Me as a Portuguese businessman

This is going to be another one of those articles where I expose uncertainties, so it’s going to be a little hard to write.

I like to think of myself as a great planner. I do lots of research, and I try to take my time with important decisions – plus, I always have at least one contingency plan if things go south.

When we were planning the move, I talked to a lot of people about the different ways I could structure working, and more importantly, taxes. Did I want to leave my business in the US, earn money as a US citizen, and pay US income tax? Or did it make more sense to transfer everything to Portugal and pay taxes there?

This is a pretty complicated question, and what I experienced as I spoke to people is that there is a lot of different opinions and a lot of room for interpretation on how the laws work. I made my decisions based on weighing all the advice, verifying wherever possible, and comparing dollars to dollars as much as I could.

The one good thing I knew was that I would only have to pay taxes in one country, since Portugal and the US have tax treaties to prevent double-dipping. But which country would be a better deal?

If I left my business in the US:

• I wouldn’t have to pay much income tax, since as a full-time expatriate I could basically be exempt earning up to about $100K.
• I would still be liable for self-employment taxes, which can be quite a chunk. But I could still deduct business expenses as usual – direct costs, plus a percentage of things like rent, utilities, etc.
• I would also have to keep my company in Oregon going, which meant I would still be liable for Oregon state taxes.
• Something I couldn’t verify 100% – if I didn’t earn anything in Portugal, it looked like I might not be available for citizen benefits like health care, which was a major deal.

If I moved my business to Portugal:

• The biggest difference right off the bat – any expenses that were somewhat business related could be deducted, including the entire cost of our flat, not just the 8% I could declare in the US for the square footage of my office! Since the flat is also the company headquarters, it’s all deductible – as are furnishings, utilities, internet, phones, and even a car. This means that income profit can be offset by a healthy amount.
• Also, although the company would be a single person LLC, I would actually set myself up as an employee and pay myself a salary – which was also a deduction, as was the social security tax I’d be paying into the system for my employee’s health & pension (government pension, here).
• Of course, I’d pay myself a small enough amount that I wouldn’t owe any PERSONAL taxes …
• Even if I made a little too much money, if I based the business in Portugal, I could take advantage of a special tax program created to lure in value-add companies. There is a 20% cap on my business taxes for ten years with this program.

Five or six spreadsheets later, it looked like moving the business was a clear winner by a sizeable amount.

I was incredibly lucky in that I connected with a really great business tax and law guy. I’ve mentioned Leonel before, and I will mention him again. I’m extremely grateful for all the assistance that he’s given me to this point, and I think he’s been completely honest and given me some excellent advice.

The problem is that I did not have a full appreciation for how complicated this was going to be … You hear a lot about bureaucracy, but it doesn’t sink in until you experience it.

When Leonel and I went to the registry office the first day we were here and set up the company, I though, “Well! That wasn’t too bad!” But that was actually only the start of the process. The company needed to be validated – and then set up for social security payments to the employees (me) – and then registered locally – and then there are web sites, all of which require PIN codes which all come separately. Some come by email (in Portuguese, without a lot of explanation of what it’s for), some come by snail mail (in Portuguese, usually without ANY explanation of what it’s for, for security purposes), and some things you have to show up for in person – but only if you have an appointment, which you have to make by phone, but all the phone trees are in Portuguese and no-one answers them anyway because it’s August and everyone is on vacation …

To add insult to injury, it’s been more complicated arranging receiving payment here than I expected. I had conversations with LinkedIn fairly early and they told me there’d be no issue with them paying directly into a Portuguese bank. However, part of the paperwork includes a W-8 form for the IRS.

Problem – there are five different types of W-8 forms, and no-one – including the IRS, who I had a very amusing conversation with – can tell me which is the right one for certain. I finally made a best guess and submitted it; I figure if I’m wrong there are only four other possibilities, right?

And of my two other major clients, one of them may not be able to deposit outside the US, which means I have to keep my US business account open, which means I may wind up getting taxed in the US anyways …

I will be perfectly transparent and admit there are times I wish I had just not bothered with the local company, even though I know that theoretically it is going to save me a ton of money. If I had it all to do over again, I probably wouldn’t – and I don’t know that I would necessarily recommend this path to anyone without a huge stubborn streak who was also a little on the masochistic side.

I knew this first year’s taxes were going to be a mess, and they show promise of being an unholy mess. At this point, I’m going to keep working through the system as well as I can, and sort it all out at the end. A possible path forward is that I wind up closing the company here in a year or two, and just take a loss on the expenses (which may actually be to my advantage tax-wise).

Now, after all that, a little bit of bright-side news: Today is August 28^th, and it’s Kristie’s last day as a Nike employee! She’s officially been on vacation for the last seven weeks, burning up available time. She’s logged in to her email account right now, sending farewell notes to people in the office, and then she’ll be shutting down for good. Congratulations for sticking it out for 18 years, B!