TAXATION OF DIVIDENDS –

GET INFORMED ABOUT WHETHER YOU HAVE TO PAY TAXES OR NOT

Introduction

Over the past years “Profit and Gains Ltd.” has been having a great

performance. This company based in Portugal since 2009 has been expanding

its business into international markets, taking advantage from the growth of

some emerging markets through means of local partnerships. The international

dimension is part of its DNA, since its four founding partners are of different

nationalities. João is Portuguese, Carlos is Angolan, Alfonso is from Spain and

Walter from Belgium. Each one of them hold 25% of the company’s capital.

For the first time, and due to the company’s good results, the four members are

considering to start distributing dividends. However, their doubts about how much

taxes they will pay are preventing them to go ahead with the decision. In addition

to their different nationalities, João and Walter’s share of the “Profit and Gains

Ltd.” capital is done through other companies they have created, so that they

could invest in other companies.

In order to help these four investors and to clarify all their doubts about

taxation of dividends, we will begin by analysing the overall framework of this

issue, so that we can then apply the rules to the actual case.

Overall Framework

First and foremost, it is important to clarify the concept of “Dividends”.

Dividends are the returning of the investment that a company does to their

partners and shareholders in proportion to the share of capital each shareholder

has. The distribution of dividends presupposes the existence of positive results

during the previous year to the one when the decision of the distribution is made.

It is up to the general meeting of the company to decide when, how much, and

how the dividends will be paid. In other words, it is up to the shareholders to

analyse the situation and vote on the most appropriate application of the results

(if they are to be kept in the company in order to be used on its own investment,

or to be distributed among the capital holders). It is important to note that the

decision reached by the general meeting of the company could point to a “mixed”

decision, i.e., a part of the results should be used for more investments in the

company and the other part should be distributed.

Let’s move on to the analyses of the tax environment.

Tax Environment

A) Residents

1. Natural persons

Dividends paid to natural persons with tax residence based in Portugal are subject

to withholding tax at 28%. As a general rule, the tax withheld is deemed as the final

tax due. Nevertheless, the beneficiary of dividends can choose to include them in the

total amount of income earned in that year. In that case, the withholding tax will be

deemed as payments on account. If the beneficiary opts to do this way, dividends will

be consider only at 50% of their total value, for the purpose of the determination of

their taxable income. Note, however, that the inclusion of dividends in the income

subject to the general Personal Income Tax rates will also determinate the inclusion

of other types of income, which, as a general rule, are deemed as a final tax due (v.g.

interests).

2. Companies

The payment of dividends to companies based in Portugal is subject to withholding

tax at a rate of 25%, which is deemed as a payment on account for the final tax due.

All companies that hold a direct or indirect participation equal or superior to 5% for

a minimum period of 12 months, will benefit from an exemption of deduction at

source.

Dividends earned must be included in the taxable profit of the beneficiary company

and taxed at a general rate of 23% (to which is added a state surcharge at a rate of 3%

applicable to any taxable profit higher than €1.500.00, a state surcharge at a rate of

5% applicable to any taxable profit between €7.500.000 and €35.000.000, and finally,

a state surcharge of 7% applicable to any taxable profit superior to €35.000.000).

Dividends are yet subject to a municipal surcharge at a rate of 1,5%. This rate varies

depending on the municipality where the company is based. Resident taxpayers who

practice an agricultural, commercial or industrial activity as their main business and

are qualified as a small or medium enterprise on the terms laid down in Decree-Law

372/2007, the applicable corporate income tax on the first €15.000 of taxable profit

will be at a rate of 17%, adding a 23% tax to the remaining amount.

However, according to the Portuguese elimination of double taxation regime,

the shareholder may deduct in the calculation of the respective taxable amount

all dividends earned, provided they derive from a direct or indirect participation

of, at least, 5%, for a minimum period of 12 months (the requirement relating to

the 24-month retention period may be observed after the date of distribution of

dividends).

Every dividend earned by means of investment funds constituted and ruled

according to the Portuguese national legislation are taxed independently by

withholding tax at a rate of 28%. On the other hand, there is no obligation withholding

tax for shareholders who are exempt of corporation income tax, namely pensions and

venture capital funds. This exemption will not be applied if the participation held

by those companies is inferior to a minimum period of 12 months. For these cases,

dividends will be subject to an independent tax at a rate of 25%.

B) Non-residents

As a general rule, dividends paid to non-resident investors are subject to a

withholding tax at a rate of 28% and deemed as a final tax due when they are paid

to natural persons, and at a rate of 25% when they are paid to companies. In both

cases, the withholding tax is deemed as a final tax due. In case investors are residents

in countries with which Portugal has concluded a DTT (Double Taxation Treaty), the

withholding tax tax may be slightly decreased, in virtue of the application of this

treaty.

Additionally, in case the shareholder is a company based in a member state of the

European Union or in a member state of the European Economic Area that is bound

to the field of taxation equivalent to the one established in the European Union

or in a country with which Portugal concluded the DTT and predicts an identical

administrative cooperation, dividends can benefit from an exemption of withholding

tax in Portugal, as long as they respect the participation not inferior to 5% held in a

minimum period of 24 months.

In relation to the exemption of deduction at source for companies based in a

member state of the European Economic Area or in a country with which Portugal

has concluded a DTT will still depend on its subjection and non-exemption to a

tax identical or similar to the CIT, at a rate not inferior to a 60% of the general tax

applicable in Portugal.

The same exemption can still be applied to dividends paid to a company based in

Switzerland which held a minimum participation of 25% on the company responsible

for the distribution of the profit earned for a minimum period of two years. Although

the law establishes more restrictive conditions to the application of exemption of

withholding tax to all dividends distributed to investors residents in Switzerland,

it has been suggested to assessment the application of a more favourable regime

of application to most of investor residents in countries that concluded a DTT with

Portugal. This assessment must be done case-by-case to investors residents in that

country.

Every dividend that have been made available in accounts opened in the name of

one or more owners but on behalf of non-identified third parties are subject of a

withholding tax and deemed as the final tax due at a rate of 35%, except when the

beneficial owner is identified.

Dividends made available in companies based in a country, territory or region

subject to a clearly more favourable tax regime are also subject to withholding tax

and deemed as final tax due at the rate of 35%, as long as they are included in the list

approved by order of the Minister of Finance.

Next week we will analyse specifically the situations of João, Carlos,

Alfonso and Walter.

* Todas as imagens são utilizadas sobre a licença CC0 1.0 Universal (Dedicação ao Domínio Público) mais informações em : http://creativecommons.org/publicdomain/zero/1.0/deed.pt

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