The Portuguese participation exemption regime allows international enterprises to avoid double taxation of dividends and capital gains arising from the disposal of both foreign and Portuguese shareholdings.

Portuguese companies are exempt from corporate income tax on inbound dividends and capital gains and foreign corporate shareholders are exempt from withholding tax on dividends provided certain conditions are met.

This regime puts Portugal on the map as a privileged jurisdiction for companies to do business and invest worldwide in a tax efficient manner.

Dividends

Dividends derived from qualified shareholdings in companies located in non-blacklisted jurisdictions will not be liable to Corporate Income Tax in Portugal.

[Regime applicable during the fiscal years of 2014-2015]

A qualified shareholding requires a 5% direct or indirect shareholding (or voting rights) by a Portuguese Parent Company in a foreign subsidiary held for a minimum 24-month period.

[Regime applicable since 2016]

A qualified shareholding requires a 10% direct or indirect shareholding (or voting rights) by a Portuguese Parent Company in a foreign subsidiary held for a minimum 12-month period.

The foreign subsidiary’s profits must be liable and not exempt from a type of Corporate Income Tax listed in Directive 2011/96/EU or taxed at a minimum rate of 12.6%.

If the participation exemption is not applicable due the non-fulfillment of one of the aforesaid requirements, the Portuguese company may still be entitled to a tax credit for the underlying tax paid by eligible direct or indirect subsidiaries or a tax credit for double taxation due to tax being withheld on dividends.

Intra community payment of dividends is also regulated by the Parent-Subsidiary Directive.

Domestic payments of dividends are tax exempt provided a 5% shareholding is held for one year prior to the payment of dividends.

Permanent establishments

The exemption regime is also applicable (and optional) to profits and losses attributable to foreign permanent establishments of Portuguese companies. Therefore, Portuguese companies are entitled to exclude from taxation profits and losses in foreign PE. Some restrictions may apply.

Capital Gains

Capital gains derived from the sale of foreign qualified shareholdings are not taxable in Portugal. The applicability of the participation exemption regime to capital gains may be limited by anti-abuse provisions, namely where the subsidiary owns real estate.

Dividends

Dividends paid by Portuguese subsidiaries to foreign Parent companies will not be liable to withholding tax in Portugal if the qualified shareholding requirements are met.

[Regime applicable during the fiscal years of 2014-2015]

A qualified shareholding requires a 5% direct or indirect shareholding (or voting rights) by a foreign Parent Company in a Portuguese foreign subsidiary. The qualified shareholding must be also be held for a minimum 24-month period.

[Regime applicable in the fiscal year of 2016]

A qualified shareholding requires a 10% direct or indirect shareholding (or voting rights) by a foreign Parent Company in a Portuguese foreign subsidiary. The qualified shareholding must be also be held for a minimum 12-month period.

The Parent Company must be tax resident in a E.U. jurisdiction or in a country with which Portugal has entered into a Double Taxation Agreement.

Also the following additional requirements must be met:

• The nonresident corporate shareholder must be liable and not exempt from a type of Corporate Income Tax as listed in Directive 2011/96/EU or taxed at a minimum rate of 12.6%; and
• The applicable Double Tax Treaty provides for an administrative cooperation mechanism regarding taxation similar to the E.U. system.

Intra community payment of dividends is also regulated by the Parent-Subsidiary Directive.

Domestic payments of dividends are tax exempt provided a 5% shareholding is held for one year prior to the payment of dividends.

Permanent establishments

As a rule, after tax repatriation of profits by Portuguese permanent establishments is not liable to withholding tax in Portugal.

Capital Gains

Capital gains derived from the sale of Portuguese shareholdings are not liable to corporate tax in Portugal, provided corporate shareholders are not located in a blacklisted jurisdiction.

The exemption does not apply if the participated company owns real estate properties in Portugal accounting  for more than 50% of the total value of the company’s assets. This exception does not apply in the event these properties are used in an agricultural, industrial or commercial activity.

The information above is a simple overview of the implications and benefits. Such information is not to be used in place of proper and complete professional advice, as it does not constitute a binding legal opinion nor does it not consider the particularities of your case.