CFC Rules in Portugal

Author:Ms Inga Kilikeviciene
Profession:KPL Legal

A basic outline of the Portuguese CFC measures

The Portuguese CFC rules follow the path of other European countries: assessing the shareholding threshold in a non-resident company, verifying its location in the low-tax jurisdiction, evaluating profit generating activity and taxing on the income before dividend distribution.

The first anti-abusive norms in the Portuguese legislation were introduced back in 1995, by Decree-Law No. 37/95 aiming to tackle international fiscal fraud and evasion. The measures were based on limiting the use of tax heavens and preferential fiscal regimes through companies established in privileged tax jurisdictions. The actual Portuguese legislation maintains the core measures.

CFC Definition and Profit Allocation

A company is resident if it is incorporated in Portugal or if its place of central management and control is in Portugal.

The Portuguese CFC measure provides for the allocation of the derived profit of companies resident in countries with a privileged tax regime, regardless of its distribution or not, to the members of a company who are resident within the Portuguese territory; such company members are those holding a share in the company of at least 25 per cent, which is reduced to 10 per cent in case if the non-resident company is held by more than 50 per cent by resident members.

Thus, for the Portuguese tax purposes a controlled foreign company is a corporation meeting two criteria:

company's location in a clearly more favourable tax jurisdiction; and holding: a) at least 25% shares; or b) at least 10% of a non-resident company where 50% or more of the share capital is held by resident shareholders. It is important to note that the apportions above apply both to direct and indirect shareholding. The conditions are cumulative, i.e., if one of them is not met, CFC rules are not applicable.

Portuguese CFC legislation is applicable both to companies and individuals. For profit allocation, the term "entidade", or "entity", was initially used but later the confusing wording was clarified. In English, "entity" implies a corporate or collective person, and does not include an individual. In Portuguese, the term is broader and extends to individual persons. In order to avoid possible misinterpretations, the law was amended and now it clearly refers to corporations' profit only. Moreover, such profit shall necessarily be derived from a business activity of the corporations.

A company is considered located...

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