxation of income paid by a Limited Liability Company (LLC) – entity headquartered in the United States of America – a partner resident in Portugal

Process: 2360/2016, with the consent of the General Director, of 12/20/2017

Contents:

The Applicant, residing in Portugal, requests binding information on whether the transfer, to its patrimonial sphere, of the results obtained in an information society limited liability based on the United States of America (USA), of which it is partner, is taxable in Portugal. More specifically, the questions:

A) If the “transfer” of the results of the financial year is subject to the payment of taxes in Portugal?

B) If this “transfer” of results is taxed by applying the rates general provisions of article 68 of the IRS Code or by the application of a fee liberatory?

C) Whether such a transfer can qualify as capital gains?

D) Whether the transaction can be taxed in Portugal and the USA?

Having analyzed the issues and consulted the Tax and Customs Studies Center of AT, please inform:

1. From the facts stated, it appears that the income obtained was produced by the Limited Liability Company (LLC) which, according to the Applicant, is treated for tax purposes in the USA as a “partnership”.
2. Under American law, the income produced by partnerships are taxed through the application of the tax transparency mechanism, ie in the sphere of the partner, as income derived from a commercial activity. Still, that fiscal transparency of US law cannot, in terms of the law compared to return to the fiscal transparency of Portuguese tax law.
3. Thus, unless the LLC of the specific case can qualify, in view of its purpose and function, as a society of professionals or as a society of simple administration of assets, for the purposes of the tax transparency regime in Portugal, the US tax regime of LLCs is of a nature clearly different from the nature of the Portuguese tax transparency regime (limited, strict and well typified).

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4. In this way, the yields described in the request for binding information configure, in view of the Portuguese legal order, income derived from the distribution profits of a company, which implies its taxation under the IRS as capital income (see article 5 of the IRS Code), given the principle of universality of the tax since the holder of the income is resident in Portuguese territory (cf. no. 1 of article 15 of the IRS Code).
5. Taking into account the facts stated, and the provisions of paragraph g) of paragraph 1 of article 18. of the IRS Code, the income in question is not considered to have been earned in Portugal since the paying entity has neither headquarters nor effective direction in Portugal. Even so, this income will be taxable in Portugal by means of application of the special rate of 28%, taking into account the provisions of paragraph d) of paragraph 1 of article 72 of the IRS Code, without prejudice to the possibility that they may be included in the option of its holder, residing in Portuguese territory.
6. However, and so that this income can be effectively taxed in Portugal, it is necessary to take into account the effective attribution of a tax jurisdiction considering the existence of a Protocol to avoid Double Taxation entered into between Portugal and the USA (CDT) , given that the yields are obtained in that State.
7. Analyzing the situation, it is considered that the income produced by this type of companies (LLC) is covered by the exclusion provided for in paragraph 3 of the Protocol to the CDT concluded between Portugal and the USA, and, as such, this income is not treated, for the purpose of attributing a tax jurisdiction, under the terms defined for the “dividends”, but by the provisions of article 24 of the CDT, which presupposes a shared tax jurisdiction, ie both States can tax these income. As a result, this income is eligible for the application of the mechanism for the elimination of international legal double taxation contained in 1 and 3 of article 81 of the IRS Code.
8. Thus, in conclusion, the “transfer” of this income to the applicant, holder income, residing in Portuguese territory, qualified as income capital, is subject to taxation in Portugal by applying the rate 28%, in accordance with the provisions of paragraph d ) of paragraph 1 of article 72 of the Code of the IRS, without prejudice to the exercise of the right of option for its inclusion, if where income is taxed by applying general IRS rates.

Should you require help with your US-related taxes in Portugal, please don’t hesitate to get in touch.