Portugal might be the last country to consider when incorporating a holding company. However, like numerous nations, Portugal also has tax incentives for holding corporations in their tax systems. The purpose is to minimise double taxation of the revenue typically earned from these firms and to encourage international investment.
Under the current tax law, incorporating a holding company (pure, i.e. holding of participations, or mixed, i.e. holding of participations and conducting commercial activity) in Portugal is associated with the following tax benefits.
Holding Company Participation Exemption
Portuguese Participations
The Participation Exemption applies to Portuguese companies as foreseen in the Council Directive 2011/96/EU of 30 November 2011 (the latest legal version transposed into Portuguese tax law). Under this scheme, dividends received by Portuguese companies from European Union (and European Economic Area) are subject to total exclusion; this means that the holding company can deduct their dividends, received when they calculate their taxable income), provided the following conditions are met:
- The holding company must hold at least 10% shareholding (capital or voting rights) of the subsidiary company.
- The shares are held for at least one year (or maintained for that period).
- The tax transparency regime does not cover the holding company.
- The subsidiary is subject to and not exempt from Corporate Income Tax (CIT), an income tax mentioned in Article 2 of the EU Parent/Subsidiary Directive (Council Directive 2011/96/EU), or a tax similar to CIT with a legal rate that is not lower than 60% of the standard CIT rate.
- The subsidiary is not resident in a blacklisted jurisdiction
- Portugal black-lists jurisdictions with whom it has signed a Double Taxation Agreement.
Non-Portuguese Participations
The above rules also apply to the distribution of dividends to a Portuguese holding from:
- A legal entity residing in the EU meets the standards outlined in Article 2 of the EU Parent/Subsidiary Directive.
- An EEA-resident entity subject to tax cooperation responsibilities analogous to those created within the European Union.
- Providing the entity satisfies conditions comparable to those outlined in Article 2 of the EU Parent/Subsidiary Directive.
- Entity resident in a state with which Portugal has agreed a double taxation agreement (unless resident in a blacklisted jurisdiction) that provides for information sharing and is subject to and not exempt from a similar income tax to the Portuguese CIT in its state of residence.
Under the rules above scheme, capital losses or gains due to the transfer of shares in these companies shall not contribute to their taxable profit.
Tax Credits
In addition to the participation exemption abovementioned, foreign-sourced dividends (regardless of their source) may also benefit from tax credits. This is particularly important when the participation exemption does not apply to the holding company’s subsidiaries.
To benefit from said tax credits, the parent company must comply with the following requirements:
- The holding company must hold at least 10% shareholding (capital or voting rights) of the subsidiary company.
- The shares are held for at least one year (or maintained for that period).
- The subsidiary is not resident in a blacklisted jurisdiction.
The above option is a unilateral tax credit for international economic double taxation. In addition, there is also the potential of utilising the unilateral tax credit for foreign double taxation, namely source-deducted income tax.
Madeira Island: Exclusive Tax Benefits
Holding companies incorporated within the Madeira International Business Centre (MIBC), Portugal, a state regime approved by the European Commission with guaranteed tax benefits until 2027, benefit from additional tax incentives.
Holding Company Corporate Tax Rate
- 5% rate (2015-2027) on non-exempt income derived from holdings whose main activity consists of the management of shareholdings of a non-financial nature.
- 14,7% rate on other income
Profits or Dividends
As long as they are non-residents (excluding blacklisted jurisdictions), private individuals who are shareholders of Madeira companies are exempt from tax on profits placed at their disposal, including the amortisation of shares without capital reduction, provided that such profits derive from income subject to the reduced corporate income tax.
Suppose the shareholders reside in Portugal. In that case, distributions of profits/reserves made by the Madeira company shall also be exempt from taxes (withholding tax) under the Participation Exemption scheme abovementioned.
Interests, Royalties and Services
Shareholders of Madeira companies, as long as non-residents in Portugal or blacklisted jurisdictions are also exempt from tax on the payment of income deriving from interest or other forms
of remuneration of shareholder loans, allowances, or capital advances that they have made to the company.
In addition to the above, there is no withholding tax on the worldwide payment of royalties and services.
Capital Gains
Non-residents (except those in blacklisted jurisdictions) who realise capital gains through the sale of a shareholding in a Madeira company are exempt from taxation if the company’s principal assets do not involve real estate in Portuguese territory.
Under the abovementioned terms for a Participation Exemption, capital gains obtained by a Madeira firm through the sale of its subsidiaries or affiliated companies are free from taxation.
MIBC Economic Substance Requirements
To qualify for the tax reductions, companies incorporated in the MIBC have to comply with one of the following pre-established requirements:
- Creation of one to five full-time job post(s) (the job posts must be filled in by residents, for tax purposes, in Madeira, regardless of their nationality) in the first six months of operation and undertake a minimum investment of €75.000 in the acquisition of fixed assets, tangible or intangible, in the first two years of operation; or
- Creation of six or more full-time job posts (the job posts must be filled in by residents, for tax purposes, in Madeira Island, regardless of their nationality) in the first six months of operation.
Job Posts
The entire economic activity of the MIBC-licensed company must be carried out solely by the above-required employees. They qualify from an immigration and taxation standpoint as residents of the Autonomous Region.
Investment in Assets
As for the investment on fixed assets, tangible or intangible: said investment shall be realised in assets located or received within the scope of the MIBC, used within said MIBC and which are necessary to the carrying out of the business activities conducted within the scope of the MIBC.
Furthermore, the assets acquired must remain within the MIBC during the entire period it enjoys this status or during its useful lifetime, whichever period may be shorter, without being transferred. Nor may such assets be leased or ceded to third parties for their use unless the corporate purpose or business activity of the MIBC is such lease or cession, and always provided that there is no direct or indirect link with the lessee or transferee of the said property.
It shall be understood that this requirement is not infringed when the goods are transferred and the sum of money realised is reinvested in new fixed assets under the same conditions within one year. In the case of used assets, these may not have been previously applied for a MIBC investment of another company.
The above requirements are based on the current MIBC regulations, advice from the Portuguese Tax and Customs Authority and best practices. Different interpretations by the European Commission, in case of an audit, may apply given the state aid nature of the regime.
This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind. Should you have any questions, please do not hesitate to contact us.
Rosana Rodrigues is a co-founder and partner of TFRA Law Firm. Her work mainly involves advising foreign investors in Portugal, particularly in areas of Corporate and Tax law. She has also worked extensively in Shipping law… Read more
