As a member of the European Union, Portugal is subject to and benefits from the application of the European Directives, which aim to reduce the tax obstacles in cross-border operations and minimize situations of double taxation.
Council Directive 2011/96/EU of 30 November 2011 (previously Directive 90/435/EEC) regarding the common tax regime applicable to parent companies and affiliate companies of different Member States is fully applicable to Portuguese companies.
Through this directive, distribution of profits by a Portuguese company to companies residing in the European Union (EU) shall benefit from withholding tax exemption, providing that the following conditions exist:
- Both companies meet the criteria of one of the corporate forms stipulated in the Directive Annex;
- Both are subject to and not exempt from the income tax referred to in the Directive;
- The shareholder has directly or indirectly held a share in the subsidiary >= 10% for at least 2 years.
Portuguese companies fulfil the first two requirements. If the third is also met, it shall be possible for entities resident in another EU Member State to pay dividends to Portuguese companies without paying withholding tax in the State of origin and vice-versa.
Under article 15 of the Agreement between the EU and the Swiss Confederation, the aforementioned exemption is also applicable to the relationship between companies in Portugal and Swiss companies if the company benefitting from the profit has had at least a 25% direct stake in the capital of the company distributing the profits for at least two years, if both entities are subject to income tax without exemptions, and if they are both limited companies.
Similarly, if the requirements of this Directive have been complied with, the distribution of profits made by companies that reside in the European Union to a Portuguese company shall be exempt from withholding tax.
Directive 2009/133/CE adopted by the council on October 19, 2009, regarding a common system of taxation applicable to mergers, divisions, transfers of assets, and trading of shares that are of interest to companies of different Member States, is fully applicable to companies in Portugal.
Mergers, division of assets and exchanges of shares between companies established in the EU, as well as transferring headquarters within the EU, are carried out with Corporate Income Tax neutrality, as long as the companies involved embody one of the legal forms of constitution provided for in the Directive, and are subject to income tax.
In certain instances, transmission of unused tax losses is allowed.
Interest and royalties directive
Council Directive 2003/49/EC dated June 3, 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, is applicable to companies in Portugal.
Payment of interest and royalties between companies in the EU are exempt from withholding tax, if:
- Both companies embody one of the legal forms of constitution provided for in the Appendix to the Directive;
- Both are subject to Income Tax;
- There is an existing association of capital between them >= 25%, or if both are directly held in >= 25% by a third company, which complies with the two requisites stated above, so long as in either of the cases, the subsidiary is held for a minimum of two years;
- The company to which the interest or royalty payments are made is the beneficial owner of such income, which shall be deemed to be the case when it earns the income for its own account and not as an intermediary, and where a permanent establishment is deemed to be the beneficial owner, the credit, right or use of information from which the income derives is effectively related to the activity carried out through its intermediary and constitutes taxable income for the purpose of determining the profit attributable to it in the Member State in which it is situated.
Companies in Portugal comply with the first two requirements. If the 3rd and 4th are also fulfilled, it is possible for entities in other Member States to pay interest or royalties to the company in Portugal without automatic withholding at source.
Under the Agreement between the EU and Switzerland, tax exemption on the payment of interest and royalties shall also apply to the relationship between Portuguese and Swiss companies, provided that both are limited companies and fulfil the above-mentioned requirements.
A significative advantage of Madeira companies in relation to companies under the Portuguese general tax regime is that, with the application of the tax regime available within the International Business Centre of Madeira, payment of interest to third parties is exempt from withholding tax.
Partners or shareholders of Madeira companies, as long as non-resident in Portugal or in tax-havens, are also exempt from tax on the payment of income deriving from interest or other form of remuneration of shareholder loans, allowances or advances of capital that they have made to the company.