Moving to Madeira offers expats many opportunities, but the Portuguese tax system requires careful planning. One crucial issue is tax transparency in Portugal, a regime that can unexpectedly apply to certain companies. This classification turns a company into a pass-through entity, shifting the tax burden directly to shareholders. Understanding when it applies and how to avoid it is essential for anyone establishing a business in Madeira (or any part of Portugal!).
What Is Tax Transparency in Portugal?
The tax transparency regime disregards a company’s legal personality for tax purposes. Under this system, profits are calculated at the company level, but the company itself is not taxed on corporate income. Instead, profits are imputed directly to the shareholders and taxed under personal income tax (IRS) or corporate tax (IRC), depending on whether the owner is an individual or a legal entity.
Crucially, this applies even when the company retains earnings. Shareholders pay tax as though profits were distributed, which often creates unexpected liabilities for expats.
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Several key provisions govern tax transparency in Portugal:
- Article 6 of the Corporate Income Tax Code (CIRC).
- Article 12 of the CIRC confirms that companies under this regime are not taxed in corporate income.
- Article 20 of the Personal Income Tax Code (CIRS) defines how profits are allocated to individual shareholders.
- Portarias 1011/2001 and 1041/2001 list professional activities and set deduction limits.
These rules create an exhaustive framework where qualification as a transparent company is not optional. If conditions are met, transparency is mandatory.
Which Companies Fall Under the Regime?
Portuguese law identifies several categories of companies that are automatically considered tax transparent:
- Civil companies not incorporated in commercial form.
- Professional companies, when income derives mainly from liberal professions listed in Article 151 CIRS. This includes lawyers, doctors, engineers, accountants, and other regulated professions.
- Asset management companies (sociedades de simples administração de bens) hold and manage family property or investment assets.
In addition, European Economic Interest Groupings and Complementary Groupings of Companies are treated similarly, with profits attributed directly to members.
Professional and asset-holding companies are the most common traps for expats in Madeira.
Why Expats in Madeira Should Pay Attention
Many expats relocate to Madeira to practice a liberal profession or to hold real estate investments. Without careful structuring, they may inadvertently create a tax-transparent company. The consequence is immediate taxation on profits at the personal level, regardless of whether dividends are distributed.
This can be particularly harmful for expats who intend to reinvest profits locally. The regime does not recognise retained earnings, and taxation applies regardless of the company’s internal decisions. Therefore, planning is critical.
How to Avoid Tax Transparency in Portugal
Although the regime is mandatory, the law provides ways to structure companies so they are not classified as transparent.
Strategies include:
1. Diversify the Shareholding Structure
A company qualifies as a professional entity when all shareholders are professionals of the same listed activity. Introducing a shareholder who is either a non-professional or a legal entity prevents the company from being classified as tax transparent.
2. Ensure 26% of Capital Is Held by Non-Professionals
Portuguese tax law specifies that if non-professional shareholders own at least 26% of the capital, the company escapes the definition of a professional company. This rule is beneficial for single-shareholder companies converting into multi-member entities.
3. Expand the Number of Partners
Professional companies with more than five partners are excluded from transparency, even if most of their income derives from listed activities. Increasing the shareholder base can therefore remove the company from the regime.
4. Convert into Multidisciplinary Firms
Companies subject to professional associations (such as law firms or medical practices) may become multidisciplinary. By including professionals from different fields or non-professionals, the company no longer fits the strict definition of a tax-transparent professional society.
5. Restructure Single-Shareholder Companies
For unipersonal companies (“sociedades unipessoais por quotas”), dividing and transferring part of the quota to another shareholder is key. Once another partner holds at least 26% of the capital, the company can be converted into a multi-member limited company. This step eliminates its automatic classification as a transparent professional company.
6. Avoid Simple Asset Management Companies
Family-based companies that only hold property or assets often fall into the transparency rules. Adding different economic activities or structuring through a holding company can sometimes help avoid this treatment.
Practical Implications for Expats
For expats in Madeira, the difference between being taxed at the company level or under transparency is significant. A standard company enjoys the corporate tax rate and can reinvest earnings before distribution. A transparent company, by contrast, forces immediate taxation at the personal level, which may interfere with long-term investment plans.
Therefore, structuring the shareholding and company type at the outset is vital. Once transparency applies, it cannot be waived or replaced by choice.
Conclusion
Understanding tax transparency in Portugal is essential for any expat planning to live and invest in Madeira. The regime can apply automatically, leading to unexpected tax burdens, even on undistributed profits.
Fortunately, legal structuring options exist. Expats can avoid pass-through classification by diversifying shareholders, ensuring 26% ownership by non-professionals, expanding the partner base, or creating multidisciplinary firms.
Proper planning at incorporation is the safest way to protect investments and ensure efficient taxation. Expats are strongly advised to seek specialised advice before setting up a company in Madeira.
The information provided in this article on tax transparency in Portugal is intended for general informational purposes only. It does not constitute legal, tax, or accounting advice and should not be relied upon as such. The Portuguese tax regime is complex and subject to frequent changes. Expats in Madeira or elsewhere should always seek professional advice from qualified legal and tax consultants before deciding on company structuring or personal taxation. Madeira Corporate Services does not accept liability for any actions taken based on this content.
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