Purchase of shares in Portuguese resident company
The purchase of shares in a Portuguese resident company is generally not subject to taxation, unless the Portuguese resident company qualifies as a land-rich company, in which case, if certain requirements are met, it can be subject to Property Transfer Tax (PTT).
Under article 2 (2) (d) of the PTT Code, the disposal of shares in Portuguese companies is subject to PTT, due from the buyer, if all the following requirements are met:
- more than 50% of the value of the company's assets derives, directly or indirectly, from real estate located in Portugal, by reference to the balance sheet value or the tax value of the real estate, whichever is higher;
- such real estate is not directly allocated to an activity of an agricultural, industrial or commercial nature, excluding the activity of purchasing and selling real estate;
- as a result of the acquisition (or other corporate events), a shareholder becomes the holder of, at least, 75% of the share capital of the target entity, or the number of shareholders is reduced to two persons who are married or in a non-marital partnership.
The PTT rate on the acquisition of shares in land-rich companies is 6.5%, unless the buyer is resident in a blacklisted jurisdiction (such as Hong Kong), in which case the tax rate is increased to 10%, levied on the tax value of the immovable property or its balance sheet amount (whichever is higher).
Portuguese tax residence
In Portugal, companies are considered tax residents if their head office or their place of effective management is located within the country. Portuguese tax resident companies are taxed under the worldwide income principle.
Under the Portugal-China double tax treaty (DTT), if a company is a resident of both Portugal and China, then it is deemed to be a resident only of the state in which its place of effective management is situated. However, if the company has its effective management in one of the contracting states and its head office in the other contracting state, the residence will be decided by the competent authorities of the contracting states by mutual agreement.
Corporate income tax rate
Entities with a head office or effective place of management in Portugal are subject to Corporate Income Tax (CIT) on their taxable profit, at a standard rate of 20%. This is increased by:
- a Municipal Surcharge on taxable profit, at a maximum rate of 1.5%; and
- a State Surcharge on taxable income, at the following rates: - 3% for taxable income between €1,500,000 and €7,500,000; - 5% for taxable income between €7,500,000 and €35,000,000; and - 9% for taxable income above €35,000,000.
A reduced CIT rate of 16% is applicable to the taxable income of small or medium-sized companies, up to a threshold of €50,000. The taxable income exceeding that threshold is liable to the general CIT rate of 20%.
Equity financing from Chinese resident parent company to Portuguese resident subsidiary
Equity financing (for example an increase in share capital though capital contributions) has no impact on the taxation of a Portuguese company.
Withholding tax on dividend payments to Chinese parent company
Dividends paid by a Portuguese resident company to a non-resident company are generally liable to withholding tax (WHT) at a 25% CIT rate.
However, a domestic exemption from WHT on dividend payments to a Chinese parent company may apply if the Chinese parent company:
- is subject to a CIT rate of at least 60% of Portugal’s statutory rate (currently 20%), i.e. 12%;
- holds a direct or indirect participation of not less than 10% of the share capital or of the voting rights of the distributing entity; and
- such participation is held for 12 consecutive months prior to the dividend’s distribution.
If the conditions required in order to apply the domestic exemption are not met, a reduced tax rate may be applicable under the Portugal-China DTT, which provides that the WHT rate may be reduced to 10% (provided that the Chinese company is the beneficial owner of the dividends).
Debt financing from Chinese resident parent company to Portuguese resident subsidiary – tax deductibility of interest payments
Interest due on loans from the Chinese parent company is deductible for CIT purposes by the Portuguese resident subsidiary, up to the higher of the following thresholds:
- 1 million Euros; or
- 30% of the earnings before interest, taxes, depreciation and amortisation, adjusted for tax purposes (EBITDA).
Financing expenses which are non-deductible in a certain fiscal year (because the relevant limit has been exceeded) may be deductible in the following five fiscal years, provided that, when they are added to the net financing expenses of the relevant fiscal year, the above-mentioned limits are not exceeded.
Where financing expenses do not exceed 30% of the EBITDA, the unused difference is added to the maximum deductible amount in the following five tax years, until it has been completely deducted.
Restrictions to these rules may apply where there is a change in ownership of more than 50% of the share capital or voting rights of the company.
In order for the interest to be deductible, the rate of interest must comply with transfer pricing rules (i.e. it must be aligned with the fair market standard between unrelated parties).
Debt financing from Chinese resident parent company to Portuguese resident subsidiary – withholding tax on interest payments
Interest paid by a Portuguese resident company to a non-resident company is generally liable to WHT at a 25% CIT rate. A 35% rate applies if the interest is paid to a company resident in a blacklisted jurisdiction (such as Hong Kong).
However, under the Portugal-China DTT, when interest is paid to a Chinese resident company, the CIT rate may be reduced to 10% (provided that the Chinese company is the beneficial owner of the interest). This rate only applies to interest aligned with transfer pricing rules; any amount exceeding this will be taxed under the general rules set out above.
Intellectual property – withholding tax on royalties paid to Chinese parent company
Royalties paid by a Portuguese resident company to a non-resident company are generally liable to WHT at a 25% CIT rate. A 35% rate applies if the royalties are paid to a company resident in a blacklisted jurisdiction (such as Hong Kong).
However, under the Portugal-China DTT, when the royalties are paid to a Chinese resident company, the tax rate may be reduced to 10% (provided that the Chinese company is the beneficial owner of the royalties). This rate applies only to royalties aligned with transfer pricing rules (i.e. which are consistent with the arm’s length principle); any amount exceeding this will be taxed under the general rules set out above.
Intellectual property – tax treatment of licence granted by Chinese parent company to Portuguese resident company
Portuguese Value Added Tax (VAT) applies to an intellectual property licence granted to a Portuguese licensee, as this is deemed to be a supply of services located in Portugal. VAT exemptions for intellectual property may apply depending on the type and content of the licence.
Intellectual property – tax incentives
It may be possible to deduct eligible expenses incurred in relation to research and development (R&D) activities, subject to certain limits and conditions. (This regime is known as SIFIDE II and is available until the end of the 2025 tax year).
Portugal’s patent box regime allows income/profit arising from the assignment or temporary use of patents, industrial designs and copyrights of computer programmes (i.e. intellectual and industrial property) to be excluded from the taxable income (up to a limit of 85%), subject to certain limits and conditions.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various Portuguese anti-avoidance rules may be relevant to intra-group transactions. These include:
- the general anti-avoidance rule (GAAR), which gives tax authorities the power to disregard, for tax purposes, transactions or arrangements that are primarily designed to avoid taxes;
- specific anti-avoidance rules, such as thin capitalisation rules (which prevent companies from using excessive debt to reduce taxable profits) and hybrid mismatch rules (which prevent the use of hybrid mismatches that exploit differences between tax systems to create tax advantages); and
- transfer pricing rules, which ensure that the transaction has been priced in accordance with its Fair Market Value (i.e. consistently with the arm’s length principle).
Sales tax/VAT
Portuguese VAT may apply to goods and services provided and received by a business established in Portugal, depending on the type of supply.
Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as some financial services and some supplies of real property, are exempt from VAT.
In Portugal, the VAT rates depend on the place in which the supply (of either goods or services) is deemed to occur, as the rates vary between Mainland Portugal, Madeira and the Azores, as well as depending on the type of transaction, as Portugal has three types of VAT rates (standard, intermediate and reduced).
The current standard rate of VAT is 23% in Mainland Portugal, 22% in Madeira and 18% in the Azores. Depending on the nature of the supply, an intermediate rate of 13%, 12% or 9% (in Mainland Portugal, Madeira or the Azores, respectively) or a reduced rate of 6%, 5% or 4% (in Mainland Portugal, Madeira or the Azores, respectively) may apply.
Pillar Two
Portugal has recently implemented the Pillar Two EU Directive.
This new regime creates a global minimum tax regime by establishing an Income Inclusion Rule and an Undertaxed Profits Rule (IIR and UTPR, respectively) and a Qualified Domestic Minimum Top-up Tax (QDMTT), aimed at ensuring that the effective tax rate (ETR) of the largest multinational or national groups is at least 15% in each territory in which they operate.
Broadly, the IIR and UTPR apply to group entities located outside Portugal, whereas the QDMTT (ICNQ-PT) applies to group entities located in Portugal, as set out below.
- The IIR provides that a parent entity of a multinational group or large domestic group calculates and pays its attributable share of the top-up tax in relation to the constituent entities of the group which are subject to low taxation, referred to as the "IIR top-up tax."
- The UTPR provides that a constituent entity of a multinational group pays its share of the top-up tax that was not collected through the IIR, with respect to the constituent entities of that group subject to low taxation, referred to as the "UTPR top-up tax."
- Lastly, the ICNQ-PT entails the calculation and payment of a top-up tax on the excess profits of all constituent entities subject to low local taxation, which are located in Portugal.
The global minimum tax regime only applies to entities that are members of multinational groups of companies or large national groups that reach the annual threshold of at least € 750m in consolidated revenue.
Certain specific situations in which the risks of base erosion and profit shifting are low have been taken into account. For example, an exclusion of income based on substance has been included, based on the costs associated with employees and the value of tangible assets in a given jurisdiction.
There are also specific rules for multinational groups of companies that are in the initial phase of their international activity, as well as an exclusion of income from large national groups during a transitional period, in order to ensure fair treatment. Finally, the legislation provides for a de minimis exclusion for multinational groups or large national groups with an average revenue of less than € 10m and an average net profit of less than € 1m in Portugal.
The global minimum tax regime will apply to tax years commencing on or after 1 January 2024, with the exception of the UTPR, which applies only to tax years commencing on or after 1 January 2025 (unless the relevant entity is the constituent entity of a multinational group whose parent entity is located in a Member State that has applied the option provided for in article 50 (1) of Directive 2022/2523, in which case the global minimum tax regime will apply to tax years commencing on or after 1 January 2024).
Use of trading losses
Tax losses – including tax losses incurred in tax years prior to 1 January 2023, for which the carry-forward period was still running as of that date – can be carried forward for an unlimited period to reduce the taxable income of the company. However, the deduction of carried forward tax losses is capped at 65% of the taxable profit of the company. Tax losses not deducted in a given tax year, due to the 65% cap, may be deducted in the following years.
The Portuguese CIT code does not provide for losses to be carried back.
Tax losses available to carry forward are lost when there is a change in ownership of more than 50% of the share capital or voting rights of the company. However, this rule does not apply if the change does not have tax evasion as its main or one of its main purposes. For example, the rule does not apply when the change of ownership was due to valid economic reasons.
Surrendering losses within group
In Portugal, the management of losses within a group of companies is governed by the Special Tax Regime for Corporate Groups. This regime enables companies within a group to consolidate their tax position, allowing the offset of losses incurred by one company against the profits of others within the same group. This is subject to certain conditions, which align with the general conditions set out above (i.e. the deduction of carried forward tax losses is capped at 65% of the taxable income of the relevant company, losses may not be carried back and no tax evasion purposes).
Payroll taxes relating to employing staff in Portugal
In general, the employees of a Portuguese resident company will be subject to Personal Income Tax (PIT) and Social Security contributions on their employment income and benefits (some exclusions may apply).
The employer is responsible for withholding PIT from employees' salaries monthly and remitting it to the state. The tax rate varies depending on the personal situation of the employee (for example, whether they are single or married, whether they do or don’t have children etc.) and the amount withheld serves as an advance payment for the final PIT due from the employee.
The final PIT rate depends on the employee's annual income, progressively taxed through tax brackets with rates currently varying between 13% and 48%. A solidarity surcharge of 2.5% is applied to taxable income between EUR 80,000 and EUR 250,000, and 5% is applied to taxable income higher than EUR 250,000). These tax brackets and the corresponding tax rates are reviewed annually by the government.
Social Security contributions are mandatory for both employers and employees. These contributions are intended to fund social protection (for example pensions, unemployment and sickness) and are shared between the employer and the employee as follows.
- Employer Contribution: 23.75% of the employee’s gross salary.
- Employee Contribution: 11% of the employee’s gross salary (deducted directly from the salary).
Tax issues relating to secondees sent from China to Portuguese resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment carried out in Portugal may be taxed in Portugal. However, the remuneration is instead generally taxable only in China if:
- the secondee is not present in Portugal for more than 183 days within a civil year;
- the secondee’s remuneration is paid by, or on behalf of, a non-Portuguese resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Portugal.
The secondee must be covered by the Portuguese Social Security regime, unless it is proven that they are covered by the mandatory social protection regime in China. If this is not proven, Portuguese Social Security contributions are due from both the employer and the employee, calculated over the secondee’s gross salary at the general rates of 23.75% and 11%, respectively.
Tax on disposal of shares in Portuguese resident company
A non-resident company’s capital gain from the disposal of shares in a Portuguese company is, as a general rule, exempt from taxation, unless the value of the real estate, directly or indirectly held by the Portuguese company, represents more than 50% of its assets, in which case capital gains are taxed at a CIT rate of 25% (unless otherwise provided for in a double tax treaty).
For these purposes, where a Chinese resident derives a capital gain from the sale of shares of a company, the assets of which consist primarily of immovable property located in Portugal, article 13 of the Portugal-China DTT allows the capital gain to be taxed in Portugal.
The capital gain is calculated based on the difference between the sale price (net of expenses) and the acquisition cost, adjusted by reference to an inflation index if more than 24 months have elapsed since the acquisition of the participation.
Contact
© Eversheds Sutherland. All rights reserved. Eversheds Sutherland is a global provider of legal and other services operating through various separate and distinct legal entities. Eversheds Sutherland is the name and brand under which the members of Eversheds Sutherland Limited (Eversheds Sutherland (International) LLP and Eversheds Sutherland (US) LLP) and their respective controlled, managed and affiliated firms and the members of Eversheds Sutherland (Europe) Limited (each an "Eversheds Sutherland Entity" and together the "Eversheds Sutherland Entities") provide legal or other services to clients around the world. Eversheds Sutherland Entities are constituted and regulated in accordance with relevant local regulatory and legal requirements and operate in accordance with their locally registered names. The use of the name Eversheds Sutherland, is for description purposes only and does not imply that the Eversheds Sutherland Entities are in a partnership or are part of a global LLP. The responsibility for the provision of services to the client is defined in the terms of engagement between the instructed firm and the client.