Welcome to the world of Portuguese Golden Visa investment funds. The Portuguese residency by investment program has gained significant popularity among international investors seeking to obtain residency and ultimately citizenship in this vibrant European country.
One of the most effective ways to qualify for the program is by investing in approved Golden Visa investment funds.
Whether you are an experienced investor or just starting your investment journey, it is essential to equip yourself with a solid understanding of the terminology associated with these funds.
What are Portugal Golden Visa Investment Funds?
The investment fund option for the Portugal Golden Visa was implemented through an amendment to Portuguese Law no. 102/2017, enacted on August 28th, 2017 with the following characteristics:
- Capital transfer of the amount of €500.000 or higher
- Acquisition of units of investment funds or venture capital Portugal fund of funds dedicated to the capitalization of companies, capital injected under the Portuguese legislation
- Maturity, at the moment of the investment, is, at least, of five years
- At least 60% of the investments are realized in commercial companies with head office in the national territory.
Glossary for the Portugal Golden Visa Investment Funds?
Private Equity Fund
A private equity (PE) fund is an investment vehicle established as a company or a legal entity that raises capital from institutional and private investors to make investments in privately held companies.
Venture Capital Fund
A venture capital (VC) fund is a type of investment fund that provides capital to early-stage, high-growth companies with significant growth potential. Venture capital funds typically invest in startups or small businesses that are deemed to have strong prospects for rapid expansion and substantial returns on investment.
Auditor
Entity duly registered with the CMVM, responsible for the legal audit of the accounts and other legally established competences.
Investment Period
the period during which the Management Entity will select assets to be included in the Fund’s portfolio, in accordance with the investment policy set forth in these Regulations, and perform the necessary acts for the successful implementation of that strategy, including the acquisition of such assets.
General Partner (GP)
The General Partner is the fund management company responsible for identifying, evaluating, and managing investments. The GP invests its own capital in the fund and oversees its operations.
Assembly of Participants
Meeting of the Fund’s Participants, previously summoned in accordance with the law and by the Management Regulations, to deliberate on the matters set forth in the agenda contained in the respective summons.
Investment Committee
Structure with the competences and operating rules stipulated in these Regulations, aimed at the assessment and evaluation of investment opportunities in strict compliance with the purposes of the Fund and the protection of the Participants’ interests.
Business Day
for the purposes of performing acts and meeting deadlines provided for in these Regulations, it corresponds to any day that is not a Saturday, Sunday, or public holiday in Portugal.
Due Diligence
Due diligence is the comprehensive analysis and evaluation of a target company by the private equity fund before making an investment. It involves reviewing financial data, operations, market dynamics, risks, and opportunities of the company.
Exit Strategy
An exit strategy is the plan to divest from a company in which the private equity fund has invested. Common exit strategies include IPO (Initial Public Offering), selling to another company or investor, or a management buyback of the company.
Mutual Fund
A mutual fund is an investment vehicle operated by an investment company that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, options, commodities, or money market instruments.
Management Fee
The management fee is the fee charged by a mutual fund to cover the costs of managing the fund’s portfolio and providing investment advisory services. It is typically expressed as a percentage of the fund’s total assets under management.
Internal Rate Return (IRR)
It is a financial metric used to measure the profitability and potential return of an investment. The IRR is the rate of return that makes the present value of cash inflows equal to the present value of cash outflows over the life of an investment.
Diversification
Diversification is an investment strategy that aims to reduce risk by spreading investments across different asset classes, sectors, regions, or individual securities. The principle behind diversification is that by investing in a variety of assets, the potential losses from any one investment can be offset by gains in others.
Capital Gain
Capital gain refers to the profit realized from the sale or disposition of a capital asset, such as stocks, bonds, real estate, or other investments. It is the difference between the sale price of the asset and its original cost basis.
Dividend
A dividend is a payment made by a corporation to its shareholders, typically in the form of cash or additional shares of stock. Dividends are usually distributed out of the company’s profits as a way to share the financial success with shareholders.
Yield
Yield refers to the income generated by an investment, typically expressed as a percentage of the investment’s value. It represents the return an investor receives from holding a particular asset.
Liquidity
Liquidity refers to the ease with which an asset or investment can be bought or sold in the market without causing a significant impact on its price. It is a measure of how quickly an investment can be converted into cash without incurring substantial transaction costs or loss of value.
Management Regulation
Is equivalent to Private Placement Memorandum. Prepared by the issuing company or its legal representatives and serves as an informational disclosure document for prospective investors. It contains essential information about the investment opportunity, including the terms of the offering, the company’s business and financial details, risk factors, and any legal or regulatory considerations.
Depositary Entity
Entity legally authorized for this purpose, entrusted with the assets that constitute the Fund’s portfolio, with the competences provided by the Regulations, without prejudice to other legally established competences.
Participation Units (UPs)
Participation units is the ownership units or shares issued by certain investment vehicles, such as mutual funds or real estate investment trusts (REITs). These units represent an individual’s ownership interest in the investment vehicle.
CMVM
CMVM stands for “Comissão do Mercado de Valores Mobiliários,” which translates to the Portuguese Securities Market Commission. CMVM is the regulatory authority responsible for supervising and regulating the securities market in Portugal.
Portuguese Investment Funds tax details for US citizens
PFIC
PFIC stands for “Passive Foreign Investment Company.” It is a term used in the United States tax code to refer to certain foreign corporations that meet specific criteria related to their income and assets.
A foreign corporation is classified as a PFIC if either:
- At least 75% of its gross income is passive income, which includes dividends, interest, rents, royalties, and certain gains from the sale of assets, or
- At least 50% of its assets produce, or are held for the production of, passive income.
PFIC status has significant tax implications for U.S. taxpayers who own shares or have an interest in a PFIC. The tax treatment of PFICs is complex and designed to discourage U.S. taxpayers from deferring U.S. tax by investing in passive income-generating foreign entities.
The default tax treatment for PFICs is unfavorable. U.S. taxpayers who own shares in a PFIC are subject to a default tax regime known as the “excess distribution regime” or the “mark-to-market regime.” Under these regimes, any distribution of earnings or gains from the PFIC, or any gain realized upon the sale or disposition of PFIC shares, may be subject to special tax calculations and potentially higher tax rates.
To mitigate the tax consequences of PFIC investments, the U.S. tax code provides certain elections and reporting requirements. For example, taxpayers may elect to treat a PFIC as a “qualified electing fund” (QEF) or make a “mark-to-market” election, which can result in more favorable tax treatment.
Form 8621
Form 8621 is a tax form used by U.S. taxpayers who have an interest in a Passive Foreign Investment Company (PFIC). The PFIC reporting requirements are intended to prevent U.S. taxpayers from deferring tax on passive income earned through foreign investments.
Form 8621 is filed annually and provides information about the PFIC investment, including details such as the taxpayer’s ownership percentage, income received, gains or losses realized upon disposition, and any elections made regarding the tax treatment of the PFIC.
The form requires detailed calculations to determine the taxpayer’s tax liability related to the PFIC investment. Depending on the taxpayer’s specific situation, different sections of the form may need to be completed, such as the Annual Information Statement, Mark-to-Market Election, or Qualified Electing Fund Election.
Why select for Portugal Residency Advisors for your Golden Visa application?
Local Expertise
We know Portugal. Due to our extensive local knowledge, we believe that concentrating our services in a single country destination is the best way to give you the most thorough and useful information.
Holistic Approach
One single channel of communication for the entire process. We provide you with a comprehensive service that covers all aspects of your investment and Golden Visa application.
Transparent Service
We recommend what’s best for you based on an extensive process experience that saves time and money to clients. Our pricing is clear and competitive, and we don’t sell services that make us more money.
Simple Process
Technology plays a very important role in our company. We minimize our clients’ involvement in paperwork. We are customers ourselves and we know how to serve you.
This article is for informational purposes only and shall not be understood or construed as financial advice. We cannot act as a financial advisor and, therefore, will not provide specific advice on which funds you should invest in.
