Participation exemption is the term generically used to refer to the tax exemption applicable to dividends received from a subsidiary and any possible capital gains ensuing from the sale of that participation.
Profits and reserves distributed to Portuguese 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:
- The Portuguese company holds, directly or indirectly, and uninterruptedly, for the 12 months that precede the distribution or transfer, a participation that is no less than 10% of the shareholder capital or the voting rights of the entity that distributes the profits/reserves or whose participation has been transferred (in the case of distribution of profits, if the participation has been held for less time, it must be maintained throughout the time necessary to complete the 12 months);
- The entity that distributes the profits/reserves or whose participation has been transferred is subject to and not exempt from corporate income tax (Portuguese companies), any tax referred to in the Parent-Subsidiary Directive (companies resident in the EU) or a tax of an identical or similar nature to that of corporate income tax, provided that the rate applicable to said entity is not less than 60% (12.6%) of the corporate income tax rate (other cases); *
- The entity that distributes profits/reserves or whose participation was transferred is not resident in a tax haven;
- The distributed profits/reserves do not correspond to costs deductible by the entity that distributed it;
- The company is not subject to a tax transparency regime.
* 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%:
- An agricultural or industrial activity within the territory where they are established;
- 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:
- Operations pertaining to the banking activity, even if not performed by credit institutions;
- 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;
- 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;
- 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 Portuguese 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.
Reinvestment of capital gains
If the capital gains are not exempt because the Participation Exemption requirements have not been met, there is also the possibility of only half (50%) of the capital gains being considered if the capital gains are reinvested, subject to certain conditions.