Portugal – Investment hub for emerging economies

Economy diplomacy will play a big part on the recovery of the Portuguese economy for the next few years.  Portugal is focused on positioning itself as a hub for investments in emerging economies, such as Angola, China, India and Brazil, given the existing strong historic links, not to mention the same language in some of the cases.

Strong treaty network

The Portuguese Government has been actively pursuing negotiations and implementing treaties, as part of a strategy to internationalize and strengthen the economy.

Portugal has signed 62 Double Tax Treaties (DTT), of which 53 are already in force.  Hong-Kong, United Arab Emirates, Qatar and Japan have recently been added to this list and negotiations with

Saudi Arabia, Bahrain, Cyprus and Malawi are under way. Portugal is the only country with which Cape Verde has signed a DTT, one of the few with which Mozambique has a DTT and with which Angola is negotiating.

For example, when investing in China, one should consider that the Portugal/ China treaty, contrary to the majority of the Chinese treaties, prevents China from taxing the capital gains arising from the sale of shares.

Some of the DTTs signed by Portugal (e.g. Mozambique, Cape Verde, China and South Korea) provide for a tax sparing clause, and therefore Portugal grants its residents relief with respect to source taxes that have actually not been paid for.

Several Tax Information Exchange Agreements (TIEA) have been concluded and, once in force, will remove jurisdictions such as Cayman, Isle of Man and Bermuda from the Portuguese black-list. Hence, they will no longer be subject to more severe tax treatment, as provided for in various provisions of the Portuguese tax law, including capital gains on the sale of shares, higher taxation of real estate, among other.

Mutual Promotion and Protection of Investment are key investing in risky economies.  Portugal has concluded approximately 50 Agreements (e.g. Angola, Venezuela, China, India, East-Timor). Therefore, investors investing in these jurisdictions through a Portuguese company will be able to have additional security and protection.

Additionally, new social security bilateral agreements are being signed adding up to the existing ones (e.g. US, Canada, UK, Australia, Cape Verde, Brazil) providing safety and certainty about benefits and contributions and thus facilitating work mobility.  Within the next years, the Ibero-American Social Security Convention, signed by the Latin American countries, Portugal and Spain, should also come into force, thus preserving the rights of Ibero-American migrant workers, ensuring migrant workers retain their social rights.

Participation exemption (Parent Subsidiary Directive)

The Portuguese participation exemption was set out under the EU Parent-Subsidiary Directive. Therefore, dividends received by Portuguese companies from EU and EEA subsidiaries will not be taxable, if a participation of at least 10% is held for a period of one year.

In addition, a special participation exemption is foreseen for dividends received from Portuguese subsidiaries in Portuguese speaking African countries (which comprises Angola, Cape Verde, Guinea Bissau, Mozambique and São Tomé and Príncipe) and East Timor. In this case, dividends will not be taxed in Portugal if the Portuguese company holds at least 25% of capital of the subsidiary, for not less than 2 years, and the distributed profits arise from profits taxed in the hand of the subsidiary at a rate of at least 10% and the underlying profits are not deemed as passive income.

Pure holding regime

Pure holding companies benefit from a special and attractive tax regime.  In addition to the participation exemption for dividends set out above, capital gains realized on the sale of shares, irrespectively of the subsidiary location, should be tax exempt provided the shareholding has been held for at least 1 year (in some cases, 3 years are required).

Subject to some planning, interest and transaction costs could be, at least partially, deductible.

Holding location – The Madeira International Business Center

Madeira is an attractive and competitive holding location for foreign investment.  In addition to offering a number of tax benefits, Madeira’ appeal is based on its preferential, but fully regulated regime, which is completely transparent and fully integrated in the Portuguese and European Union tax and legal systems.  The MIBC can accommodate both operating and holding companies.

Tax incentives are ranted mainly in the form of a reduced corporate taxation (4% in 2012 and 5% between 2013 and 2020) subject to the fulfilment of some substance requirements.  The regime is stable and fully approved by the European Commission until the end of 2020. Payments to non residents regarding interest, royalties and services, as well as dividend distributions to non resident shareholders benefit from a withholding exemption.

Madeira companies may benefit from the general Portuguese tax provisions (e.g. participation exemption and have full access to most of the Treaties signed by Portugal, as well as EU law.

Personal taxation

The current environment for expatriates is very attractive, namely due to the recent regime for non habitual residents.  This new special tax regime, applicable during a period of 10 consecutive years, establishes a flat income tax rate of 20% for some Portuguese employment source income derived from “high value added activities of a scientific, artistic or technical nature” and a tax exemption for almost all foreign source income.

This regime is an additional step taken to attract researchers and highly qualified individuals, namely executives for investment holdings.

Conclusion

The promotion of inbound and outbound investments requires an extensive treaty network, favourable and stable holding regime and an attractive regime for highly skilled expatriates. Portugal wants to position itself as an option to seriously consider when investing, namely in Portuguese Speaking Countries. 

Catarina joined PwC Portugal’s Tax department in 2004, where works with national and multinational groups in setting-up and restructuring international corporate structures and structuring inbound and outbound investments. She started her career in the PwC Audit department in 2001. She was on assignment with the International Tax Services Department in PwC New York between July 2007 and August 2008.

Catarina holds a Law Degree by Universidad Católica Portuguesa.  She can be contacted on +351 225 433 121 or by email at catarina.goncalves@pt.pwc.com