Income generated by investment can be transferred on the following terms:
Direct investment through a permanent establishment
Once the profits have been taxed in Portugal, income can be transferred to foreign investors without any further taxation. This is because a transfer between a Portuguese PE and its head office is considered to be an internal transfer within the same corporate entity.
Direct investment without a permanent establishment
Any tax paid by the investor in Portugal usually receives a tax credit in its country of residence, under most double-taxation agreements (‘DTA’) entered into between Portugal and other states.
Indirect investment through a corporate entity
In Portugal tax may have to be withheld on the distribution of dividends to shareholders. Tax withheld (if mandatory) may be provisional for residents and definitive for non-residents. This depends on the investor’s status as follows:
PORTUGUESE-RESIDENT CORPORATE SHAREHOLDERS
- Provisional withholding tax
- Distributions of dividends to Portuguese-resident corporate shareholders may be made without withholding tax if the participation exemption regime applies, and such equity was held by the shareholder in the year preceding the distribution. If the shareholder has its registered office in Portugal or if its management is located on Portuguese territory then it is deemed to be a tax resident.
In all other cases, a 25% withholding tax applies and the amount received as dividends is also taken into account in determining the taxable profits for the accounting period of the Portuguese-resident corporate shareholder.
Distributions of dividends to Portuguese-resident corporate shareholders are exempt from IRC if certain conditions are met, notably:
- The taxpayer holds shares representing at least 10% of the share capital or voting rights of the entity distributing the dividends;
- The relevant holding is maintained uninterruptedly for at least one year;
- The taxpayer does not fall within the tax transparency regime;
- The entity distributing the dividends is subject to and not exempt from IRC or any identical tax at a rate not lower than 60% of the Portuguese tax (for 2020 this will be 12.6%); and
- The entity distributing profits is not resident in a country, territory, or region with a preferential tax regime.
If the conditions are not met, the amount received as dividends is also taken into account in determining the taxable profits for the accounting period of the Portuguese-resident corporate shareholder.
The income of resident taxpayers is subject to IRC at the general rate of 21% (on the Portuguese mainland). A reduced rate of 17% may be applicable to the first €25,000 of taxable income (if the company is recognized as a small or medium-sized company. To be recognized as such, the company must have fewer than 250 employees and its annual turnover must not exceed €50 million, or its annual balance sheet total must not exceed €43 million).
- The income of resident corporate taxpayers is also subject to a municipal surcharge of up to 1.5%, which is levied by many Portuguese municipalities, and a state surcharge of 3% applies to income varying between €1.5 million and €7.5 million. For income between €7.5 million and €35 million, the surcharge rises to 5%. Above €35 million the surcharge rises to 9%. Taxable income for IRC purposes is calculated on the basis of the net accounting profit as adjusted for tax purposes.
CORPORATE SHAREHOLDERS NOT ESTABLISHED IN PORTUGAL (DEFINITIVE WITHHOLDING TAX)
Profits distributed by a legal entity that is tax resident in Portugal (provided the entity is subject to and not exempt from taxation and is not a tax transparent entity), are exempt from IRC if the shareholder is resident:
- in a Member State of the European Union;
- in an EEA country that has agreed to administrative cooperation;
- in a State with whom a DTA has been entered.
Besides the requirements regarding the tax residency of the shareholder further conditions need to be met; notably
- the taxpayer must hold shares representing at least 10% of the share capital or voting rights of the entity distributing the dividends before the dividends are made available;
- the referred holding must be maintained uninterruptedly during the year preceding the distribution;
- the entity distributing the dividends must not fall within the tax transparency regime;
- the shareholder must be subject to and not exempt from a corporate income tax mentioned in the EU Parent Subsidiary Directive, or to a corporate income tax similar to IRC, at a rate not lower than 60% of the Portuguese tax (for 2021 this will be 12.6%).
Additionally, profits distributed to a company deemed to be tax resident in Switzerland are exempt from IRC in the terms set out in article 15 of the EU-Switzerland Agreement if:
- the company to which the profits are distributed holds at least 25% of the share capital of the company distributing the dividends, for at least two years;
- in the terms set out in the DTAs entered into by Portugal and Switzerland with third countries, the company is not deemed to be tax resident in that third country; and
- both companies are subject to and not exempt from Corporate Income Tax and both companies are limited liability companies.
If the above-mentioned requirements are not met, 25% of any dividend paid must be withheld by the Portuguese corporate vehicle except where a DTA is deemed applicable.
Most of the DTAs entered into by Portugal, following the OECD Model Treaty, establish that the applicable Portuguese withholding tax rate on dividend or profit distributions cannot exceed 15% or 10%, depending on the percentage of participation in the corporate vehicle.
Dividends paid to shareholders established in a country, territory, or region whose tax regime is deemed to be clearly more favorable will be subject to withholding tax at a rate of 35%.
Dividends deposited in accounts of fiduciary entities, which act on behalf of undisclosed third parties, will be subject to withholding tax at a rate of 35%.
If the income generated from real estate ownership is transferred to shareholders or partners, this income is only subject to taxes. No other costs or charges are payable.
Taxes that are payable on the sale of real estate
Whether generated through a resident corporate vehicle, a permanent establishment (PE) of a non-resident entity, or a non-resident entity without a PE, income from the sale of real estate may be subject to tax as follows:
Real estate assets held by a foreign investor through a corporate vehicle
- Sale of real estate by the corporate vehicle
A corporate vehicle established under Portuguese law is subject to IRC at 21% plus surcharges up to 9 % on any capital gains arising from the sale of real estate. Municipal surcharges of up to 1.5% may also apply. A reduced 17% tax rate applies on the first €25,000 of taxable income, with respect to small or medium-sized entities.
In the case of a Portuguese corporate vehicle, capital gains can be offset against other capital costs or losses. Only 50% of the capital gains need to be included in taxable income for IRC purposes if the sale proceeds from certain real estate assets are reinvested in the purchase of certain qualified assets.
- Sale of shares in a corporate vehicle
Portuguese taxation on the capital gains of non-residents arising from the disposal of shares in a Portuguese-based property company applies as follows:
- 25% for corporate entities.
- 28% for individuals (although only half of the capital gain will be taken into consideration for tax proposes if the company whose shares will be sold is recognized as a micro or small company. To be recognized as such, the company must have less than 50 employees and its annual turnover or annual balance sheet total must not exceed €10 million).
Certain exemptions from Portuguese capital gains tax on the sale of shares by non-Portuguese-resident individuals or entities are available. However, these do not apply to the disposal of shares in Portuguese-resident companies where more than 50% of the company’s assets consist of immovable property located in Portugal, or of shares in holding companies in which an affiliated or controlled company holds more than 50% of its assets in an immovable property located in Portugal.
Real estate assets held by foreign investors through a PE in Portugal
A PE is taxed on capital gains or business profits arising from the disposal of real estate in the same way as a Portuguese corporate vehicle.
Capital gains can be offset against other capital costs or losses. Only 50% of the capital gains need to be included in taxable income for IRC purposes if the sale proceeds from certain real estate assets are reinvested in the purchase of certain qualified assets.
Real estate assets held by foreign investors directly without a permanent establishment in Portugal
Capital gains or business profits from the sale of real estate are subject to IRC at a flat rate of 25% or IRS at a flat rate of 28%.
This was the third part of our three articles regarding taxation when buying or selling property in Portugal. Don’t forget to check out the other articles as well!