Participation Exemption Regime

Portugal - Gateway into Europe

Introduction

Portugal is becoming a top jurisdiction to set up a holding company with the purpose of investing in non-European markets. Likewise, it is also a flexible and efficient gateway for foreign companies to tap into the European Union market.

An increasing number of multinational groups is now seeking the swift incorporation of efficient holding structures in Portugal to do business in Brazil, African countries, the United States of America, India, Middle East or Southeast Asia.

The information contained in this page was updated due to the new legislation being introduced by the 2016 State Budget.

 

The benefits

The Portuguese participation exemption regime provides a tax exemption on the dividends derived from a qualified holding and on gains derived from the transfer thereof. This includes dividends paid to and by Portuguese companies.

Amendments introduced in 2014 have significantly extended the participation exemption regime’s scope to include a full exemption on branch profits.

Due to Portugal’s extensive network of Treaties to Avoid Double Taxation, this regime allows global companies to tackle many tax pitfalls of direct trading worldwide, namely with Portuguese speaking countries.

Portuguese companies benefit in full from the application of all European Union Directives regarding intra community taxation of dividends, royalties and interest.

“The Portuguese participation exemption regime is one of the most comprehensive and flexible in Europe”.

Inbound transactions

Portuguese shareholders

Dividends

Dividends derived from qualified shareholdings in companies located in non blacklisted jurisdictions will not be liable to Corporate Income Tax in Portugal.

 

[2014-2015 Regime]

A qualified shareholding requires a 5% direct or indirect shareholding (or voting rights) by a Portuguese Parent Company in a foreign subsidiary held for a minimum 24 month period.

 

[2016 Regime]

A qualified shareholding requires a 10% direct or indirect shareholding (or voting rights) by a Portuguese Parent Company in a foreign subsidiary held for a minimum 12 month period.

The foreign subsidiary’s profits must be liable and not exempt from a type of Corporate Income Tax listed in Directive 2011/96/EU or taxed at a minimum rate of 12.6%.

If the participation exemption is not applicable due the non fulfillment of one of the aforesaid requirements, the Portuguese company may still be entitled to a tax credit for the underlying tax paid by eligible direct or indirect subsidiaries or a tax credit for double taxation due to tax being withheld on dividends.

Intra community payment of dividends is also regulated by the Parent-Subsidiary Directive.

Domestic payments of dividends are tax exempt provided a 5% shareholding is held for one year prior to the payment of dividends.

 

Permanent establishments

The exemption regime is also applicable (and optional) to profits and losses attributable to foreign permanent establishments of Portuguese companies. Therefore, Portuguese companies are entitled to exclude from taxation profits and losses in foreign PE. Some restrictions may apply.

 

Capital Gains

Capital gains derived from the sale of foreign qualified shareholdings are not taxable in Portugal. The applicability of the participation exemption regime to capital gains may be limited by anti-abuse provisions, namely where the subsidiary owns real estate.

Outbound transactions

Portuguese subsidiaries

Dividends

Dividends paid by Portuguese subsidiaries to foreign Parent companies will not be liable to withholding tax in Portugal if the qualified shareholding requirements are met.

 

[2014-2015 Regime]

A qualified shareholding requires a 5% direct or indirect shareholding (or voting rights) by a foreign Parent Company in a Portuguese foreign subsidiary. The qualified shareholding must be also be held for a minimum 24 month period.

 

[2016 Regime]

A qualified shareholding requires a 10% direct or indirect shareholding (or voting rights) by a foreign Parent Company in a Portuguese foreign subsidiary. The qualified shareholding must be also be held for a minimum 12 month period.

 

The Parent Company must be tax resident in a E.U. jurisdiction or in a country with which Portugal has entered into a Double Taxation Agreement.

Also the following additional requirements must be met:

  • The non resident corporate shareholder must be liable and not exempt from a type of Corporate Income Tax as listed in Directive 2011/96/EU or taxed at a minimum rate of 12.6%; and
  • The applicable Double Tax Treaty provides for an administrative cooperation mechanism regarding taxation similar to the E.U. system.

 

[2017]

Restrictions to this regime may apply if one of the beneficial owners has its residency or domicile in a tax haven. It is important to note that companies may still benefit from this regime if they can successfully argue that the beneficial owner’s residence was not set up with an artificial purpose.

 

Intra community payment of dividends is also regulated by the Parent-Subsidiary Directive.

Domestic payments of dividends are tax exempt provided a 5% shareholding is held for one year prior to the payment of dividends.

 

Permanent establishments

As a rule, after tax repatriation of profits by Portuguese permanent establishments is not liable to withholding tax in Portugal.

 

Capital Gains

Capital gains derived from the sale of Portuguese shareholdings are not liable to corporate tax in Portugal, provided corporate shareholders are not located in a blacklisted jurisdiction.

What can Lugna do for you and your company?

 

Lugna is a trustworthy partner to guide you during all stages of investment in Portugal.

The information above is a simple overview of the implications and benefits. Such information is not to be used in place of proper and complete professional advice, as it does not constitute a binding legal opinion nor does it not consider the particularities of your case.

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