Foreign tax credit
International juridical double taxation
Taxes paid abroad can be offset against corresponding Portuguese tax, capped at the lower of (i) the tax liability corresponding to the foreign income, net of costs directly or indirectly incurred, or (ii) the foreign tax paid. In both cases, it is limited to the foreign tax as foreseen in the applicable DTT. This foreign tax credit can be carried forward for five years. The computation of the amount of the tax credit is determined per jurisdiction, considering the total amount of the respective income, except in relation to income obtained by foreign PEs (the deduction in this case is assessed individually).
International economic double taxation
Taxpayers may opt to apply a tax credit (underlying tax credit) for international economic double taxation regarding profits or reserves received, to which the participation exemption regime on profits does not apply, and provided that the taxpayer holds (or becomes the holder of) at least 10% of the share capital of the subsidiary for a period of one year.
When choosing the above-mentioned option, the taxpayer shall add to the taxable income the amount of the income tax related to the distributed profits or reserves that has been effectively paid abroad by the subsidiary.
General tax benefits and incentives
Contractual tax incentives
Relevant investment projects up to 2020 (minimum investment of EUR 3 million) that qualify for strategic economic interest and promote the creation of jobs are eligible for tax incentives, as foreseen in the Tax Benefits Code and the Investment Tax Code. These are granted on a case-by-case basis under a government contract for a period not exceeding ten years and include a tax credit of 10% to 25% of the investment in addition to exemptions or reductions from property transfer tax, property tax, and stamp tax.
Patent box regime
Use or exploitation of copyright and industrial property rights
The patent box regime applicable to certain copyright and industrial property rights is in line with BEPS Action 5 (Authorised Nexus Approach). The regime foresees a 50% tax exemption on income derived from the use or exploitation of copyright from computer programs as well as registered patents, designs and industrial models. There is a limitation provided by the ratio between the eligible expenses and the total expenses incurred in developing or using the intellectual property (IP)-protected assets. The regime also foresees a 30% mark-up of the eligible expenses incurred with the development of the assets with IP protection, capped at the amount of the total expenses incurred with the development of those assets. The regime applies to income derived from industrial property rights derived from research and development (R&D) developed internally. Transactions with associated enterprises, including entities resident in black-listed jurisdictions, are excluded.
Costs/expenses not directly connected with the activities of R&D are excluded from the computation, such as interest or real estate depreciation.
The applicability of this regime requires a clear distinction in the accounting records in respect of profits, as well as expenses, associated with the IP in order to be able to distinguish them from other source profits and expenses.
This regime applies to patents and other industrial models or drawings registered on or after 1 July 2016. Regarding copyright from computer programs, the provision was introduced by the 2020 State Budget Law and applies from 1 April 2020.
Industrial property rights registered up to 30 June 2016
Income derived from the use or exploitation of registered patents, designs and industrial models, registered between 1 January 2014 and 30 June 2016 is also 50% tax-exempt. The former patent box regime applies not only to income derived from industrial property rights derived from R&D developed internally but also if contracted from third parties. Transactions with associated enterprises, including entities resident in black-listed jurisdictions, are excluded. This regime applies until 30 June 2021.
Collective Investment Vehicles (CIVs)
The taxable profit of a CIV is the net income of the period, computed in accordance with the applicable accounting standards, while disregarding the following:
- Investment income, rental income, and capital gains (unless if derived from ‘offshore’ entities).
- Expenses related to the income referred to above.
- Non-deductible expenses under article 23-A of the CIT Code.
- Income and expenses related to management fees and other commissions reverting to the CIV.
Tax losses generated by the CIV follow the regime foreseen in the CIT Code, with the necessary amendments.
The taxable profit assessed by a CIV is subject to the standard CIT rate. CIVs are exempt from municipal and state surtax; however, they are subject to autonomous taxation rates as foreseen in the CIT Code.
CIT owed by a CIV is assessed in the periodical CIT return. Respective payments should be made until the last day of the time limit established for the submission of the form.
Stamp tax is also levied on the net asset value of the CIV, as follows:
- For CIVs investing exclusively in money market instruments and deposits: 0.0025%.
- For other CIVs: Assessed quarterly at a rate of 0.0125%.
The tax is assessed quarterly, in March, June, September, and December of each year, and should be paid by the CIV by the 20th day of the month following the end of the quarter.
Taxation of a CIV’s investors
The taxation ‘at exit’ rule is applicable to the taxation of the income obtained by holders of participation units/shareholdings in the CIV.
Income obtained by resident investors is subject to taxation at the PIT level (generally, at the rate of 28%) and CIT level (being considered in the taxable profit of the investors).
Income obtained by non-resident investors without a PE benefit from a favourable tax regime is subject to the following:
- Taxation at the rate of 10% in case of income deriving from Real Estate Investment Funds (REIFs) and Real Estate Investment Companies.
- Exemption in case of income deriving from Securities Investment Funds and Securities Investment Companies.
This regime does not apply whenever the investors are tax residents in ‘offshore’ jurisdictions or, as a rule, are held more than 25% by tax residents in Portugal, being instead applicable the PIT and CIT regime established for resident investors.,
Foreign investment funds
Similar to other non-resident entities, foreign investment funds are taxed only on income obtained in Portugal.
WHT is applicable at a rate of:
- 25% on dividends.
- 25% on real estate income.
- 25% on treasury bonds.
- 25% for the remaining cases.
Under EU law, a discriminatory treatment may be argued between resident and non-resident CIVs, considering that the core income (e.g., investment income, rental income and capital gains) obtained by the resident CIVs is not subject to taxation in Portugal while the same income if obtained by non resident CIVs is.
Administrative claims challenging this discriminatory treatment may be filed by the non-resident CIV within 2 years as from the year following the one when the tax was withheld.
Retirement and educational saving funds
Retirement and education saving funds are exempt from CIT when established and operating under national legislation.
Venture capital funds
Venture capital funds are CIT exempt when established and operating under national legislation.
Pension funds are CIT and IMT exempt when established and operating under national legislation.
The CIT exemption is applicable to pension funds incorporated under the Portuguese law as well as to pension funds established in another EU country or in an EEA member state (bound to administrative cooperation on tax matters) that cumulatively fulfil the following requirements:
- Exclusively assure the payment of retirement pensions granted to elderly, handicapped, surviving, pre-retired, health, and post-employment benefits, as well as death benefits, when complementary and ancillary to the previously mentioned.
- Are managed by pension funds professional institutions to which Directive 2003/41/EC, of the European Parliament and Council, applies.
- Are the effective beneficiaries of the income.
- In the case of dividend distributions, the related shareholding should have been held for a consecutive one-year period.
CIVs in forest resources
CIVs in forest resources are CIT exempt when established and operating under national legislation, if:
- at least 75% of its assets are allocated to the exploitation of forest resources, and
- that exploitation is submitted to forest management plans or certification.
In case the above conditions are not met, the exemption will not be applicable, and the taxation regime for CIVs will apply.
Real Estate Investment Fund for Residential Lease (REIFRL)
A regime is applicable to REIFRL and to Real Estate Investment Companies for Residential Lease (REICRL) incorporated in accordance with the Portuguese law until 31 December 2015.
The following benefits are established for this tax regime:
- CIT exemption on income obtained by REIFRLs.
- CIT exemption for the income obtained by participation unit holders, except for the capital gains arising from the sale of such participation units.
The above-referred tax regime and respective exemptions are not applicable to entities resident in a black-listed jurisdiction.
This special tax regime is applicable until 31 December 2020, after which the tax regime applicable is the one applicable to CIVs.
Incentives to urban rehabilitation
Incentives can be granted to real estate property covered by rehabilitation projects undertaken until 2020.
REIFs that have been incorporated between 2008 and 31 December 2013 may benefit from:
- CIT: The income obtained by REIFs is tax exempt when the funds are incorporated in accordance with the Portuguese law, and the respective assets are at least 75% real estate, subject to rehabilitation projects in qualifying areas.
- Property transfer tax: The available tax benefits will cover only buildings located in urban rehabilitation areas or buildings built more than 30 years ago, as follows:
- IMT exemption on the acquisition of buildings, provided that the rehabilitation works are initiated within three years of purchase.
- IMT exemption on the first transfer of buildings intended for leasing for permanent abode and, in case of buildings located in an urban rehabilitation area, buildings intended for main permanent abode.
- The granting of the above-mentioned exemptions depends on an assenting decision of the municipality of the area of the real estate property.
- Property tax: There is a three year IMI exemption available for urban properties subject to rehabilitation works, which is renewable for an additional five-year period in case of buildings intended for leasing for permanent abode or main permanent abode. Again, the granting of this exemption depends on an assenting decision t of the municipality of the area of the real estate property.
Real Estate Investment Trusts (SIGIs)
SIGIs were introduced in Portugal as of February 1st 2019, following similar REIT models implemented in Europe.
SIGIs, with tax residence and place of effective management in Portugal, are joint-stock companies (Sociedades anónimas) with a minimum share capital of EUR 5 million.
It is possible, upon decision of the general meeting, to convert already existing companies into SIGIs.
Additionally, SIGI shares must be listed within one year following its incorporation date either in a regulated market in Portugal, in another EU member state, or in an EEA member state (which is committed to administrative cooperation in tax matters similar to those in the European Union).
SIGIs have a free float requirement of 20% from the end of the 3rd year after their admission. From the 5th year onwards, this requirement increases to 25%.
SIGIs must have as their main activity:
- acquisition of real estate, surface rights, and/or other real estate rights for letting
- acquisition of shares in the capital of other SIGIs or companies resident in Portugal or in another EU member state, EEA member state, under certain conditions, or
- acquisition of units or shares in Collective Investment Vehicles (CIVs), specialised in residential letting, governed by Portuguese law having similar profit distribution rules.
A SIGI’s portfolio must be comprised of real estate and investments in real estate entities representing at least 80% of the total assets, and of real estate let or allocated to other atypical contractual forms related to the granting of the use of space in properties, which may include the provision of services, representing at least 75% of the total assets.
Both the above-mentioned real estate assets and shareholdings must be held for at least three years following the date of acquisition . Additionally, a SIGI’s indebtedness cannot exceed, at any time, 60% of their total assets.
SIGIs must distribute 75% of their annual profits and 90% of their annual profits that derive from dividends and other income from shares held in real estate entities.
Regarding the applicable tax regime, SIGIs are subject to the same tax regime as the one applicable to regulated real estate investment vehicles (i.e. CIVs), as follows:
- Subject to a 21% CIT rate (but not to local and state surtaxes) and investment income, rental income, and capital gains tax exempt. Additionally, expenses related to these income categories are not deductible.
- Income from profit distributions is subject to WHT at a final 10% rate for non-resident investors and 25% and 28%, as payment on account, for resident entities and resident individuals, respectively.
- Income or gains arising from distributions, share redemption, and sale and purchase of shares are deemed to derive from immovable property located in Portugal, so Portugal may retain its taxing rights under DTTs.
Contractors for North Atlantic Treaty Organization (NATO) infrastructures
Contractors for NATO infrastructures are exempt from CIT.
Research and development (R&D) (Sistema de Incentivos Fiscais em Investigação e Desenvolvimento Empresarial or SIFIDE II)
Portuguese tax resident companies carrying out commercial, industrial, or agricultural activities, and non-resident companies with a PE in the Portuguese territory, are allowed to deduct from the CIT due, up to the respective amount, the value of eligible expenses incurred with R&D, in a double percentage as follows:
- Base rate: 32.5% of the R&D expenses incurred; this rate is increased by 15% in case of SMEs that do not benefit from the incremental rate of 50% (applicable to entities that had completed two years of activity).
- Incremental rate: 50% of the difference between the R&D expenses made in the tax year and the average amount of the R&D expenses made in the previous two years, up to the limit of EUR 1.5 million.
Expenses that, due to insufficient tax due, cannot be deducted in the tax year they were incurred can be carried forward for eight years.
Eligible expenses related to allowances paid to personnel directly involved with R&D tasks are capped at 55% of the operational expenses incurred.
Expenses incurred in connection with projects that include, exclusively, third parties, including contracts and R&D services, are not considered.
Expenses relating to staff with a minimum academic qualification of level 8 of the National Qualifications Framework are considered at 120% of their amount.
Expenses related to the making of eco-design products will be increased by 10%. This increase will depend on the submission and approval of the project to the Portuguese Environment Agency.
Expenses related to demonstrations are eligible for the SIFIDE II regime, provided they are notified up front.
Expenses incurred with the acquisition, registration, and maintenance of patents, essential for the performance of R&D activities and audits, are accepted only for micro, small, or medium-sized companies.
The deduction of R&D expenses requires that the entity develops agricultural, industrial, or commercial activities or services as its main business activity.
The applications should be submitted by the last day of the fifth month of the year following the year in which the investment was made, and applications referring to years previous to that fiscal year will not be accepted.
The regime applies until 2025.
Incentives for the acquisition of companies in a difficult economic situation
The regime of incentives applicable to the acquisition of companies in a difficult economic situation may also apply to cases approved by IAPMEI within the scope of the Incentive System for the Revitalization and Modernization of Companies (SIRME). Under this regime, the acquiring company may deduct tax losses assessed but not yet used by the acquired company for a period of five years in proportion of its participation in the share capital of the acquired company, capped at 60% of the taxable income.
Tax regime for investment promotion (Regime Fiscal de Apoio Ao Investimento or RFAI)
RFAI establishes several tax incentives to investment realised within specific business sectors.
Among other incentives, companies that invest in certain regions can benefit from a deduction against CIT otherwise payable (capped at 50% of the CIT due) of 25% (for qualified investments lower than EUR 15 million) or 10% (for the part of qualified investments exceeding that limit) of the qualified investment. Companies are also able to carry forward any unused credit for ten years and may benefit from exemptions or reductions from property transfer tax (IMT), property tax (IMI), and stamp tax on the acquisition of real estate for investment purposes. IMT exemptions are subject to the approval of the municipality where the real estate is located and where the investment is made.
Loan interest and lease rentals on imported equipment
When paid by the state, regional authorities, and public services, loan interest and lease rentals on imported equipment can qualify for partial or full exemption from tax upon an appropriate application.
Conventional remuneration of share capital/notional interest deduction
This regime foresees a deduction of 7% of credits or the current year profits, up to EUR 2 million, upon the incorporation of an entity or on capital increases. The deduction is made in the tax period where the entries are made and in the following five tax periods.
This benefit is applicable to all entities and is not limited to the de minimis rule.
This tax benefit will not be applicable when it is or has been applied, in the same tax period or in the previous five tax periods, to entities that hold, directly or indirectly, a shareholding in the beneficiary entity, or are held, directly or indirectly, by the same entity, to the extent of the amount of the capital contributions of the entities that have benefited from this regime.
For the taxpayers that use this benefit, the limitation of the net financing expenses will be the higher value between EUR 1 million and 25% of the income before depreciation, amortisation, net financing expenses, and taxes (instead of the standard 30%).
Deduction for retained and reinvested profits (DLRR)
The DLRR provides a tax incentive to micro, small, and medium-sized companies. It allows a CIT credit of 10% of the retained profits reinvested in eligible investments within four years as from the respective realisation. The deduction is capped at EUR 12 million of retained and reinvested profits, and 25% of the CIT assessed.
Madeira International Business Centre (MIBC)
Entities licensed to operate in the MIBC until 31 December 2020 benefit from a special tax regime, which is applicable until 31 December 2027.
The MIBC special tax regime provides a reduced CIT rate of 5% on qualifying foreign-source income, based on thresholds of taxable income and job creation requirements. MIBC-licensed entities also benefit from an 80% exemption from stamp tax, property taxes, and municipal and regional surtaxes.
Non-resident shareholders (except if domiciled in black-listed jurisdictions) of MIBC-licensed entities benefit from an exemption from WHT on dividend distributions, regardless of the percentage of ownership or holding period, and shareholders’ loans.
Other non-resident entities, regardless of their tax residence, that carry out business with MIBC-licensed entities benefit from an exemption from WHT on interest, royalties, technical assistance, and service income received, regardless of their tax domicile, provided that the income received is related with the activity of the MIBC-licensed entity.
MIBC-licensed companies generally benefit from Portugal's network of DTTs. EU laws and regulations apply to Madeira.
The MIBC special tax regime is not available to entities pursuing intra-group services (head office activities and business and management consulting), financing, and insurance activities. Certain productive activities are also excluded.
Tax benefits and incentives to investment in the Autonomous Region of Madeira
The Investment Tax Code applicable to the Autonomous Region of Madeira adapts the tax benefits and incentives foreseen for the mainland to the Autonomous Region of Madeira.
The main adjustments are made in the following tax benefits and incentives:
- Contractual tax benefits regime: Investment projects in Madeira Island amounting to EUR 750,000 and EUR 250,000 in Porto Santo Island in the sectors foreseen under the EU guidelines for regional aid are consider as eligible. The CIT credit is available at up to 35% of the relevant investment, provided some conditions are met. Exemptions or reductions from property taxes and exemptions from stamp tax are also available.
- Tax regime for investment support: Investments in specific business sectors are eligible for a CIT credit of up to 35% of the relevant investments up to EUR 1.5 million of investment and up to 15% for the relevant investments above that amount. The unused credit can be carried forward for a ten-year period. Exemptions or reductions from property taxes and exemptions from stamp tax are available.
- Reinvestment of retained earnings: Micro, small, and medium-sized companies in Madeira that reinvest up to 15% of their retained earnings, capped at EUR 1.5 million, are eligible for a CIT credit of up to 25% of the tax due.
- R&D incentives: 32.5% of R&D expenses, including acquisition of assets, costs with qualified staff and board members involved in the R&D activities, among others, might be deductible to the taxable amount in the period they are incurred or in the following eight years. An additional 50% deduction might be available for increases in the average R&D expenses in comparison with the two previous years, limited to EUR 1.5 million.
Investment projects developed in ‘Brava Valley’ will benefit from an additional deduction of 10% in all the tax benefits and incentives available. The above incentives are subject to the de minimis rule within the context of European Union Commission's (EC) Regulation 651/2014 of 16 June.
Tax benefits and incentives for non-resident corporate entities
Capital gains on the sale of shares and quotas held in a Portuguese company by a non-resident company may be tax exempt. However, there are some important exceptions, such as:
- Where the non-resident shareholder (without a PE in Portugal) is owned more than 25%, directly or indirectly, by a Portuguese resident company, except when the following cumulative conditions are met in respect of the non-resident shareholder:
- Is resident in an EU member state, an EEA member state (bounded by an agreement for administrative cooperation in tax matters similar to the EU's), or a state that has a tax treaty in force foreseeing exchange of information.
- Is subject to and not exempt from corporation tax as foreseen in EU Council Directive (Directive 2011/96/EU, dated 30 November) or a tax similar to the Portuguese CIT (in the latter case, provided that the legal rate is not lower than 60% of the standard Portuguese CIT rate that now stands at 21%).
- Directly, or directly and indirectly, holds at least 10% of the share capital or of the voting rights of the Portuguese resident entity being sold for a minimum holding period of one consecutive year.
- Is not part of an artificial scheme which purpose or main purpose does not aim at obtaining a tax advantage.
- Where the non-resident shareholder is located in a black-listed jurisdiction.
- Where the assets of the company sold consist in more than 50% of immovable property located in Portugal or, in case of a holding company, if it is in a control relationship with a Portuguese resident company whose assets consist in more than 50% of immovable property located in Portugal.
Capital gains arising from the transfer of equity or similar rights in non-resident entities shall also be subject to taxation in Portugal when, in any moment of the previous 365 days, the value of such equity or rights derives, directly or indirectly, in more than 50% from immovable properties located in Portuguese territory (except if these immovable properties are allocated to agricultural, industrial, or commercial activities other than the buying and selling of real estate).
Government and corporate bonds
Interest and capital gains on government and corporate bonds are tax exempt (where held by entities not located in black-listed jurisdictions) under certain conditions.
Interest paid by resident credit institutions
Interest paid by resident credit institutions to non-resident financial companies deriving from loans as well as gains arising from swap transactions are tax exempt.
Tax regime applicable to external loans
Interest derived from Schuldscheindarlehen loan agreements signed by the Public Treasury Institute (IGCP), on behalf of the Portuguese Republic, is tax exempt, provided the creditor is not resident in Portugal and has no PE herein to which the loan can be allocated to.
Special tax regime applicable to debt securities issued by non-resident entities
Income from debt securities representing public and non-public debt issued by non-resident entities is tax exempt, provided that the income is considered to be obtained in Portugal, under Portuguese tax rules, and paid by the Portuguese state as a guarantor of the obligations undertaken by the entities in which it owns a participation, together with other EU member states.
Gains obtained by non-resident financial institutions on securities’ repo operations undertaken with resident credit institution are exempt from CIT, provided that such gains are not attributable to Portuguese PEs of non-resident financial institutions.
Securities repos or similar rights exchanged in stock markets, as well as the repo and fiduciary sales in guarantee, performed by financial institutions intermediated by central counterparties, are also exempt from stamp tax.