PORTUGAL Law and Practice Contributed by: Francisco Cabral Matos, Rita Pereira de Abreu and Margarida Campelo, VdA
6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Corporate entities resident in Portugal for tax purpos - es are – similarly to individuals – subject to tax in Por - tugal on their worldwide income, ie, income sourced in Portugal and abroad. As described in 2.1 Taxable Profits , taxable profits include operating income and capital gains. However, in order to ensure that no double taxation takes place, Portugal applies a credit method that allows for a relief to be achieved through a deduction to be offset against foreign-sourced income included in the company’s taxable basis. The effective applica - tion of the tax credit method considers the tax paid abroad (in the country of source of the income) or the CIT assessed before the deduction corresponding to the net income taxed abroad, whichever is the lower amount. Whenever a double tax treaty applies, the tax credit cannot exceed the amount of tax that should have been paid abroad under the terms of that treaty, and any unutilised credit may be carried forward. 6.2 Non-Deductible Local Expenses The non-deductibility of local expenses applies to tax - payers that have chosen the exemption method for the profits of their foreign permanent establishments. 6.3 Dividends From Foreign Subsidiaries Dividends received by a shareholder resident in Por - tugal from a non-resident subsidiary will be subject to taxation in Portugal as they are included in CIT taxable income. These distributions may, however, be exempt from taxation in Portugal if the participation exemp - tion regime applies (please see requirements in 4.1 Application of Withholding Taxes ). If the participation exemption regime cannot apply, a reduced rate may be provided in the double tax treaty signed between Portugal and the country of residence of the affiliate. Additionally, a credit for economic double taxation may be available.
6.4 Taxation of Intangibles Developed by Local Corporations Intangibles developed by local entities that are used by non-local subsidiaries in their business must com - ply with the arm’s length principle. The income result - ing from this use will be included in the taxable basis and subject to CIT under general terms. See the patent box regime mentioned in 2.2 Technol- ogy Investments . 6.5 Controlled Foreign Corporation-Type Rules The aim of the Controlled Foreign Company (CFC) rules is to prevent the deferral or even elimination of taxation on income through the use of non-resident entities located in low-tax jurisdictions or subject to low taxation on their profits. These rules apply to Por - tuguese-resident entities or individuals that, directly or indirectly, hold at least 25% of the capital, voting rights, or rights over income or assets in non-resident entities that fall under a “more favourable tax regime”. Non-resident entities are considered to operate under such a regime if they are located in a blacklisted juris - diction or if they are fully exempt from tax, or subject to an income tax rate lower than 50% of the standard Portuguese CIT rate (ie, an effective rate of 9.5%) that would apply if they were based in Portugal. However, the CFC rules are triggered only if more than 25% of the profits of these non-resident entities con - sist of certain types of passive income, including: roy - alties or income from IP, image rights or similar rights; dividends and capital gains from shares; financial leasing income; insurance and banking income (even if not earned by credit institutions), and other financial activities contracted with related parties; income from invoicing companies that generate sales and service income in transactions with associated enterprises without adding substantial economic value; and inter - est or other income from financial assets. If the CFC rules apply, the income of the non-resident entity is attributed to the Portuguese-resident shareholder, regardless of whether it has been distributed. This undistributed income is subsequently subject to PIT or CIT, as applicable.
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