Many U.S. expatriates living in Portugal operate through a Limited Liability Company (LLC) — often a single-member disregarded entity for U.S. tax purposes. However, when it comes to Portuguese taxation, the treatment of LLC income is very different and can easily lead to double taxation or under-reporting if not properly understood.
A recent technical opinion issued by the Ordem dos Contabilistas Certificados (OCC) in October 2025, following an inquiry submitted by GoalSeek, clarifies once again how these situations should be approached under Portuguese tax law.
1. Undistributed capital gains or profits from a U.S. LLC
If a Portuguese tax resident owns 100% of a U.S. LLC that has realized capital gains (for example, from the sale of listed shares) but has not distributed those profits, the general understanding remains that these gains are not automatically reportable in the owner’s Portuguese tax return (Modelo 3).
Portugal does not recognize the “disregarded entity” status used by the IRS. Therefore, unless the LLC qualifies as a transparent partnership under Portuguese law (which is rarely the case), income is only taxed when actually distributed to the individual. In other words, unrealized or retained earnings remain at the company level until paid out.
This interpretation aligns with several official rulings by the Portuguese Tax Authority (Autoridade Tributária, AT), including:
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Binding Ruling no. 2360/2016
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Binding Ruling no. 23980/2024
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Binding Ruling no. 26925/2024
All these confirm that income from a U.S. LLC is not automatically attributed to the member for Portuguese tax purposes.
2. How to report distributions from an LLC
When the LLC makes an actual distribution — for example, $10,000 transferred to the Portuguese resident — this amount should generally be treated as a dividend under Article 5(2)(h) of the Código do IRS (Personal Income Tax Code).
In such cases, the Portugal–U.S. Double Tax Treaty (DTT) applies. The U.S. may withhold up to 15% tax on the dividend (Article 10 of the DTT), while Portugal taxes the same income at a flat rate of 28%, or allows the taxpayer to opt for aggregation if more favorable. Any U.S. tax withheld can be claimed as a foreign tax credit in Portugal (Article 81 of the CIRS).
3. Practical steps for compliance
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Report the distributed amount as foreign dividend income in Annex J of Modelo 3.
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Indicate the U.S. as the source country and attach proof of withholding if applicable.
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Retain all LLC documentation (bank statements, tax filings, brokerage reports) in case the AT requests clarification.
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Do not include unrealized or retained earnings until an actual distribution occurs.
4. Key takeaway
While U.S. tax rules may treat your LLC as “transparent,” Portugal does not. For Portuguese tax purposes, the timing and nature of income recognition depend entirely on actual distributions, not on the LLC’s internal accounting or U.S. tax classification.
As these situations often involve dual reporting and treaty coordination, it’s essential to obtain tailored advice to ensure both compliance and tax efficiency.
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