Taxation of Dividends Between Companies and Shareholders Resident Abroad

The distribution of dividends by Portuguese companies to shareholders or entities resident abroad is one of the most frequent cross-border operations in the business context, raising relevant issues in terms of taxation. The correct application of the applicable tax regime requires a combined analysis of Portuguese domestic law and international tax law instruments.

The General Withholding Tax Regime

In Portugal, dividends paid or made available to non-resident entities and individuals are subject to withholding tax under the Corporate Income Tax Code (Código do IRC) and the Personal Income Tax Code (Código do IRS), as applicable. It is essential to distinguish the applicable regime according to the nature of the income beneficiary.

When the beneficiaries are non-resident entities (corporate income taxpayers), the withholding tax rate is 25%. This taxation is final when the income holder does not have a permanent establishment in Portuguese territory to which the income is attributable.

In the case of non-resident individuals (personal income taxpayers), dividends are subject to withholding tax at the rate of 28%, pursuant to Article 71 of the Personal Income Tax Code, also with a definitive (liberatory) nature.

However, these general rates may be waived or reduced through the application of specific international law instruments or special regimes provided under domestic legislation.

The “Participation Exemption” Regime

It should be noted that the Portuguese legal framework establishes requirements for the elimination of economic double taxation of profits and reserves distributed to corporate income taxpayers with their registered office or effective management in Portuguese territory, so that such amounts do not contribute to the determination of taxable profit.

This regime, internationally known as the “participation exemption,” aims to prevent the same profits from being taxed successively as they move up the corporate structure, promoting the competitiveness of Portuguese companies and encouraging investment and internationalisation.

To benefit from this regime, the following cumulative requirements must be met:
a) the taxpayer must hold, directly or indirectly, a participation of not less than 10% of the share capital or voting rights of the entity distributing the profits or reserves;
b) such participation must have been held uninterruptedly for the year prior to the distribution or, if held for a shorter period, must be retained for the time necessary to complete that period;
c) the taxpayer cannot be subject to the tax transparency regime;
d) the distributing entity must be subject to Corporate Income Tax, to an identical tax within the EU/EEA, or be located in a country with which Portugal has a double taxation convention and be subject to income tax;
e) the subsidiary must not be resident in a jurisdiction with a more favourable tax regime included in the list approved by ministerial order, unless it is resident in the EU and the taxpayer demonstrates that the holding does not have as its main purpose, or one of its main purposes, the obtaining of tax advantages.

The Parent-Subsidiary Directive

In the EU context, Directive 2011/96/EU establishes a withholding tax exemption for profit distributions between parent companies and subsidiaries of different Member States, complementing the domestic participation exemption regime. To benefit from the exemption, requirements similar to those provided in the Corporate Income Tax Code must be met, including a minimum 10% participation in the share capital and a one-year holding period. The Directive ensures that no withholding tax applies in Portugal when dividends are distributed to parent companies in other Member States, eliminating tax obstacles to intra-EU cross-border operations.

Double Taxation Conventions

Portugal also has an extensive network of double taxation conventions — bilateral instruments that generally establish reduced withholding tax rates for dividends distributed to residents of the other contracting state.

Convention rates typically range between 5% and 15%, and may be lower where the beneficial owner is a company holding a certain percentage of the capital of the distributing company. The application of these treaty benefits requires that the income beneficiary be considered a tax resident in the other contracting state and that they are the beneficial owner of the dividends, and not acting as a mere intermediary.

Procedural and Compliance Aspects

The application of exemption regimes or reduced rates is subject to compliance with declarative and documentary obligations. Entities making dividend payments must ensure that the legal requirements for applying the tax benefit are met, as they are responsible for the correct withholding.

For the application of treaty benefits, the presentation of a tax residence certificate issued by the competent authority of the beneficiary’s state of residence is generally required.

In the context of the Parent-Subsidiary Directive, beneficiary companies must provide adequate proof of the applicable requirements, namely through a declaration including the relevant identification elements and confirmation of compliance with the legally required conditions, including the participation percentage and holding period.

Recent Developments and Trends

The taxation of cross-border income has been subject to increasing scrutiny by tax authorities, within the broader context of initiatives to combat base erosion and profit shifting. The correct identification of the beneficial owner of income and the economic substance of the structures used are increasingly important aspects in the tax analysis of these operations.

Companies must pay particular attention to the application of anti-abuse clauses, both in domestic legislation and in international law instruments, which allow the denial of tax benefits where the operations do not have valid economic reasons or form part of schemes essentially aimed at obtaining tax advantages. The Corporate Income Tax Code expressly provides that the economic double taxation elimination regime does not apply where there is a construction or series of constructions carried out with the main purpose of obtaining a tax advantage and which is not considered genuine.

Directive 2011/96/EU, as amended by Directive (EU) 2015/121, also incorporates anti-abuse rules, reinforcing the need for corporate structures to have real economic substance.

This framework highlights the importance of careful and transparent tax planning in structuring cross-border dividend distribution operations.

Companies and professionals must ensure full compliance with declarative and documentary obligations, while always observing the principles of economic substance and transparency that govern international operations, ensuring both legitimate tax optimisation and full compliance with applicable tax obligations.

For more information or specialized assistance, click here to schedule a meeting with one of our professionals.