Jaime Carvalho Esteves
CIT (Corporate Income Tax) – tax rates and double taxation relief
Updated: Dec 29, 2020
Portuguese Tax Series - Basic information on the Portuguese tax system
Generally, corporate profits are subject to CIT at a flat standard rate of 21% (20% for Madeira and 16.8% for Azores).
For mainland micro, small and medium companies the tax rate can be reduced to 17% for the taxable profit up to 25k euro (or further reduced to 12.5% for companies in the same circumstances but with activities and effective place of management in the inland areas). Under the same circumstances tax rates are of 11.9% in Madeira and 13.6% in Azores).
A so-called State Surcharge (known as Derrama Estadual) may also be due depending on the level of the taxable profit, thus introducing a degree of progressivity on the corporate income taxation. For taxable profits in excess of 1.5M euro and up to 7.5M euro the tax rate is of 3%; being of 5% for taxable profits exceeding 7.5M euro up to 35M euro; and of 9% for taxable profits in excess of such amount (for Azores the tax rates are reduced to, respectively, 2.4%, 4%, and 7.2%)
Municipalities can also levy a local surcharge, known as Derrama Municipal, of up to 1,5% of the taxable profit.
PIT relating to distributed profits - Individuals
Dividends paid to resident individual shareholders are subject to a final Personal Income Tax (PIT) withheld at a 28% tax rate.
Individual resident shareholders can opt to tax the dividends with their remaining income. In such case, 50% of dividends received are subject to PIT at progressive marginal rates. Thus, PIT withheld will be credited against the shareholder's PIT liability and, this being the case, the excess will be refunded.
Dividends paid to non-resident individual shareholders are also subject to a final PIT withholding tax of 28%. Double tax treaties to avoid or to reduce double taxation (DTT) may however lower the maximum withholding tax rate on outgoing dividends, usually to a maximum of 10, 12 or 15%.
CIT relating to distributed profits - Corporations
There is no withholding tax on dividends paid to resident corporate shareholders, if some requirements are met, namely the participation is not lower than 10% of the share capital and was held for, at least, one year.
The same applies to European Union corporate shareholders under the Parent-subsidiary Directive on dividends, as well as to some companies from the Economic European Area and companies resident at a country with a DTT in force with Portugal (under certain conditions).
If the above exemption would not apply, then 50% of dividends received by resident corporate shareholders should be included in the recipient’s taxable income.
If the shareholder is a non-resident entity, then dividends are subject to CIT to be withheld at a 25% tax rate, except if a DTT should apply. In this case the withholding tax rate will be reduced to a maximum of, usually, 10, 12 or 15%. Dividends paid to entities resident in a blacklisted jurisdiction may be subject to a 35% withholding tax rate. In case the jurisdiction entered a DTT in force with Portugal and is also blacklisted, it seems to be reasonable to understand the DTT should prevail.
Dividends received from non-resident companies can be exempted under the participation exemption regime (10% shareholding for more than 12 months, in case of Portugal, EU, EEA or DTT countries), provided the distributing company is not resident in a tax haven. If the participation exemption would not apply, the dividend should be included in the taxable profit and tax credits both for international juridical double taxation (withholding tax at source country) and international economical double taxation (CIT paid by the distributing company on the underlying profits) will be granted.
Under Controlled Foreign Companies (CFC) rules, undistributed profits of some companies resident in a low tax jurisdiction could also be taxable, provided certain positive and negative conditions are met.
See also: https://pt.jaimecarvalhoesteves.com/post/cit-corporate-income-tax-taxable-profit-quantification
In collaboration with Duarte Roncon and João Pereira de Sousa (ISEG students)