Fund Investment Portugal vs. Real Estate for the Portugal Golden Visa – Which To Pick?

The Portugal Golden Visa is an attractive residency by investment scheme, inviting qualifying investors to make an investment in the nation, and in turn, obtain legal residency. One of the key benefits of the Golden Visa is the sheer range of investment routes available, including investing in real estate or investing in the fund investment Portugal option. 

In this guide, we walk you through the fund investment option, comparing it to the more traditional route of investing in property for the golden visa. By the end of this guide, you should have a clearer understanding of which investment route is right for you.

The Portugal Golden Visa- In Brief

Since the Portugal Golden Visa’s inception in 2012, the program has attracted over 10,000 investors to date, rewarding foreign investors with residency permits, unlimited visa-free travel access to the European Union, and the opportunity to live, work, or study in Portugal.

Known for its flexible application requirements, relatively straightforward timeline to residency, and affordable investment options, the Portugal Golden Visa scheme is a favorite among Americans, Russians, Chinese and Brazilian investors.

For more information, consult our Golden Visa Portugal guide.

The most common investment routes include:

The Golden Visa – Fund Investment Portugal Option

In 2018, the Portuguese authorities lowered the minimum threshold from €500,000 to €350,000 in venture capital funds as an investment option to take for obtaining the Portugal Golden Visa.  However, the investment amount has now been raised again to a €500K investment in a fund. Applicants are granted Portuguese residency in a short timeframe.

Venture capital simply means a pool of investment funds that are managed by authorized experts in the field. Regardless of the fund you choose, it’s regulated and offers options to invest in areas like energy, industry, healthcare, technology, or real estate.

Some quick benefits to know about for the fund investment Portugal:

• Dividends and capital gains returned to investors may be tax-exempt for venture capital funds
• Some funds have a minimum return hurdle-rate
• A handful of funds are supported by the Portuguese government through subsidies or financed by the IFD (Instituição Financeira de Desenvolvimento).
• The funds are regulated and they comply with the Portuguese Securities Market Commission rules
• Opportunity to invest directly in real estate development in Portugal

For more comprehensive information, consult our investment funds golden visa guide.

Advantages of fund investment Portugal vs real estate

There are numerous advantages to consider when looking at whether to pick the fund investment Portugal vs real estate. 

• Possibility to diversify your investment as opposed to investing in one or two properties 
• Tax advantages on fund earnings and no withholding taxes to pay
• Low acquisition fees: no transaction fees compared to property acquisition which comes with IMT tax and stamp duty
• The investment is handled by professional fund managers. With real estate, you are the sole proprietor of your property unless you find a third party property manager, which comes at a cost
• By choosing the investment fund route, you save time and legal fees compared to acquiring property

Disadvantages of fund investment Portugal vs real estate

There are some cons to consider if you opt to go for the fund investment option instead of investing in Golden Visa Portugal real estate.

Specifically:

• The Portuguese funds are classified as ‘risk funds’, meaning a certain degree of risk is applied to this investment route
• The funds do not guarantee the invested capital or a stable yield
• To keep your Golden Visa, the investment must reach a maturity of six years before you can sell your participation unit. 

Things to consider before committing to fund investment Portugal

Additional considerations must be taken into account when choosing the fund investment Portugal option. 

1. Is my selected fund eligible for the Portugal Golden Visa?
2. What is my fund strategy and legal obligations?
3. Is the fund regulated by the Portuguese authorities?

As an investor for the golden visa, you must keep your investment for a minimum of five years when you can apply for permanent residency and citizenship in Portugal.

Funds vs Real Estate: Final Verdict

Whether you opt for the funds or real estate investment route for Portuguese residency, the decision is ultimately a personal one. As mentioned above, the most notable difference is the capital deployed under investment funds compared to real estate. Specifically, you pay less tax overall for the investment funds, compared to the property route. Funds also offer portfolio diversification and exposure to other sectors while the traditional real estate route is somewhat more limiting. 

Having said that, it’s important to note that the investment funds carry a longer life term of six to ten years, whereas there’s no such minimum term for property investment.

2022 changes to the Portugal Golden Visa

From 1 January 2022, the Portugal Golden Visa scheme will undergo several changes, including restricting investments or raising the minimum threshold.

Two notable changes include:

• After  1 January 2022, the minimum investment required for the fund investment Portugal option will increase from €350K to €500,000.
• Investors will no longer be able to buy property in urban areas like Lisbon, Porto and the Algarve. 
• Only residential property investments in the designated interior areas of Portugal will qualify for the Golden Visa

Check out the latest changes to the Portugal Golden Visa Program here.

The Portugal Golden Visa changes do not impact applications in 2021. So you have until the end of the year to take advantage of the current  €350,000 investment requirement for the fund option before it increases.

Speak to a fund investment specialist

Global Citizen Solutions is a boutique investment migration consultancy firm focused on finding the right residency or citizenship planning for individuals wanting to secure their future and become global citizens. 

 With offices in Portugal, UK, and Brazil, our multicultural and multilingual team will guide individuals and families from start to finish, providing expert advice considering freedom, mobility, taxation, and security. If you are interested in applying for the Golden Visa in Portugal, be it through buying a property or investing in a fund, we can help.

Get in touch today and schedule a free initial consultation.

 

Frequently asked questions about fund investment Portugal vs real estate

Which golden visa investment route is the most popular, the fund investment or property?

While real estate has traditionally been a popular option, the Portugal fund investment option is growing in popularity, due to having a minimum investment amount of €500K.

What will change regarding the investment fund route after January 2022?

After January 2022, the minimum investment will increase from €350,000 to €500,000. You have until the end of 2021 to enjoy the current Portugal Golden Visa regime before the changes kick in.

What are the benefits of choosing the fund investment Portugal option compared to real estate?

Some key benefits include: the option to diversify your investment to other sectors, as well as paying lower tax amounts.

Who is considered a U.S. Person?

According to the Internal Revenue Service or IRS, the term “United States Person” means:

• A citizen or resident of the United States 
• A U.S. based partnership 
• A U.S. based corporation 
• Any U.S. estate other than a foreign estate 
• Any U.S. based trust if: 
  • A court in the USA is able to display primary supervision over the trust’s administration, and 
  • One or more US persons have the authority to control the substantial decision making processes of the trust
• Any other person that is not a foreign person. 

What is a PFIC (Passive Foreign Investment Company or Qualifying Electing Fund)?

The Passive Foreign Investment Company (PFIC) rules are designed to prevent United States Persons from deferring tax on passive income earned through non- U.S. corporations. Also PFIC rules are in place to prevent converting this income into capital gains that will then be taxed at preferential rates. 

A foreign corporation is a PFIC if it meets either:

1. Passive Income Test – a foreign corporation is a PFIC if greater than or equal to 75% of its gross income is passive income, for example, dividends, payment in lieu of dividends, interest, rents, royalties, annuities. 
2. Passive Asset Test – a foreign corporation is a PFIC if the average annual percentage of the fair market value of all passive income producing assets is greater than or equal to 50% of the value of the entity’s assets. This is determined on a quarterly basis, And, it is considered passive if it generates passive income or is reasonably expected to generate passive income in the foreseeable future.

Almost all foreign mutual funds are PFICs. In other cases possible examples of PFICs include: 

• Passive investments in offshore Mutual Funds, Hedge Funds, including Venture Capital Funds, Stocks, Annuities, or Income Producing Property; 
• Foreign Brokerage Accounts with Mutual Funds, Bond Funds, Equity Funds; 
• Foreign Retirement Accounts; 
• Foreign Cash Value Life Insurance Policies. 

What is Form 8621?

Form 8621 is the form that a U.S. person must file if they are a direct or indirect shareholder of a passive foreign investment company (PFIC) under some specific criteria. 

Who must file Form 8621?

According to the IRS, any U.S. person that is a direct or indirect shareholder of a “PFIC” must file Form 8621 for each tax year if they:

1. Receive certain direct/ indirect distributions from a Passive Foreign Investment Company or Qualifying Electing Fund (PFIC). 
2. Recognize a gain on a direct/indirect disposition of PFIC stock. 
3. Are reporting information with regards to section 1296 mark-to-market election or a QEF. 
4. In Part II of the form are making an election reportable.
5. Will need to file an annual report pursuant to section 1298(f). 

Each PFIC must have a separate Form 8621 in which stock is held.  All interests in PFIC’s must be reported annually.

When must Form 8621 be filed?

The investor must calculate annually their pro rate share of the earnings of their investment, regardless of having received or not any distribution, as it will be considered taxable income for that year. 

 By doing this, you will maintain the beneficial capital gain rate, otherwise, you would be subject to a considerable higher capital gain tax rate. 

Nonetheless, one must be aware that you can only make this selection in the first year of holding. It is highly complex to retroactively make a QEF election. 

Portuguese Investment Funds and PFIC

Most Portuguese Investment funds have until the end of April to report accounts, whilst U.S. tax filling is due until the 15th of April.  

This means that, due to the schedule difference between the date by which investment funds in Portugal issue their reporting and U.S’ date of submission of tax return, US investors may consider filing for a tax extension deadline for October 15th in order to secure enough time to be able to appropriately file their taxes.

Any information contained in this communication is not intended as, or to be construed as tax advice. We advise our clients and readers to seek professional tax consultancy from a trusted partner in their jurisdiction.