Member Article

Recently, in 2005, the Portuguese tax system streamlined its rules for the taxation of dividends, by harmonising rates which previously varied in accordance to the nature of the recipient of the dividends. This, along with the introduction of some provisions aimed at dealing with schemes that used exempt entities to evade tax, helped to turn the taxation of dividends more coherent and simple. We will outline here the basic features of the current system for taxation of dividends distributed by Portuguese resident companies. Further below, more details can be found on a table and some notes therein included. A different tax treatment that may stem from the application of the Madeira Free Trade Zone regime was not considered. Pursuant to the parent-subsidiary directive – directive 90/435/EEC - Portugal exempts from taxation, subject to certain conditions, dividends earned by legal entities, maxime companies, located in the EU territory. Double taxation is effectively eliminated in these situations. Otherwise, maxime dividends earned by individuals resident in Portugal, only 50% of the earned dividends are exempted from taxation. As an alternative, the resident individual (but not the resident company) may opt for the application of a 20% flat rate applicable to 100% of the received dividend (the maximum rate being 42%, currently, applicable to the aggregated income exceeding € 60.000). Non-resident individuals (and non-resident companies not benefiting from the application of the parent-subsidiary directive) are subject to taxation on dividends received from Portuguese resident companies, at a rate of 20%. Accordingly, in the negotiation of tax treaties as well as in EU negotiations, Portugal tries, as a rule, to preserve the source country power to tax dividends. In the negotiation of tax treaties, Portugal follows the OECD Model Convention as regards dividends, for it is deemed protective enough of the source country interests.