Besides the regimes applicable to individuals, and although it still remains barely unknown, Portuguese tax legislation provides several benefits for foreign companies who intend to invest or incorporate in Portugal, placing it at the top of the map of international tax competitiveness.

Portugal has redefined its international tax policy and its corporate tax code, as well as its Investment Fiscal Code (creating the Fiscal Regime for Investment Incentive - RFAI and the Fiscal Incentive System for Investigation and Entrepreneurial Development - SIFIDE II) with the aim of attracting international investment by reducing the corporate tax and providing fiscal incentives to companies and investments.

Benefiting from deep water harbors and, at an European level, from a suspended regime of taxation on merchandises, Portugal holds unequalled conditions of access to European Law and to a wide number of Double Taxation Treaties (DTT) globally, including with several Portuguese-speaking countries (recently even with Angola which has not yet entered into a DTT with any other country) and all European countries.

This also allows the application of tax limits to income source countries and, which may reposition Portugal as the "gateway" for Europe, not only considering its strategic geographic location in the Atlantic  Ocean but also its positioning in international tax competitiveness and as an investment platform to other countries, in Europe, Latin America, Africa or Asia, and, in particular, in the Portuguese-speaking countries, due to the historical, cultural, linguistic and affective strong relations with countries such as Brazil, Angola, Mozambique, Sao Tome and Principe, Cape Verde, Guiné-Bissau, Macao (as gateway to China) and East-Timor.

PARTICIPATION EXEMPTION

Portugal has introduced the new “participation exemption” regime, which is nowadays one of the most attractive European regimes. Under the aforementioned regime, capital gains and dividends are exempt from Portuguese Corporate Income Tax whenever a Portuguese Company or a Foreign Company with a permanent establishment in Portugal holds, at least, 5% in the share capital or voting rights of a participated company, for a minimum period of 24 months.

The “Patent Boxes” regime also seeks to be an investment incentive applicable to intellectual property assignment contracts, as only half of its profits will be taxed under certain conditions.

REAL ESTATE INVESTMENT TRUSTS (REIT’s)

The development of the real estate and capital markets in Portugal led the government to approve the regime of Sociedades de Investimento e Gestão Imobiliária (“SIGI”) based on the known Real Estate Investment Trusts.

These companies are a new vehicle for the promotion of real estate investment, mainly for the property rental market, that allows the conversion of real estate investments into financial investments. The Portuguese Government hopes that, combined with the tax regime for Collective Investment Organisations, this scheme may be fruitful and heavily employed by investors. The main fiscal benefit is that the 21% corporate tax rate is not applied on capital gains arising from sales as well as on property income and capital income. The withholding tax applied to non-resident investors will be of 10%.

This new type of companies may have as principal activities the i) purchase of real estate for lease or other forms of exploration, ii) purchase of participations in similar companies and iii) purchase of participations in real estate investment funds.

Some of the main requirements for these companies are as follows:

·         Head office and Administration in Portugal, as “Sociedade Anónima“ (PLC) labelled as "Sociedade de Investimento e Gestão Imobiliária, S.A.” ou “SIGI, S.A.”;

·         Company object including the activities set out in the paragraph above;

·         Share capital of € 5.000.000,00, admitted to negotiation in an European stock market;

·         At least 80% of assets must be real estate rights or entitlements, owned directly or not; and 75% of assets in leased properties or other forms of exploration of real estate;

·         Rights and participations must be held for at least 3 years;

·         Company indebtedness below 60%;

·         75% of profits must be distributed each year.

MADEIRA FREE ZONE (“ZONA FRANCA DA MADEIRA”)

This is a free zone and international business center sanctioned by the EU which offers broad tax benefits until December 2027 to companies incorporated in the region until December 2020.

The benefits are (i) a reduced corporate tax rate of 5%, (ii) an abatement of 50% on the taxable profit, (iii) exemption of personal income tax or corporate tax for non-resident shareholders, as long as the company generates jobs, promotes skilled workforce, contributes to the environment, modernises and diversifies the regional economy.

This free zone also includes the International Ship Register of Madeira - Registo Internacional de Navios da Madeira (MAR), the fourth by size in Europe, that has several fiscal incentives for the maritime industry and registry, as well as a new tonnage tax regime that allows companies to choose an alternative, and potentially more favourable, method in determining the taxable profit on their maritime transport activities.

INTERNATIONAL DOUBLE TAXATION

Certain aspects of international double taxation are harmonised within the EU, namely through EU Directives, this fact, together with the OECD Model Convention for Double Taxation Treaties (DTT’s) allows to implement coherent fiscal systems.

The Portuguese network of DTT’s negotiated and ratified has expanded to 80 countries (Angola and East Timor are the most recent ones that should enter into force this year). These DTT’s eliminate or reduce international double taxation, thus making it more interesting for individuals and companies to reside or invest in Portugal due to greater transparency on tax implications arising from their choices.

Furthermore, Portugal is among several countries that have expressed their intention to be bound by the Multilateral Convention (“MLI”) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“BEPS”), one of the main international responses against certain practices leading to the erosion of the tax base or abusive practices under the DTT’s.

Finally, when no DTT or MLI is in place, usually Portugal offers to its residents the elimination or reduction of international double taxation unilaterally, thus individuals and companies may benefit of a tax credit tantamount to the lower of the following sums, the tax owed in Portugal and the tax paid in the other State.

An exemption of withholding tax on dividends of a resident company is applicable if the receiving company is domiciled in the EU or EEE or in a country with which Portugal has a DTT, provided the mechanisms of exchange of information are in operation.

As a final note, we draw the attention to the existence of the Fiscal Arbitration Regime that has enabled the resolution of the conflicts between taxpayers and the tax authorities by using the arbitration of the Center for Administrative Arbitration (CAAD). This option has several advantages compared to the judicial tax courts, namely since it is simpler, fully dematerialized and electronic, swifter (usually the arbitration award is issued within a maximum delay of six months) and the arbitration award is provided by arbitrators with certified professional experience in Tax Law and economic matters.

Lisbon, February 2019

GDP Advogados

This information is intended for general distribution to clients and colleagues and the information contained herein is provided as a general and abstract overview. It should not be used as a basis on which to make decisions and professional legal advice should be sought for specific cases.