As a dual citizen of the U.S. and Portugal, the taxation of your salary from your S-corporation depends on several factors, including both U.S. and Portuguese tax laws.
U.S. Taxation
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- S-Corp Income: As a shareholder of an S-corporation, the corporation itself generally does not pay federal taxes. Instead, the income “passes through” to you. You then report that income on your personal tax return (Form 1040) in the U.S. Even if you are living outside the U.S., you are still subject to U.S. taxation on your worldwide income.
- Foreign Earned Income Exclusion (FEIE): If you’re living in Portugal and meet certain requirements, you may be eligible to exclude a portion of your foreign earned income from U.S. taxation under the Foreign Earned Income Exclusion (FEIE). For 2024, the exclusion is up to $112,000 (adjusted for inflation). However, this exclusion only applies to earned income (i.e., wages or salary), not to passive income, such as dividends.
- Self-Employment Tax: Even if you’re living abroad, you may still be subject to U.S. self-employment taxes (Social Security and Medicare) on income derived from your S-corp if you’re actively working in the business. However, some treaties or the FEIE may offer exceptions or relief depending on your situation.
Portuguese Taxation
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- Tax Residency: If you are a tax resident of Portugal (which typically means spending more than 183 days in the country during the year or having a primary place of residence there), you will be taxed by Portugal on your worldwide income, including income from your S-corp salary.
- Tax on Salary: If you’re being paid a salary by your S-corp, Portugal will tax that salary as personal income. Portugal has progressive tax rates for individual income, with rates ranging from about 14.5% to 48%, depending on your income level.
- Double Taxation Agreement (DTA): The U.S. and Portugal have a Double Taxation Agreement (DTA) that helps prevent you from being taxed twice on the same income. Under this treaty, you can typically claim a credit for taxes paid to one country (e.g., Portugal) against your tax liability in the other country (e.g., the U.S.). This means that if you’re taxed on your salary in Portugal, you may be able to reduce or eliminate U.S. tax on the same income.
- Social Security Contributions: Portugal has its own social security system, and if you’re working there, you may be required to pay into it. However, the U.S. and Portugal have a Totalization Agreement to avoid double contributions to social security. If you’re paying into one country’s system (say, the U.S. system through your S-corp), you may not have to pay into the Portuguese system, or vice versa.
Summary:
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- U.S. Taxes: As a U.S. citizen, your salary from the S-corp is generally subject to U.S. taxation. You can potentially exclude up to $112,000 in earned income under the FEIE if you meet the requirements. However, S-corp dividends (if applicable) are not eligible for this exclusion.
- Portuguese Taxes: If you’re a tax resident of Portugal, your salary will be subject to Portuguese personal income tax. Portugal taxes its residents on worldwide income, but you may be able to reduce double taxation through the U.S.-Portugal Tax Treaty and credits for taxes paid to Portugal.
Recommendation:
It’s highly advisable to consult with a tax professional who is familiar with both U.S. and Portuguese tax laws, as there can be nuances and specific requirements for dual citizens. They can help you determine your exact tax liabilities, apply any available exclusions or credits, and ensure you’re compliant with both U.S. and Portuguese tax obligations. If you are looking for guidance, contact us here!
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