The Portugal Private Pension (RPC) US Tax, FBAR & FATCA

The Portugal Private Pension (RPC) US Tax, FBAR & FATCA

Portugal Private Pension (RPC) US Tax, FBAR & FATCA

The Portugal Private Pension Scheme operates similarly to other foreign pension plans across the globe. Technically referred to as a Regime Público de Capitalização aka RPC or Planos Poupança-Reforma – their purpose is to provide support to taxpayers in Portugal when it comes time to retire. Since these are considered private pensions, they are usually managed by private companies and may be tied to various insurance or assurance products as well (this is similar in countries such as Singapore). The key issue for the Portugal Private Pension Plan from a US Tax perspective is that when a US Person has a Portugal Private Pension, they will have both. US tax and international reporting consequences. Since there is a tax treaty with Portugal the income generated may be tax-deferred and may qualify for thd PFIC Tax Treaty/Pension exception would not apply. Let’s review the basics of the Portugal Private Pensions for US Tax, FBAR & FATCA

What are the Portgual Public Pension

As Provided by the OECD: 

Portugal’s voluntary-funded pension system consists of a public-funded scheme and various private personal and occupational-funded schemes.

4.2.1. Public scheme

      • The public voluntary funded scheme, Regime Público de Capitalização (“RPC”), offers a personal pension plan. The Portuguese government established it to help individuals save voluntarily for retirement when it introduced social security reforms in 2007. As discussed in Chapter 3, those reforms involved a number of changes, one of which was the introduction of a sustainability factor in the public pension scheme’s benefits formula.

      • The sustainability factor reduced pension benefits as life expectancy increases. To preserve their benefits at pre-reform levels, individuals could either work longer or voluntarily increase their personal contributions. The government created the RPC to cater to people choosing the latter option. The Institute of Management of Capitalisation Funds of the Social Security (Instituto de Gestão de Fundos de Capitalização da Segurança Social, “IGFCSS”) is responsible for the administration and investment management of the RPC. The IGFCSS is a unit within the Ministry of Labour, Solidarity and Social Security.

4.2.2. Private schemes

  • The legal framework for voluntary funded private schemes has existed since 1985.2 The objective of these schemes is to promote long term saving behaviour in order to help fund individuals’ retirement. Private schemes can be occupational pension plans or personal pension plans. Occupational pension plans can be delivered through closed pension funds, open pension funds (through collective membership) or collective insurance contracts. Closed pension funds are established by private companies, groups of social or professional associations, or by agreement between workers’ associations and trade unions.

  • Open pension funds differ in that they do not require a business or association link between employers. The occupational plans can be defined benefit (“DB”) or defined contribution (“DC”) plans. In 2017, DB plans represented about 92% of assets under management for occupational plans. DB arrangements are further classified as:

      • integrated complementary, where established pension amounts are complementary to the social security pension

      • non-integrated complementary, where plan sponsors cap pension amounts to reduce exposure to volatility from the social security scheme’s pension liabilities

      • independent plans, where pension payments are independent of the social security pension Most private DB plans are independent plans, accounting for 67% of the number of DB pension plans and 85% of DB assets under management in 2017. Personal pension plans come in the form of open pension funds (individual membership) or Retirement Savings Plans (Planos Poupança-Reforma, “PPR”). PPRs were introduced in 1989 to promote long-term savings to finance individuals’ retirement and to improve the development of the Portuguese capital market. Most personal pension plans (around 96%) come in the form of PPRs. Personal pension plans are usually based on individual membership but employers can also make contributions to these plans on behalf of their employees. There are three types of financing vehicles for private pension schemes: pension funds, insurance contracts and investment funds.

Foreign Mutual Funds in a Portugal Private Pension

Foreign Mutual Funds within a pension can sometimes lead to an unnecessarily complex tax scenario, but if the treaty pension exception applies, it should eliminate the PFIC tax issue. Otherwise, the foreign mutual funds could lead to the dreaded PFIC tax situation (Passive Foreign Investment Company) – which results in tax-deferred treatment during the growth phase but then during the distribution time, taxpayers can end up paying double to triple what they would’ve paid if it was a US mutual fund.

Portugal Private Pension with Foreign or Domestic Stock, Bond, or US Mutual Fund

In general, foreign pension in Portugal is generally not considered taxable until distribution (since there is a tax treaty between the US and Portugal).

FBAR, FATCA & PFIC Reporting for Portugal Personal Pension

Since technically foreign pension plans are foreign financial accounts, they are reportable on one or more international information reporting forms, such as the FBAR (FinCEN Form 114) and FATCA (Form 8938). The FBAR and Form 8938 or not mutually exclusive from each other — and therefore taxpayers may be required to file the FBAR on both forms. If the foreign investment also contains items such as mutual funds, ETFs, or SICAVs, then the investment may become subject to Passive Foreign Investment Company reporting on form 8621. There are some potential exceptions and exclusions from reporting on 8621, but they are limited.  In addition, the Internal Revenue Service does not require duplicative reporting of the same asset on Form 8938 and Form 8621— although if the taxpayer has multiple types of investments and categories of investments — both forms may still be required. While the failure to report these accounts may result in significant fines and penalties, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with safely getting into compliance with a reduced penalty, or even a complete penalty waiver.

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