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. - Learn more at http://bit.ly/1w3QYF8

3. TAXATION OF DIVIDENDS
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GET INFORMED ABOUT WHETHER
YOU HAVE TO PAY TAXES OR NOT

4. 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.

5. 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.

6. 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).

7. 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%.

8. 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.

9. 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.

10. * 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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