New Incentive to the Capitalization of Companies in Portugal
The State Budget Law for 2023 introduced a new Incentive to the Capitalization of Companies (hereinafter, “ICE”), consisting of a new tax deduction for the financing of Portuguese companies through equity.
Contributions made until the date of entry into force of the State Budget for 2023 (1 January 2023) will continue to benefit from the former regime of Remuneration on Conventional Share Capital, which was revoked by this new incentive.
What is this new fiscal incentive?
The ICE applies to entities that are engaged in a commercial, industrial, or agricultural activity and that cumulatively:
- Do not have its activity within the financial or insurance sector;
- Have their accounts organised under all the applicable legal requirements;
- Do not have their taxable profit determined by indirect methods; and
- Have their tax and social security situation in order.
The incentive consists of a deduction from the taxable profit of an amount corresponding to 4.5% of the amount of the net increases in eligible equity. This rate can be increased by 0.5 percentage points (i.e. to 5%), in the case of micro, small or medium-sized companies or small-medium capitalization companies.
The deduction shall be determined by reference to the sum of the eligible equity increases made in the tax period itself and in each of the previous nine tax periods. Only the net increases in eligible equity made on or after January 1, 2023, are considered.
The deduction shall not exceed, in each tax year, the higher of:
- EUR 2 million; or
- 30% of the tax EBITDA, pursuant to Article 67 of the CIT Code. The amount that exceeds this cap can be carried forward for a period of five years.
For the purpose of this new incentive, “increases in eligible equity” are:
- Cash contributions in the incorporation of companies or within the capital increase of the beneficiary company, or the nominal amount of conversions of credits into capital;
- Contributions in kind made within the scope of a share capital increase that corresponds to the conversion of credits into capital; and
- The allocation of the distributable accounting profits recorded in the year concerned, in accordance with the commercial legislation, in retained earnings or, directly, in free reserves accounts, or in the capital increase. The first accounting profit covered shall be the profit of the 2022 period.
As to “net increases in eligible equity”, the law refers to the difference, positive or negative, between “increases in eligible equity”, and outflows in cash or in kind, in favour of the owners of the share capital. This is by way of reduction of the share capital or distribution of assets, as well as distributions of reserves or retained earnings.
What are the exclusions from this incentive?
The following increases are expressly excluded from the regime:
- Contributions in cash, within the incorporation of companies or capital increases, which are financed by increases in eligible equity in another entity;
- Contributions in cash, within the incorporation of a company or capital increase of the company benefiting from the ICE by a related entity, which are financed through loans granted by the beneficiary itself or by another related entity of both the beneficiary and contributor; and
- Cash contributions, within the company incorporation or capital increase, by an entity that is not resident for tax purposes in another EU member state or the EEA or in another state where a tax treaty or an exchange of information agreement is in force.
Does this new incentive apply to my company?
The application is subject to a case-by-case analysis, but the regime looks like a step forward and a strong incentive, particularly in the context of capital-eager companies such as the Portuguese. Moreover, it anticipates some provisions of the DEBRA Directive.
Nevertheless, are still uncertainties regarding the practical aspects of the ICE. For this reason, the Tax Authorities are expected to issue some kind of guidance in the upcoming months.
Find out if this new incentive applies to your company. Schedule a call with our specialists today.