US tax rules for a Delaware LLC

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If you are the owner of a Delaware Limited Liability Company (LLC), it is essential that you know what you have and what your responsibilities are. Requirements are in constant flux and need up-to-date procedures. If you have held your company for several years, current compliance obligations may be a far cry from what you started with. Failure to comply can be both time-consuming and expensive.

US Federal taxes

A legal Limited Liability Company (LLC) in Delaware with more than one member (shareholder) has a default status of a tax partnership. The LLC is not in itself a tax paying entity but passes any taxation on income and expenses to its shareholders as tax partners. These non-US resident tax members are responsible for assessment on any net profits at 30% of their US-sourced income.

As a non-resident owner of a Delaware LLC, foreign-sourced income is not assessable in the US. However, there are still strict reporting requirements. Members must file 1040 NR individual income tax returns even though there may be, in fact, no taxable US income. These annual reporting requirements were introduced in 2017. As part of the process, shareholders need Individual Tax Identification Numbers (“ITIN”) which can be obtained at the time of filing the tax declaration. Application for the ITINs involves submitting “apostilled” documentation including reporting on identity. Non-compliance carries a fine of $10,000.

Delaware State Taxes

Unlike most states in the US, Delaware does not require an LLC to file an annual report. However, companies must pay an annual “franchise” tax. By default, since LLCs are “pass-thru” tax entities, the responsibility for paying federal and state income taxes “passes thru” the LLC itself and falls on the individual LLC members (shareholders). Currently, the State of Delaware imposes a flat annual tax of $300 on LLCs. The levy is due on or before 01 June with a $200 penalty for late payments.

Under certain circumstances, owners of an LLC may choose to have their business treated as a taxable corporation. The State of Delaware, like almost every other state, taxes corporate income. Corporation income tax in Delaware is a flat 8.7% of federal taxable income.

“FBAR” compliance

If a Delaware Company has a financial interest in or signature authority over an overseas financial account, the US requires annual reporting to the Internal Revenue Service called “FBAR”. This obligation can undermine any element of confidentiality in addition to adding another on-going compliance commitment and cost. “FBAR” non-compliance is subject to a $10,000 penalty.

The Alternative

The litany of problems goes on and on. Redomiciliation can be an attractive alternative to the ever-growing list of headaches associated with Delaware LLCs. When a company moves its base of operations to Portugal, there is no asset transfer and no assessment takes place. Only the headquarters and effective management change. Assets remain securely within the Company. In addition, there is often an opportunity to uplift the share value of the LLC which can be doubly beneficial due to the fact that many Delaware companies understated share capital at the time of formation. Annual running procedures are stable, and costs are modest, often a fraction of charges for Offshore Companies.

Merchants and companies obliged to accept electronic payments

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The Banco de Portugal wants companies and shops to accept at least one form of electronic payment in addition to cash.  With cash increasingly in decline, the covid-19 pandemic has only accelerated the digitalization of transactions, thereby increasing online consumption and the use of contactless payments.

2021 State Budget: Government moves to increase take-home pay

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Finanças will lower IRS withholding to increase disposable income for workers in 2021. These measures should reach 2 million Portuguese taxpayers. However, tax authorities plan to settle accounts in the following year. Also, unemployment benefits will rise €60 for those earning the minimum wage.

“Golden Visas” slow down but do not leave the Greater Lisbon area

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The Municipality of Lisbon concentrated 59.1% of total real estate purchases entitled to a “Golden Visa” this year, a distribution that increases to 75.2% if the analysis takes into consideration the greater metropolitan area. In the first nine months of this year, 993 residence permits for investment (ARI) were granted, better known as “Golden Visas”, which represented the entry of €540 million of foreign capital, 10.2% less when compared to the same period in 2019.

70% of hotels in the Algarve to close during the winter

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Almost three out of four hotels and tourist developments in the Algarve plan to suspend  their hospitality activities during the low season due to the crisis caused by the pandemic. Before the arrival of Covid-19, about 50% of hotels and tourist developments were already planning to close during the off-season. This number may continue to rise and leave even fewer establishments and developments open for business during the coming winter months.

FAQ’s: Freelancers and the Simplified Regime

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Sole Trader Start-up

Many foreign residents plan to open a small business when they move to Portugal. Regardless of your interest or motivation, it is essential to understand the basic requirements in Portugal before launching and conducting your new business activity. The following FAQ’s will help you get off to a good start while better serving your clients throughout the EU and beyond.

What is the difference between Standard Accounting and the Simplified Regime?

“Standard Accounting”  refers to the traditional system of accounting that calculates taxable profits from the net difference between income and expenses. This method requires professional accounting services (“TOC”).  Under the “Simplified Regime”, taxable income is calculated as a percentage of invoiced income (from the total of “electronic green receipts”) and is usually self-administered.

Do most self-employed go automatically into the Simplified Regime?

Yes, but not all. The Simplified Regime is designed for smaller businesses.  To qualify, your gross invoiced income must not exceed €200 000. 

What happens if my income exceeds this limit?

On a one-time basis, you may surpass this threshold by 25%. If repeated, the “AT” will switch you automatically to Standard Accounting (“Contabilidade organizada”). Subsequently, a Chartered Accountant must do regular reporting.

Initially, I opted for Standard Accounting but now realise that the Simplified Regime should be more advantageous. Can I switch?

Yes, taxpayers may switch in the following fiscal year if they so wish.

I only had €1,500 of income from a sideline business.  How should I report?

When freelance income constitutes less than one half of an individual’s declarable income, it may be treated as an “Isolated Act” and follow standard accounting rules.  No “TOC” is required.

How do I calculate my taxable income?

The calculation for determining taxable income is as follows:

 Category B      Expanded Simplified Regime                      Base

Sales of goods and services; Activities related to tourism      15%

Liberal Profession business activities (profissões liberais)     75%

Other income from services                                                    35%

Royalties, know-how, other income in connection with

activity; Rental income not declared in Category F               95%

Non-business-related subsidies                                                30%

Business related subsidies; Other income not listed              10%

This income is added to other sources (aggregation) to determine your final rate of taxation.

Is it true that there is a minimum tax?

No. While one used to exist, the minimum tax was abolished in 2010.

When do I have to charge “IVA” to my clients?

“IVA” (Valued Added Tax) requirements are the same under both methods. Once income exceeds €12,500, regular IVA collection and reporting is mandatory, either on a quarterly or monthly basis, depending on turnover.

Do I have to make contributions to Social Security?

Beginning in the first year of business activity, you are entitled to a 50% discount. In year two, the adjustment reduces to 25% and disappears altogether in the 3rd year and beyond, based on monthly payments to Social Security at the rate of 21% of your taxable income.

If your business activity is Local Lodging (“Alojamento Local”), you are exempt from Social Security contributions on this income.

If you already contribute to Social Security in another country or receive Social Security benefits, you can request exemption from paying again in Portugal. Alternatively, you may be eligible for reduced contributions.

Início de Actividade” (Business Registration)

Formal registration of your business activity with Finanças is the first step to detail all required information about yourself and your planned endeavour.

Recibos Verdes Electrónicos” (Electronic Green Receipts)

Freelancers may no longer buy books of Green Receipts and must file invoices electronically via Internet. Be careful to use the correct procedures within the duly designated time periods as there are fines if deadlines are not met.

Social Security

Freelancers must register with Social Security (National Insurance) and make monthly payments in the beginning of the second year of business activity. Services as well as Sales and Production currently contribute 21%. If you receive Social Security benefits or are already contributing to Social Security in another country, you may be eligible for exemption from contributions in Portugal.

National Health Coverage

As a freelancer, you will be eligible to apply for your “Cartão de Utente” (National Health Card). You, your spouse, and dependent children will be covered. With this registration, you will gain access to local Health Centres and Regional Hospitals. The card also entitles you to reductions on medication and prescriptions at local pharmacies.

IVA” (VAT)

Unless your income or activity exempts you from collecting “IVA” (freelance income under €12,500 pa), quarterly submissions need to be filed. Unfortunately, only Portuguese-language applications are available. If you invoice primarily outside of Portugal to other countries in the EU and beyond, this reporting could entitle you to a refund for “IVA” paid on business expenses Portugal.

VISA D2 for a Sole Trader or Investor

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The request for a Residence Visa to exercise an independent professional activity or to become an immigrant investor (visa D2) is normally issued to the applicant in his country of residence through the Portuguese Embassy or Consulate. Once application has been made, the deadline for the decision is usually 60 days, starting from the day of submission of the application with all substantiating documentation. This period may vary depending on the country of origin. Continue reading

Tax authorities simplify IRS payments IRS in instalments

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With the Tax and Customs Authority (“AT”) asking taxpayers to remain at home by using digital channels, the process for IRS payments in instalments has been simplified. If you have an outstanding debt of up to €5,000 and do not owe other taxes, it is possible to divide the amount to be paid in a maximum of 12 instalments. However, when the amount owed is above €5,000 or more than 12 instalments are required, the tax authorities still ask for a guarantee.

Lisbon Airport with 50% of air traffic in August, compared to 2019

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During this month of August, at least half of the number of flights registered at Lisbon Airport has resumed according to the data from ANA – Airports. Air traffic has begun to show signs of recovery after the 93.8% drop in the second quarter as compared to the same period in 2019. Due to the pandemic and consequent movement restrictions, the number of passengers fell by 97%. Airports expect to only recover their usual volume of passengers by 2024.