By Miguel Silva Reichinger Pinto Correia No Comments
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. Continue reading
By Miguel Silva Reichinger Pinto Correia No Comments
Economic substance describes the economic (operational) reality of a corporate structure which has been put in place because of international tax optimization reasons.
In an ever more globalized economy, and especially taking into account the European Union context, it is not the the freedom of the establishment, guaranteed under EU law and Treaties, that is being questioned nowadays by Tax Authorities. What is being put into question is whether such structures do reflect the economic/operational reality of day-to-day business.
Taking into account the above-mentioned and, in line with international and European best practices and orientations, the Madeira International Business Center (MIBC or IBCM) was the leading jurisdiction to set up enhanced economic substance requirements for the international services, trading and shipping companies operating within its scope.
In fact, the International Business Center of Madeira, always a subject of Portuguese and European law, paved the way for the European Union Code of Conduct Group assessment of non-EU jurisdictions.
Companies benefiting from the 5% tax, made available to those operating within the Madeira International Business Center, must begin their activities in a period of six months in the case of international services and one year in the case of industrial activities or shippingg, counting from the date of licensing and they must observe one of the following enhanced economic substance requirements:
- Create 1 to 5 jobs, within the first 6 months of activity, and make a minimum investment of €75,000 in the acquisition of tangible or intangible fixed assets within the 2 first years of activity;
- Create 6 or more jobs, withing the first 6 months of economic activity.
Furthermore, the jobs to be created need to be on a full-time basis and to be performed by a residents, for tax purposes, in the Autonomous Region of Madeira, regardless of their nationality. Company directors can obviously count as jobs posts, but need to fulfill the requirements above-mentioned.
In relation to the “investment”, this economic substance requirement foreseen within the rules applicable to the MIBC must involve control of a resource and generate future economic benefits for the company (financial investments/portfolios are excluded from the investment definition). In the case of real estate and IT servers the investment must occur within the Autonomous Region of Madeira.
The above economic substance requirements needed to obtain the lowest corporate income tax rate in the EU, through the MIBC, make it comply with the OECD and EU guidelines economic substance. This is because:
- It demonstrates that the core income generating activities have been undertaken in the jurisdiction (i.e.: coordinating group activities; managing stock and taking orders; providing consulting/administrative services; R&D activities; agreeing funding terms; monitoring and revising any agreements, managing risks; taking relevant management decisions, etc…)
- It assures adequate expenditure in the MIBC proportionate to the level of activity and have adequate physical presence in the MIBC (e.g. office space, facilities and employees).
- It can be use to show that the company is directed and managed in the jurisdiction with regards to the relevant activity (e.g. having board meetings with an adequate frequency, quorum of directors physically present at such meetings, the directors having the necessary knowledge and expertise to discharge their duties as directors, meeting minutes kept in the jurisdiction, etc.).
It goes without saying that investors looking into relocation or incorporation within the Madeira International Business Center are also capable of providing the economic motivation for the operation based on several factors, among which we highlight the following: profit motive, improvement of business position (market share); growth, risk reduction, better control over the operations, leverage and even in some cases the beneficial owner is also relocating to Madeira to live.
Taking into consideration the above, the Madeira International Business Center is one of the leading jurisdictions, within the European Union, to provide the best of both worlds: low corporate taxation and the characteristics needed to assure that internationally recognized substance requirements are met.
Substance levels for a company in the MIBC (or in Portugal) must always be set on a case by case basis. Our team at MCS, with more than 20 years of experience in the sector, is able to assist you in setting up and managing a company within the MIBC or Portugal. For more information click here.
By Miguel Silva Reichinger Pinto Correia No Comments
Portugal, and more specifically Madeira, offers unique conditions conditions for investors to locate not only their holding company, but also their commercial and trading company. Keep reading our article to find out why.
Cost and Quality of Living
Portugal ranks in the Top 30 Cheapest Countries in Europe (Numbeo), surpassing Spain, Malta, Greece, and France. Add this to the special tax regime available to new residents and businesses and your savings will increase even more.
Add that to the fact that Portugal ranks 1st in the World in the Quality of Life for Expatriates and is the 2nd best country in the World in leisure activities, you will rapidly understand why people have been relocating to Portugal in the last couple of years.
Furthermore, in the latest Global Peace Index, published by the Institute for Economics and Peace, Portugal ranks on the Top 3 Peaceful Countries in the World. In this index, Portugal ranks above Switzerland, Canada and Switzerland.
On the other hand, international Living ranks Portugal in the Top 10 Best Countries to Retire in the world and Investopedia ranks it 2nd best country to retire in Europe. Unlike Spain, Portugal has never suffered any terrorist attack to date.
If you are looking for the city with the best quality of life, and where you can enjoy a cosmopolitan and yet calm island life, then Funchal is the place to be. The Portuguese consumer association has ranked Funchal as the second-best city to live in Portugal.
Political Stability and Legal System
Portugal has a strong tradition of political stability, with power alternating between the two main center parties since 1974. Given its constitutional system, premier-presidentialism, it is not unusual for these center parties to form coalition with other minor parties in recent years.
The Autonomous Region of Madeira possesses its own political and administrative statute and has its own government. The branches of Government are the regional executive (Governo Regional) and the legislative assembly (Assembleia Regional). The assembly is elected by universal suffrage. Power in Madeira has been exercised by the same party since 1976.
The Portuguese Law system is part of the civil law legal systems, based on Roman Law. Since the 20th century there has been a major influence from German civil law, a shift from the French influence of the previous century. Since 1986 European Union Law became the major driving force on corporate law, administrative law and civil procedure.
Portuguese Law has influenced the legal systems of Angola, Brazil, Cape Verde, Guinea-Bissau, Mozambique, São Tomé and Príncipe, Timor-Leste, the State of Goa (India) and the Special Administrative Region of Macau (China).
Portugal is the only country in Top 6 Most Powerful Passport Index (Visa-Free Score of 185 countries) to have the most cost-efficient Residency and Citizenship by Investment in Europe.
According to the Cato Institute’s Human Freedom Index, Portugal ranked among the Top 20 Countries, surpassing France, Spain and Greece pertaining economic and personal freedoms.
As for religious, bio-ethical, family and gender freedoms, Portugal ranks in the world Top 3 in the World Index of Moral Freedom, surpassing all the G20 countries in these fields. Portugal is also among ILGA-Europe’s Rainbow Index Top 10 European countries in respect to LGBTQI equality, surpassing countries like, the United Kingdom, Norway, Sweden, Germany, France and the Netherlands.
Qualified Workforce and Low Operational Costs
Portugal has a vast network of prestigious private schools and state-run Universities scattered across the country (including Madeira), to which those residing in Madeira can apply.
Universities in Portugal rank among the Top 500 in the international Shanghai Ranking and have European renowned colleges in the engineering, economics and medicine, such as: Instituto Superior Técnico and Aveiro University (both with audited courses by the European Network for Accreditation of Engineering Education (EUR-ACE Accreditation Program)); Nova School of Business and Economics and Católica Lisbon School of Business and Economics (both certified by the Association to Advance Collegiate Schools of Business International Accreditation, EQUIS – EFMD Quality Improvement System Accreditation; and the Association of MBAs Accreditation), with the first being a Member of CEMS Global Alliance in Management Education.
The Portuguese labor force is also known for its language skills, being ranked 7th in in World by the IMD World talent report).
Operational costs in Portugal, from a human resources and managing services perspective, are the lowest in Western Europe.
Holding Companies in Portugal
Under Portuguese law a pure holding company (SGPS – Sociedades Gestoras de Participações Sociais), has the sole contractual purpose of managing stakes in other companies as an indirect form of economic activity, the taxation for this structure is the same as that of any other commercial company.
Nevertheless, any commercial company with a broad business purpose that includes the possibility of holding stakes in other companies can benefit from the mechanisms stipulated in Portuguese and European tax law for eliminating double taxation on the ensuing income, as long as certain requirements have are met. As such, investors may hold stakes in addition to the undertaking of their commercial activity, through a single company.
General Overview of the Taxation of Holding Companies in Portugal
Taxation of Holdings in Madeira (Portugal)
Apart from the considerable tax benefits granted under the Portuguese tax law, described below, Portuguese holding companies resident in the Autonomous Region of Madeira and duly licensed to operate within the International Business Center of Madeira will also benefit from the following tax advantages:
- The corporate income tax rate is 5%
- No withholding tax on royalties, services or interest paid to third parties
- Exemption from withholding tax in the distribution of dividends to shareholders
- Exemption from withholding tax upon payment of interest and other forms of remuneration through increases, allowances or advances to shareholders
- An 80% reduction in stamp duty, Real Estate Transfer Tax (IMT) and Municipal Property Tax (IMI), regional and municipal surcharges and taxes, and notary and registration fees.
- Reduction in the special payment on account and autonomous taxation in proportion to the applicable corporate income tax rate (in this case, a 76.2% reduction).
- Commercial or trading activities performed by the Madeira company shall be taxed in accordance with the income tax rate applicable to companies licensed within the scope of MIBC, i.e. 5%.
Conditions for Participation Exemptions
- The Portuguese company holds, directly or indirectly, and continuously, for the 12 months that precede the distribution or transfer, a participation that is no less than 10% of the shareholder capital or the voting rights of the entity that distributes the profits/reserves or whose participation has been transferred (in the case of distribution of profits, if the participation has been held for less time, it must be maintained throughout the time necessary to complete the 12 months);
- The participated company is subject to and not exempt from corporate income tax (in the case of Portuguese companies), any tax referred to in the Parent-Subsidiary Directive (companies resident in the EU) or a tax of an identical or similar nature to that of corporate income tax, provided that the rate applicable to said entity is not less than 60% of the corporate income tax rate (other cases);
- The participated company is not resident in a tax haven;
- The distributed profits/reserves do not correspond to costs deductible by the entity that distributed it;
- The participated company is not subject to a tax transparency regime.
There is also the possibility of making use of the unilateral tax credit for international double taxation.
If participation exemption requirements are not met, there is the possibility of considering only half (50%) of the capital gains generated if such capital gains are reinvested. This possibility is subject to certain conditions
Conditions for the Taxation of Interests
European Directive 2003/49/EC, allows for the payment of interest and royalties between companies in the EU to be exempt from taxation, provided that the following requirements are met:
- Both companies meet the criteria of one of the corporate forms stipulated in the Directive Annex;
- Both are subject to income tax;
- The direct capital relationship between both companies is 25%, or if both are directly held in 25% by a third party fulfilling the two above-mentioned requirements, if in both cases the stake has been held for at least two years;
- The company to which the interest or royalty payments are made is the beneficial owner of such income, which shall be deemed to be the case when it earns the income for its own account and not as an intermediary, and where a permanent establishment is deemed to be the beneficial owner, the credit, right or use of information from which the income derives is effectively related to the activity carried out through its intermediary and constitutes taxable income for the purpose of determining the profit attributable to it in the Member State in which it is situated.
Portuguese, and companies duly licensed to operate within the International Business Center of Madeira, companies fulfill the first two requirements. If the third and fourth ones are also met, it shall be possible for entities resident in another EU Member State to pay interest or royalties to Portuguese companies without paying withholding tax in the State of origin and vice-versa.
Conditions of the Taxation of Dividends
Dividends distributed by a Portuguese company to its shareholders who are natural persons shall be taxed in accordance with the Personal Income Tax Code (28%) unless they are not resident in Portugal and the company is licensed to operate within the scope of the International Business Center of Madeira or a double taxation treaty is applied.
Profit or dividends distributed by a Portuguese company to shareholders that are legal persons, are exempt, provided that they:
- Are residents either in Portugal, in the EU, in the European Economic Area (provided that administrative cooperation is guaranteed with respect to taxation in terms equivalent to those established in the EU); or in jurisdiction with which Portugal has signed a currently valid agreement for avoiding double taxation and allowing for exchange of information.
- Are subject to and not exempt from Corporate Income Tax (Portuguese companies), a tax mentioned in the Parent-Subsidiary Directive (companies resident in the EU) or a tax that is identical or similar to Corporate Income Tax, provided that the rate applicable to the entity is not less than 60% of the corporate income tax rate (other cases).
- Hold, directly or indirectly, a participation that is no less than 10% of the shareholder capital or the voting rights of the Portuguese company.
- Hold a participation in the Portuguese company in a manner that has been uninterrupted during the 12 months prior to the distribution date.
Taxation of Capital Gains
Capital gains earned by non-residents of Portugal from the sale of a shareholding in a Portuguese company shall not be taxed if the company’s main assets do not include real estate in Portugal. This exemption shall not apply to shareholders residing in tax havens.
Our team at MCS, with more than 20 years of experience in the sector, is able to assist you in setting up and managing a company within the MIBC or Portugal. For more information click here. Continue reading