Income Tax in Portuguese

Personal Income Tax:

Tax Return:

The Portuguese annual personal income tax return should be filed with the tax authorities, through the Internet, within 1 April to 31 May – regardless of the type of income received in the previous year.

In the situations where the taxpayer is entitled to a tax credit in Portugal (to eliminate international double taxation) on the foreign source income received, and the information on the final tax due is not available within the previous deadline, the tax return may be filed up to 31 December. In order to apply for this extension, the taxpayer must file a specific form with the tax authorities until May 31st.

The tax year is calendar year.

Residency Rule:

The recently approved rules foresee that an individual qualifies as resident for tax purposes in Portugal provided that one of the following conditions is met:

· He/she spends more than 183 days – continuously or not – in the country within a 12 month period beginning or ending in the relevant year, or

· In case he/she spent less than 183 days herein, he has, at any time of the referred 12 month period, accommodation available in Portugal in conditions where it can be assumed that it is his/her intention to use it as a place of habitual residence or abode.

In case the above criteria are met, an individual will be regarded as resident since the first day of his presence in Portugal until his/her departure. There are, however, some situations foreseen where the tax residency status applies for the entire tax year.

It is also foreseen that any day – complete or part-day – that includes sleeping in Portugal shall be considered as a day of presence in the Portuguese territory.

Furthermore, during 2009 the government created a tax regime for non-habitual tax residents who would normally qualify as tax residents in Portugal under the domestic rules. The regime would resemble the one foreseen for nonresident individuals in Portugal (such as, taxation on employment Portuguese-source income at a special 20 percent rate).

The aim of this regime is to attract specialized foreign professionals. Certain conditions, as follows, would have to be met in order to apply for it:

· The individual cannot have been deemed a tax resident in Portugal in the previous five years;

· The individual will be required to register with the Portuguese tax authorities as a non-habitual resident and this option will be valid for 10 consecutive years.

The individual will be required to qualify – under the domestic rules – as a resident in Portugal for tax purposes in every year of the above referred 10-year period in order to benefit from the taxation applicable to non-habitual tax residents. In case the activity performed by the individual is considered to be high-value added (defined by a Ministerial Order no. 12/2010, of 7 January), the income derived from this activity will be taxed at a special rate of 20%.

This regime also allows that a tax exemption apply to the foreign-source income received by the individual, if certain conditions are met (namely, if the referred income is subject or if it could be subject (depending on the type of income) to tax in the country of the source, according to the rules of the applicable DTT).

The request for registration as a non-habitual resident must be made up to 31 March of the year following the one that the taxpayer became a tax resident in Portugal.

Tax Rate:

Residents in Portugal for tax purposes are taxed on their worldwide income at progressive rates varying from 14.5% to 48% for 2017.

Non-residents are liable to income tax only on Portuguese-source income, which includes not only that portion of remuneration that can be allocated to the activity carried out in Portugal but also remuneration that is borne by a Portuguese company or permanent establishment (PE).

Non-residents are taxed at a flat rate of 25% on their taxable remuneration in 2017.

Taxable Income (EUR)		Tax Rate (%)	Deductible Amount
From	To
0	7,091	14.5	0
7,091	20,261	28.5	992.74
20,261	40,522	37.0	2,714.93
40,522	80,640	45.0	5,956.69
Above 80,640		48.0	8,375.89

For the purpose of applying the tax rate, the taxable income is divided by two if the taxpayers are married and not judicially separated, as well as in the case of de facto marriages, whatever the circumstances, should they opt for joint taxation.

Special rates apply to capital gains and investment income.

Extraordinary surtax:

For 2017, an extraordinary rate shall be applied according to the following table:

Taxable Income (EUR)		Rate (%)
From	To
20,261	40,522	0.88
40,522	80,640	2.75
Above 80,640		3.21

This tax rate applies to all types of income included in the tax return of tax resident taxpayers. This surtax is also applicable to some types of income that are subject to a special tax rate.

Additional solidarity rate:

In 2017, an additional solidarity rate, which varies between 2.5% and 5%, applies to taxpayers with a taxable income exceeding EUR 80,000.

Taxable Income:

Employment income:

Employment income/remuneration is specifically defined in the PIT Code and covers all payments made by the employer, such as salary, bonuses, commissions, tax reimbursements, redundancy payments, pensions, allowances (e.g. cost-of-living and housing allowances), and benefits in kind (e.g. company cars), regardless of where the payment originates.

Domestic and foreign travel allowances, as well as mileage and lunch allowances in excess of those permitted to employees of state departments, are also taxable as employment income.

Benefits in kind:

In general, benefits in kind provided by an employer are subject to income tax at the employee level. There are specific provisions on taxation of employer-provided housing or housing allowances, use and acquisition of company cars, and share plans.

The taxable benefit from the use of a company car is taxable at the employee level if there is a written agreement between the employer and the employee regarding the allocation of a specific car to the last. In these circumstances, the benefit corresponds to 0.75% of the market value of the car, multiplied by the number of months of use of the car. If the company car is then acquired by the employee, a further benefit in kind will correspond to the positive difference between the market price of the car and the total amount already taxed as a benefit in kind to the employee as a result of using the car plus the acquisition price. The market price corresponds to the difference between the acquisition price and the balance derived from that value considering a depreciation factor published by the relevant authorities.

Termination of employment:

Redundancy payments are taxable on the portion that exceeds the average remuneration paid during the last 12 months of employment, multiplied by the number of years of employment, unless a new employment contract or service contract is concluded with the employer or a related person within 24 months from the date of termination of the employment contract.

However, in case of a manager or administrator, the redundancy payments are fully liable to taxation. This measure is also applicable for public sector managers and PE representatives.

Pensions:

EUR 4,104 of pension income is tax exempt.

In 2015, the regressive rule applicable to the specific deduction to pensions when the gross annual income exceeds the amount of EUR 22,500 was revoked, being now only a deduction of a fixed amount of EUR 4,104, in line with the value of the specific deduction applicable to the employment income.

Business and professional income:

Income from a commercial, industrial, or agricultural activity and income from a sole trader (including scientific, artistic, or technical services) or from intellectual rights (when earned by the original owner) may be taxed either in accordance with a simplified regime or based on the taxpayer’s accounts. The simplified regime will apply only to taxpayers who, not having opted for organised accounts, have a turnover or a gross business and professional income lower than EUR 200,000 (for 2017) in the previous year. Under this simplified regime, the above income is taxed on 0.15% of sales of products or 0.75% of income arising from business and professional services listed in the table referred to in Article 151 of the PIT Code.

The PIT Reform introduced a new coefficient of 0.35 applicable to services not expressly foreseen in the table referred to in Article 151 of the PIT Code.

Capital gains:

As a general rule, capital gains will be subject to tax at a flat rate of 28%. Only 50% of capital gains arising on the sale of shares held on micro and small companies not listed in the stock exchange will be subject to taxation.

In 2017, 50% of capital gains arising from the sale of real estate by tax residents in Portugal is taxed at the marginal rates varying between 14.50% and 48%. The gain may be wholly or partially exempt if the property being sold is the taxpayer's primary residence and the sale proceeds, reduced by the value of any outstanding loans relating to the purchase of the property being sold, are reinvested in the acquisition, improvement, or construction of another primary residence in Portugal or within the European Union within 36 months from the sale or in the period of 24 months previous to the sale.

Capital gains earned by non-residents that are not borne by a PE in Portugal are fully taxable at a flat rate of 28%.

Dividend and interest income:

Dividends and interest are liable to taxation at a flat rate of 28%. However, the taxpayer may opt to be liable to tax on dividends and interest received at the marginal rates varying between 14.50% and 48% (in 2017).

A credit against the Portuguese tax liability is available for the lower of the tax paid in the foreign country on those dividends and interest or the amount of tax payable in Portugal on that income. For dividends and interest paid by countries with which Portugal has signed a double taxation treaty (DTT), the tax credit should not exceed the percentage established in the treaty.

If the taxpayer opts to disclose the dividends on the tax return, only 50% will be liable to taxation at the marginal rates in force if the paying company is tax resident in an EU country.

Interest income arising from current or saving accounts on Portuguese banks is taxed at 28% for residents. Interest paid by non-resident entities to tax resident individuals is also taxed at a rate of 28%.

Investment income paid or made available to recipients resident in the Portuguese territory by non-resident entities that also do not have a PE in the Portuguese territory, but which are domiciled in a blacklisted jurisdiction, are liable to a tax rate of 35% (in 2017), either by withholding tax (WHT) or by the application of a special rate.

Rental income:

Rental income earned by tax residents and non-tax residents is liable to a special tax rate of 28%, but the option for the inclusion of such income in the total aggregated income is possible.

The rental income that results from a consistent practice of the lease of properties, by option of the taxpayer, may be taxable as income from business and professional activities (self-employment [Category B]). However, in order to determine the income subject to taxation, the same rules used for determination of the rental income in ‘Category F’ should be taken into account.

Corporate Income Tax:

Corporate income tax (Imposto sobre o Rendimento das Pessoas Colectivas, or IRC) is levied on resident and nonresident entities.

Resident entities:

 Companies and other entities, including non-legal entities, whose principal activity is commercial, industrial or agricultural, are subject to IRC on worldwide profits, but a foreign tax credit may reduce the amount of IRC payable.

Companies and other entities, including non-legal entities, that do not carry out commercial, industrial or agricultural activities, are generally subject to tax on their worldwide income (for details regarding the calculation of the taxable profit of these entities, see Section C).

Nonresident entities:

Companies or other entities that operate in Portugal through a PE are subject to IRC on the profits attributable to the PEs.

Companies or other entities without a PE in Portugal are subject to IRC on income deemed to be obtained in Portugal.

For tax purposes, companies or other entities are considered to have a PE in Portugal if they have a fixed installation or a permanent representation in Portugal through which they engage in a commercial, industrial or agricultural activity. Under rules that generally conform to the Organisation for Economic Co-operation and Development (OECD) model convention, a PE may arise from a building site or installation project that lasts for more than six months or from the existence of a dependent agent. Under these rules, commissionaire structures, dependent agents and services rendered in Portugal are more likely to result in a PE for IRC purposes.

Double tax treaties may further limit the scope of a PE in Portugal.

Tax rates:

 For 2017, IRC is levied at the following rates.

Type of enterprise	Rate (%)
Companies or other entities with a head office or effective management control in Portugal, whose principal activity is commercial, industrial or agricultural	21
Companies or other entities with a head office or effective management control in the autonomous region of the Azores, or with a branch, office, premises or other representation there	16.8
Companies or other entities with a head office or effective management control in the autonomous region of the Madeira, or with a branch, office, premises or other representation there	21
Entities other than companies with a head office or effective management control in Portugal, whose principal activity is not commercial, industrial or agricultural	21
PEs	21
Nonresident companies or other entities without a head office, effective management control or a PE in Portugal Standard rate Rental income	25 25

Certain types of income earned by companies in the last category of companies listed above are subject to the following withholding taxes.

Type of income	Rate (%)
Copyrights and royalties	25
Technical assistance	25
Income from shares	25
Income from government bonds	25
Revenues derived from the use of, or the right to use, equipment	25
Other revenues from the application of capital	25
Payments for services rendered or used in Portugal, and all types of commissions	25*

* This tax does not apply to communications, financial and transportation services. It is eliminated under most tax treaties.

Applicable double tax treaties, EU directives or the agreement entered into between the EU and Switzerland may reduce the above withholding tax rates.

A 35% final withholding tax rate applies if income is paid or made available in a bank account and if the beneficial owner is not identified. A 35% final withholding tax rate also applies to investment income obtained by an entity located in a tax haven.

A municipal surcharge (derrama municipal) is imposed on resident companies and nonresident companies with a PE in Portugal. The rate of the municipal surcharge, which may be up to 1.5%, is set by the respective municipalities. The rate is applied to the taxable profit determined for IRC purposes. Consequently, the maximum combined rate of the IRC and the municipal surcharge on companies is 22.5%.

A state surcharge (derrama estadual) is also imposed on resident companies and nonresident companies with a PE in Portugal. The rate of the state surcharge, which is 3%, is applied to the taxable profit determined for IRC purposes between EUR1,500,000 and EUR7,500,000. For taxable profits exceeding EUR7,500,000, a 5% rate of state surcharge is levied on the excess up to EUR35 million. For taxable profits exceeding EUR35 million, a 7% rate of state surcharge is levied on the excess. Consequently, the maximum combined rate of the IRC and the surcharges on companies is 29.5%.

Companies established in the free zones of Madeira and the Azores enjoyed a tax holiday until 2011. The more important of the two, Madeira, is internationally known as the Madeira Free Zone (Zona Franca da Madeira). An extended regime has been approved for companies licensed between 2007 and 2013 (extended to 31 December 2014). Under this extended regime, the reduced rate is 5% for 2013 through 2020. This rate applies to taxable income, subject to a cap, which is generally based on the existing number of jobs. Requirements and limitations apply to the issuance of licenses for the Madeira Free Zone. This regime is also available for companies licensed before 2007. However, it was subject to a formal option that should have been elected on or before 30 December 2011. A new regime has been approved for companies licensed between 2015 and 2020. Under the new regime, the reduced rate is 5% for 2015 through 2027. This rate applies to taxable income, subject to a cap, which is generally based on the existing number of jobs as well as other criteria (annual gross value-added, employment costs or turnover). New requirements and limitations apply to the issuance of licenses for the Madeira Free Zone. The new regime is also available for companies licensed before 2015. In addition to the benefits that previously been available, the new regime provides for exemptions regarding dividends and interest paid to nonresident shareholders, provided certain conditions are met.

Significant incentives are also available for qualifying new investment projects established before 31 December 2020. To qualify for the incentives, the projects must satisfy the following requirements:

· They must have a value exceeding EUR3 million.

· They must develop sectors considered to be of strategic importance to the Portuguese economy.

· They must be designed to reduce regional economic imbalances, create jobs and stimulate technological innovation and scientific research in Portugal.

Qualifying projects may enjoy the following tax benefits for up to 10 years:

· A tax credit of 10% to 20% of amounts invested in plant, equipment and intangibles used in the project. However, buildings and furniture qualify only if they are directly connected to the development of the activity.

·  An exemption from, or a reduction of, the municipal real estate holding tax for buildings used in the project.

·  An exemption from, or a reduction of, the property transfer tax (see Section D) for buildings used in the project.

· An exemption from, or a reduction of, the stamp duty for acts and contracts necessary to complete the project, including finance agreements.

Portuguese tax law also provides for significant tax credits and deductions concerning research and development (R&D) investments, fixed-asset investments (some of which must have been performed by 31 December 2013) and creation of jobs. In addition, a specific tax benefit is introduced for the reinvestment of profits by small and medium-sized companies. Under this measure, such companies can benefit from a tax credit of 10% of the retained earnings (capped to the lower of 25% of the IRC liability and EUR500,000 per year) reinvested in the acquisition of eligible fixed assets if several conditions are met.

Companies can benefit for a six-year period from a notional interest deduction of 7% on the amount of cash contributions or conversions of loans by shareholders to share capital, if they are made on or after 1 January 2017. The amount on which the notional interest deduction applies is capped at EUR2 million.

Certain incentives are also available to land transportation of passengers and stock activities, car-sharing and bike-sharing, and activities related to bicycle fleets.

Undertakings for Collective Investment:

 Effective from 1 July 2015, a special tax regime is introduced for Undertakings for Collective Investment (UCIs) incorporated and operating in accordance with Portuguese law. UCIs can take the form of a fund or a company. UCIs are subject to IRC but benefit from a tax exemption for investment income, rental income and capital gains, unless the income or gains originated from a tax haven. UCIs are exempt from municipal and state surcharges.

UCIs are liable to stamp duty on net assets, which is payable quarterly. The rate of tax is 0.0025% for UCIs investing in securities and 0.0125% in the remaining cases.

Resident participants in UCIs are subject to tax at IRC rates and surcharges (legal entities) or 28% (individuals).

Nonresident participants benefit from a tax exemption regarding securities’ UCIs, while a 10% rate applies with respect to real estate UCIs. A 25% to 35% rate, depending on the nature of the income and the type of UCI, applies to the following nonresident entities (except those located in the EU, in an EEA member state that has entered into cooperation agreement on tax matters or in a country that has entered into a tax treaty with Portugal that includes an exchange of tax information clause):

· Entities controlled more than 25% by resident entities
· Entities located in tax havens
· Other entities if the income is paid into a bank account for which the beneficial owner is not identified

Simplified regime of taxation:

 Resident companies that have annual turnover not exceeding EUR200,000 and total assets not exceeding EUR500,000 and that meet certain other conditions may opt to be taxed under a simplified regime of taxation. The taxable income corresponds to a percentage ranging between 4% and 100% of gross income, depending on the nature of the income.

Capital gains:

Capital gains derived from the sale of fixed assets and from the sale of financial assets are included in taxable income subject to IRC. The capital gain on fixed assets is equal to the difference between the sales value and the acquisition value, adjusted by depreciation and by an official index. The tax authorities may determine the sales value for real estate to be an amount other than the amount provided in the sales contract.

Fifty percent of the capital gains derived from disposals of tangible fixed assets, intangibles assets and non-consumable biological assets held for more than one year may be exempt if the sales proceeds are invested in similar assets during the period beginning one year before the year of the disposal and ending two years after the year of the disposal. A statement of the intention to reinvest the gains must be included in the annual tax return for the year of disposal. The remaining 50% of the net gains derived from the disposal is subject to tax in the year of the disposal.

If only a portion of the proceeds is reinvested, the exemption is reduced proportionally. If by the end of the second year following the disposal no reinvestment is made, the net capital gains remaining untaxed (50%) are added to taxable profit for that year, increased by 15%.

A full participation regime is available for capital gains and losses on shareholdings held for at least 12 months if the remaining conditions for the dividends participation regime are met. The regime does not apply if the main assets of the company that issued the shares being transferred are composed, directly or indirectly, of Portuguese real estate (except real estate allocated to an agricultural, industrial or commercial activity [other than real estate trading activities]). This applies to gains and losses from onerous transfers of shares and other equity instruments (namely, supplementary contributions), capital reductions, restructuring transactions and liquidations.

Losses from the onerous transfer of shareholdings in tax-haven entities are not allowed as deductions. Losses resulting from shares and equity instruments are not deductible in the portion corresponding to the amount of dividends and capital gains that were excluded from tax during the previous four years under the participation regime or the underlying foreign tax credit relief.

Liquidation proceeds are treated as capital gains or losses. The losses from the liquidation of subsidiaries are deductible only if the shares have been held for at least four years. If within the four-year period after the liquidation of the subsidiary, its activity is transferred so that it is carried out by a shareholder or a related party, 115% of any loss deducted by the shareholder on liquidation of the subsidiary is added back.

Tax credits are available for a venture capital company (sociedade de capital de risco, or SCR) as a result of investments made in certain types of companies.

Nonresident companies that do not have a head office, effective management control or a PE in Portugal are subject to IRC on capital gains derived from sales of corporate participations, securities and financial instruments if any of the following apply:

· More than 25% of the nonresident entities is held, directly or indirectly, by resident entities (unless the seller is resident in an EU, EEA or double tax treaty jurisdiction and certain requirements are met).

· The nonresident entities are resident in territories listed on a blacklist contained in a Ministerial Order issued by the Finance Minister.

·  The capital gains arise from the transfer of shares held in a property company in which more than 50% of the assets comprise Portuguese real estate or in a holding company that controls such a company.

Nonresident companies that do not have a head office, effective management control or a PE in Portugal are taxed at a 25% rate on taxable capital gains derived from disposals of real estate, shares and other securities. For this purpose, nonresident entities must file a tax return. A tax treaty may override this taxation.

Exit taxes:

The IRC Code provides that the transfer abroad of the legal seat and place of effective management of a Portuguese company, without the company being liquidated, results in a taxable gain or loss equal to the difference between the market value of the assets and the tax basis of assets as of the date of the deemed closing of the activity. This rule does not apply to assets and liabilities remaining in Portugal as part of the property of a Portuguese PE of the transferor company if certain requirements are met.

The exit tax also applies to a PE of a nonresident company on the closing of an activity in Portugal or on the transfer of the company’s assets abroad.

Following the European Court of Justice decision in Case C-38/10, significant changes to the existing exit tax rules were made. Under the revised rules, on a change of residency to an EU or EEA member state, the taxpayer may now opt for one of the following alternatives:

· Immediate payment of the full tax amount
· Payment of the tax whenever the gains are (deemed) realized
· Payment of the full tax amount in equal installments during a five-year period

The deferral of the tax payment triggers late payment interest. In addition, a bank guarantee may be requested. This guarantee equals the tax due plus 25%. In addition, annual tax returns are required if the tax is deferred.

Administration:

 Companies with a head office, effective management control or a PE in Portugal are required to make estimated payments with respect to the current financial year. The payments are due in July, September and December. For companies with turnover of up to EUR500,000, the total of the estimated payments must equal at least 80% of the preceding year’s tax. For companies with turnover exceeding EUR500,000, the total of the estimated payments must equal at least 95% of the preceding year’s tax. The first payment is mandatory. However, the obligation to pay the other installments depends on the tax situation of the company. For example, a company may be excused from making the third installment if it establishes by adequate evidence that it is suffering losses in the current year. However, if a company ceases making installment payments and if the balance due exceeds by 20% or more the tax due for that year under normal conditions, compensatory interest is charged. Companies must file a tax return by 31 May of the following year. Companies must pay any balance due when they file their annual tax return.

Companies with a head office, effective management control or a PE in Portugal that have adopted a financial year other than the calendar year must make estimated payments as outlined above, but in the 7th, 9th and 12th months of their financial year. They must file a tax return by the end of the 5th month following the end of that year.

Advance payments concerning the state surcharge are also required in the 7th, 9th and 12th months of the tax year.

In addition, companies must make a Special Payment on Account (SPA) in the 3rd month of the financial year, or they can elect to pay the amount in the 3rd and 10th months. The SPA is equal to the difference between the following amounts:

· 1% of turnover of the preceding year, with a minimum limit of EUR850, or, if the minimum limit is exceeded, EUR850 plus 20% of the excess with a maximum limit of EUR70,000

· The ordinary payments on account made in the preceding year

The SPA may be subtracted from the tax liability in the following six years, or refunded if, on the occurrence of certain events (for example, the closing of activity), a petition is filed.

A nonresident company without a PE in Portugal must appoint an individual or company, resident in Portugal, to represent it concerning any tax liabilities. The representative must sign and file the tax return using the general tax return form. IRC on capital gains derived from the sale of real estate must be paid within 30 days from the date of sale. IRC on rents from leasing buildings must be paid by 31 May of the following year.

Binding rulings:

A general time frame of 150 days exists in the tax law to obtain a binding ruling. This period can be reduced to 75 days if the taxpayer pays a fee between EUR2,550 and EUR25,500 and if the ruling petition with respect to an already executed transaction contains the proposed tax treatment of the transaction as understood by the taxpayer. This tax treatment is deemed to be tacitly accepted by the tax authorities if an answer is not given within the 90-day period.

Dividends:

 Dividends paid by companies to residents and nonresidents are generally subject to withholding tax at a rate of 25%.

On distributions to resident parent companies, the 25% withholding tax is treated as a payment on account of the final IRC due.

A resident company subject to IRC may deduct 100% of dividends received from another resident company if all of the following conditions apply:

·  The recipient company owns directly or directly and indirectly at least 10% of the capital or voting rights of the payer.

· The recipient company holds the interest described above for an uninterrupted period of at least one year that includes the date of distribution of the dividends, or it makes a commitment to hold the interest until the one-year holding period is complete.

· The payer of the dividends is a Portuguese resident company that is also subject to, and not exempt from, IRC or Game Tax (tax imposed on income from gambling derived by entities such as casinos).

A 100% dividends-received deduction is granted for dividends paid by entities from EU member countries to Portuguese entities (or Portuguese PEs of EU entities) if the above conditions are satisfied and if both the payer and recipient of the dividends qualify under the EU Parent-Subsidiary Directive. The same regime is also available for dividends received from European Economic Area (EEA) subsidiaries. The participation exemption regime also applies to dividends from subsidiaries in other countries, except tax havens, if the subsidiary is subject to corporate tax at a rate not lower than 60% of the standard IRC rate (this requirement can be waived in certain situations).

The participation exemption regime does not apply in certain circumstances, including among others, the following:

· The dividends are tax deductible for the entity making the distribution.

· The dividends are distributed by an entity not subject to or exempt from income tax, or if applicable, the dividends are paid out of profits not subject to or exempt from income tax at the level of sub-affiliates, unless the entity making the distribution is resident of an EU or an EEA member state that is bound to administrative cooperation in tax matters equivalent to that established within the EU.

If a recipient qualifies for the 100% deduction, the payer of the dividends does not need to withhold tax. This requires the satisfaction of a one-year holding period requirement before distribution.

A withholding tax exemption applies to dividends distributed to EU and EEA parent companies and to companies resident in treaty countries that have entered into tax treaties with Portugal that includes an exchange of tax information clause, owning (directly or directly and indirectly through eligible companies) at least 10% of a Portuguese subsidiary for more than one year. Companies outside the EU and EEA must be subject to corporate tax at a rate not lower than 60% of the standard IRC rate. A full or partial refund of the withholding tax may be available under certain conditions. A withholding tax exemption is also available for dividends paid to a Swiss parent company, but the minimum holding percentage is increased to 25%.

The participation exemption on dividends received and the withholding tax on distributed dividends does not apply if an arrangement or a series of arrangements are performed with the primary purpose, or with one of the principal purposes, to obtain a tax advantage that frustrates the goal of eliminating double taxation on the income and if the arrangement or series of arrangements is not deemed genuine, taking into account all of the relevant facts and circumstances. For this purpose, an arrangement or series of arrangements is deemed not to be genuine if it is not performed for sound and valid economic reasons and does not reflect economic substance.

Foreign PE profits:

 Resident taxpayers may opt for an exemption regime for foreign PE profits. Under this regime, foreign PE losses are also not deductible if the PE is subject to one of the taxes listed in the EU Parent-Subsidiary Directive or to corporate tax at a rate not lower than 60% of the standard IRC rate and if the PE is not located in a tax-haven territory.

Transactions between the head office and the foreign PE must respect the arm’s-length principle, and the costs related to the PE are not deductible for the head office.

The following are recapture rules:
·  PE profits are not exempt up to the amount of PE losses deducted by the head office in the 12 preceding years (5 years from 2017).

· If the PE is incorporated, subsequent dividends and capital gains from shares are not exempt up to the amount of PE losses deducted by the head office in the 12 preceding years (5 years from 2017).

· If the exemption regime ceases to apply, the PE losses as well as the dividends and capital gains from shares (if the PE was previously incorporated) are not deductible or exempt, respectively, up to the amount of the PE profits that were exempt from tax during the preceding 12 years (5 years from 2017).

Foreign tax relief:

Foreign-source income is taxable in Portugal. However, direct foreign tax may be credited against the Portuguese tax liability up to the amount of IRC attributable to the net foreign-source income. The foreign tax credit can be carried forward for five years.

In addition, taxpayers may opt to apply an underlying foreign tax credit with respect to foreign-source dividends that are not eligible for the participation exemption regime. Several conditions must be met, including the following:

The minimum holding percentage is 10% for at least 12 months.

The entity distributing the dividends is not located in a tax-haven territory, and indirect subsidiaries are not held through a tax-haven entity.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.