For years, wealthy Brazilians have taken advantage of Portugal’s highly successful golden visa program. It was a way for them to protect their assets and enjoy the special ties the two countries share. But the program, commonly referred to as the non-habitual resident (NHR) tax regime, ends soon for many participants: NHR status expires after 10 years. Now that Brazil’s president-elect has stated a desire to increase taxes, more Brazilians are interesting in exploring residency options elsewhere. There are two countries with a large Brazilian population and high standards of living: the United States and the United Kingdom.
I. United States
The U.S. provides Brazilians with numerous immigration options. The most popular U.S. immigration visas for wealthy Brazilian citizens are the EB-5, E-2, L1-A, and EB-1(c). Some of these visas require an investment in the U.S., whereas others do not. Some of these options (but not all) may allow a Brazilian citizen to gain permanent resident (Green Card) status in the U.S. Anyone considering U.S. visa status should speak with qualified U.S. immigration counsel to learn more about their options.
To make the most of a residency change, it is also helpful to consult with U.S. tax counsel who specialize in such cross-border matters and conduct some “pre-immigration tax planning.” Discussed below are some common strategies to enable a Brazilian citizen to switch their tax residency from Portugal to the U.S. without incurring significant U.S. taxes.
A. Step-Up Tax Basis in Appreciated Assets
The U.S. income tax rules focus on “taxable appreciation” in assets. Thus, one way to minimize U.S. tax is to eliminate any built-in gain in an asset prior to becoming a U.S. tax resident. Importantly, the U.S. tax rules do not accomplish this automatically when a Brazilian immigrates to the U.S. A Brazilian citizen immigrating to the U.S. would need to proactively enter into transactions to accomplish this goal. One transaction is an actual sale. For example, selling and then reestablishing a position in a publicly traded stock is common. In addition, sales structured for U.S. tax purposes as installment sales may enable a Brazilian to recognize for U.S. tax purposes the entire sale proceeds prior to becoming a U.S. tax resident (and thus avoid any U.S. tax on the sale) while still receiving installment payments for the years of the term contract after settling in the United States. Please note that to obtain this favorable tax treatment taxpayers may need to make certain special elections on their U.S. tax returns and appropriately draft the installment sale agreement to satisfy the IRS.
Many clients may question whether there are options if they own appreciated assets that they do not wish to sell. There may be ways to create constructive sales solely for U.S. tax purposes. Even though nothing is sold prior to the Brazilian citizen becoming a U.S. tax resident, the IRS in certain circumstances treats the assets as if they were sold. If successful, this popular pre-immigration tax planning strategy can work to eliminate appreciation in numerous assets.
Note that the opposite strategy is likely preferable for assets that have depreciated since acquisition. Brazilian citizens can postpone selling such assets until after becoming a U.S. tax resident, so that the built-in loss is realized in the U.S. where it can shelter other U.S. taxable gains.
B. Trust Planning
Another popular pre-immigration strategy involves the formation and funding of certain types of non-U.S. trusts to maintain assets outside the U.S. income and/or estate tax systems. The current U.S. estate tax rate is 40%. Although there are some exemptions for U.S. citizens and domiciliaries, many Brazilian citizens seeking U.S. income tax residency status may not qualify for them. They also may prefer to save their U.S. estate tax exemption amount for future gifts/bequests. As a result, many Brazilians choose to put some of their assets into trusts prior to becoming U.S. residents. If done properly, the benefits are significant: (1) avoidance of U.S. estate tax on the value of those assets, (2) avoidance of U.S. income tax and (3) the ability to retain the assets if an “emergency” occurs. Some clients combine these trust strategies with private placement life insurance or other techniques to create flexibility while eliminating a potential U.S. tax burden.
C. Reorganization of Corporate Assets
Many wealthy Brazilians own active or passive companies, entities, or other corporate structures. These structures are generally designed to minimize the Brazilian tax as they may be exempt from Portuguese tax under the NHR regime. A Brazilian owning an interest in such assets may need to reorganize their corporate structures prior to becoming a U.S. tax resident to make them more efficient for both U.S. and Brazilian tax, with the goal being to minimize the global effective tax—that is, the total tax paid worldwide. Restructuring prior to immigration may permit corporate reorganizations without any U.S. tax. In contrast, Brazilians who wait to restructure after they have moved to the U.S. may find that they cannot achieve the same tax efficiency goals once they have become U.S. tax residents.