Profits and reserves distributed to Madeira companies by their associated companies, along with 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:
* This requirement shall be dispensed with when the following conditions have been cumulatively met:
a) The proportion of the respective profits or income derived from the performance of the following is at least 75%:
1) An agricultural or industrial activity within the territory where they are established; or
2) A commercial or service activity that is not predominantly directed at the Portuguese market;
b) The main activity of the non-resident entity is not included in the following operations:
1) Operations pertaining to the banking activity, even if not performed by credit institutions;
2) Operations related to the insurance industry when the respective income results mostly from insurance related to goods located outside the residential territories of the entity or insurance pertaining to persons who do not reside in that territory;
3) Operations related to shareholdings accounting for at least 5% of shareholder capital or voting rights, or any participations held in entities residing in a tax haven, or operations related to other securities, intellectual or industrial property rights, supply of information pertaining to experience acquired in the industrial, commercial or scientific sector or the supply of technical assistance;
4) Rental of goods, except real estate, in the territory of residence.
For cases in which the Participation Exemption does not apply, there is a unilateral tax credit for international economic double taxation, namely income tax paid abroad by the entity residing outside Portugal on profits/reserves distributed to the Madeira company, provided that the first two aforementioned requirements are complied with in terms of the participation exemption.
There is also the possibility of making use of the unilateral tax credit for international legal double taxation, applicable when the taxable amount includes income obtained abroad and income tax has been paid abroad on such income. This tax credit shall be determined according to the country, taking into account the total income from each country, with the exception of income attributable to permanent establishments located outside Portugal, the deduction of which is calculated individually. The deduction provided for can be made within the 5 taxation periods that follow.