Participation exemption is, under Portuguese law, a tax exemption applicable to dividends received from a subsidiary and any possible capital gains ensuing from the sale of that participation.
Under the participation exemption regime companies can do business and invest worldwide in a tax efficient manner and even benefit from Portugal’s lowest corporate tax rate under the Madeira International Taxation Regime, should they pursue other economic activities apart of that of a pure holding company.
This post of ours focus on the participation exemption regime from a Portuguese holding company standpoint, nevertheless should the Portuguese company a subsidiary, rather than a parent company, the same regime still applies, under conditions foreseen in EU law and the parents’ company home country.
Under the Portuguese participation exemption regime is applicable to the following types of income/transactions:
- Profits and reserves distributed to Portuguese companies by their subsidiaries shall not contribute to their taxable profit. Provided that these derive from:
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the subsidiary.
- The shares are held for a consecutive period of at least one year or maintained for that period.
- The taxpayer is not covered by the tax transparency regime.
- The subsidiary is subject to and not exempt from corporate income tax, an income tax mentioned in Article 2 of the Council Directive 2011/96/EU, or a tax similar to corporate income tax with a legal rate that is not lower than 60% of the standard corporate income tax rate.
- Capital losses or gains occurring due to the transfer of shares in these companies at a cost in any form, and regardless of the percentage of the share transferred, shall not contribute to their taxable profit. Provided that the following requirements are met at the date of transaction:
- The shares are held for a consecutive period of at least one year.
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the entity from which the shares are transferred.
- The taxpayer is not covered by the tax transparency regime (i.e. imputation of profits to individual or corporate shareholders, regardless of effective distribution).
- The entity from which shares are transferred is not resident in a tax haven.
- The assets of the entity from which shares are transferred are not directly or indirectly comprised of more than 50% of real estate located in Portugal and acquired on or after 1 January 2014 (except real estate allocated to an agricultural, industrial, or commercial activity that does not consist of buying and selling real estate).
- Profits, reserves, capital gains and loses realized by a Portuguese permanent establishment may also benefit from the participation exemption regime provided that said Portuguese permanent establishment is of:
- An European Union resident entity, which complies with the requirements foreseen in Article 2 of the Council Directive 2011/96/EU.
- A European Economic Area resident entity, subject to tax cooperation obligations similar to the ones established within the European Union, provided that the entity complies with requirements that are comparable to those foreseen in Article 2 of the Council Directive 2011/96/EU.
- An entity resident in a state with which Portugal has concluded a double tax treaty (except if resident in a tax haven) that foresees exchange of information and is subject to and not exempt in its state of residence from an income tax similar to the Portuguese Corporate Income Tax, which legal rate is not lower than 60% of the standard Portuguese corporate income rate.
As previously mentioned, profits, reserves, and capital gains or loses deriving from such jurisdictions cannot benefit from the Portuguese participation exemption regime.
Last, but certainly not least, tax credit for economic and legal double taxation are available to companies, in the cases foreseen in the law, when said company does not qualify for the participation exemption regime.
NOTE – list of current tax havens: American Samoa, Liechtenstein, Andorra , Maldives, Anguilla, Marshall Islands, Antigua and Barbuda, Mauritius, Aruba, Monaco, Ascension Island, Monserrat, Bahamas, Nauru, Bahrain, Netherlands Antilles, Barbados, Northern Mariana Islands, Belize, Niue Island, Bermuda, Norfolk Island, Bolivia, Other Pacific Islands, British Virgin Islands, Palau, Brunei, Panama, Cayman Islands, Pitcairn Island, Channel Islands, Porto Rico, Christmas Island, Qatar, Cocos (Keeling), Queshm Island, Iran, Cook Islands, Saint Helena, Costa Rica, Saint Kitts and Nevis, Djibouti, Saint Lucia, Dominica, Saint Pierre and Miquelon, Falkland Islands, Samoa, Fiji, San Marino, French Polynesia, Seychelles, Gambia, Solomon Islands, Gibraltar, St Vicente and the Grenadines, Grenada, Sultanate of Oman, Guam, Svalbard, Guyana, Eswatini, Honduras, Tokelau, SAR Hong Kong (China), Trinidad and Tobago, Jamaica, Tristan da Cunha, Jordan, Turks and Caicos Islands, Kingdom of Tonga, Tuvalu, Kiribati, United Arab Emirates, Kuwait, Virgin Islands of the United States, Labuan, Vanuatu, Lebanon, Yemen, Liberia.
This article is intends to be an introduction to the Portuguese participation regime, specific professional advice should be hire in order to analyse its application to one’s specific circumstances.
MCS and its team have more than 20 years of experience in assisting international investors and expats in Portugal and in the Autonomous Regions of Madeira. For more information on our services please do not hesitate to contact us.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more