The Portuguese Government has introduced a significant tax reform, with effects as of the 1st of January 2014, with very positive changes to the competitiveness of the country’s tax system. This tax reform has mainly introduced changes to the taxation of dividends, capital gains and royalties, which are also fully applicable to the companies licensed in the International Business Centre of Madeira (IBCM).
The main aspects of the tax reform are:
(1) A revised participation exemption regime, now extending the exemption to worldwide dividends and capital gains, provided that the shareholding represents at least 5% for a minimum of 2 years and that the affiliated companies are not located in a tax haven and are fully subject to tax;
(2) The payment of dividends by Portuguese companies to corporate shareholders is now exempt from withholding tax, provided that the corporate shareholders reside in a E.U. or E.E.A. country or, in addition, in a country with which Portugal as a double taxation treaty which includes a tax sharing information clause. The payment of dividends must correspond to a minimum shareholding in the Portuguese company of 5% for more than 24 months.
(3) Income derived from branches of Portuguese companies abroad is also exempt from corporate income tax in Portugal, provided that they are subject to tax and are not located in tax havens;
(4) Tax losses are now deductible for 12 years, as opposed to 5 up until 2014, with a limit of 70% of each year’s profits;
(5) The unilateral tax credit allowed by Portugal, for taxes withheld in other countries, was now extended to a 5-year period;
(6) A 50% deduction of royalties deriving from the temporary disposal or use of Industrial Property Rights subject to registration in Portugal, such as Patents and Industrial designs or models, has been introduced, which reduces the effective taxation of this type of income to 2.5% in Madeira’s IBC, under certain conditions.
(7) The period in which companies are allowed to deduct the PEC tax (Advance Tax payment) has been extended from 4 to 6 years.