Aggressive Tax Planning

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Aggressive Tax Planning

by | Wednesday, 27 July 2022 | Investment, Personal Income Tax

tax planning

Although tax planning can be legitimate under Portuguese law, the distinction between legitimate and illegitimate tax planning is blurred and depends on the interpretation and/or discretion of the tax administration. As a legitimate action, tax planning is the application of one’s knowledge of the law to concrete cases arising in professional life.

Considering the above, it has come to our attention that there is a German-language video circulating among social networks, which essentially advises NHR status holders to incorporate a holding company outside Portugal to receive the exempted dividends from their Madeira company.

Our team of professionals is aware of the proposed structure. Nevertheless, in our view, in the case of a tax audit in Madeira, the Tax and Customs Authority can deem said structure as highly aggressive tax planning, which is punishable under law.

For a foreign company to hold the Madeiran company at 100%, and for one to receive its dividends tax-free under NHR, said holding would need to make economic senses, i.e. it would need to have participated in other companies elsewhere in the world and not be incorporated to the single purposes of “filtering” Madeiran dividends, taxed at 28%, when paid directly to resident shareholders.

Even under the scenario above, from a conservative perspective, the matter of the Madeira company being held by a foreign company could be challenged by the AT for the reason that as NHR status holders, shareholders and directors living in Madeira, it does not make economic senses to repatriate the dividends back to an economically sound foreign holding. As again, one would fall under highly aggressive tax planning.

We remind you that the exchange of tax information and ultimate beneficial owners are a reality under EU law. This means should one set up the suggested structure below, in the event of a random aggressive tax audit, access to the information allowing tax authorities to connect the dots is relatively easy.

In addition to the above, the Madeira International Business Center is a state-aid regime duly authorized and ultimately audited by the European Commission. Failing to comply with its economic substance requirements and using it illegitimately could jeopardize its future existence and renewal, which in turn could cause the Autonomous Region of Madeira and its population to lose 10% of the archipelago’s GDP.

In conclusion, we at MCS do not support the above set-up suggested in social from an ethical and legal standpoint.

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Tax advisors or a tale as old as time

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As tax advisors since 1995, we have heard our fair share of tales as old as the time of expats relocating to Portuguese territory for immigration and tax purposes, ending up not complying with Portuguese tax law and therefore facing unpleasant surprises (penalties,...

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