Elimination Of Double Taxation - Binding Information

Author:Mr Paulo Cordeiro De Sousa
Profession:Abreu Advogados

Portuguese Tax Authorities ("TA") have recently published a binding information, on Procedure No. 1239/2007 by decision of the General Sub Director of Taxes, of July 18, 2008, regarding article 46 of the Corporate Income Tax Code ("IRC") (elimination of economic double taxation), where number 11 of the referred article is interpreted, and that we believe to be erroneous (or at least capable of being interpreted in an erroneous way, as its redaction is not clear enough).

The referred number 11 establishes that the deduction applicable to the distribution of dividends "is reduced to 50% when the income arises from profits that have not been subject to an effective taxation, unless the beneficiary company is a holding company".

Based on this rule, TA considered that "when the profits from a holding company ("SGPS") (Portuguese holding company) are not subject to effective taxation and said SGPS distribute those profits to a resident entity, that is not a holding company, and the conditions established in paragraphs a), b) and c) of article 46 No. 1 of the Corporate Income Code are fulfilled, the latter can only deduct 50% of those profits, in order to compute its taxable profits".

What is the sense of this understanding? Distinction must be made between the profits accrued by a SGPS that are normally exempted from taxation at the SGPS level, as article 31, No. 1 of the Tax Benefits Code states that SGPS companies benefit from a total deduction of the profits accrued by them, regardless of the requirements stated on No. 1 of article 46 of the Corporate Income Tax Code concerning the percentage or value of said participation. But the referred Tax Benefits Code does not release SGPS from the obligation of holding those participations during an uninterrupted period of, at least, one year, in order to benefit from the total reduction of the profits accrued on its taxable basis. So, there may be cases, even infrequent, where the profits accrued by a SGPS cannot be deducted from its taxable basis, as the temporal requirement is not fulfilled. Those profits, on the other side, will be partially taxed at the SGPS level and the SGPS will only be able to deduct 50% of said profits.

Literally, it seems that what TA are saying in the binding information is that only in the last situation, where the SGPS distributes profits that where already taxed at its level, the partners will be able to completely deduct the profits accrued from their taxable basis. But...

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