- 1 -

Questionnaire on corporate income tax subjects

2013 EATLP CONGRESS

PORTUGAL

Francisco de Sousa da Câmara* / Nuno de Oliveira Garcia** / José Almeida Fernandes***

1. General presentation of the Portuguese CIT in Portugal

1.1. CIT Code and brief historical evolution

The Portuguese Corporate Income Tax (CIT) Code (Código do IRC) entered into force on

the January 1st, 1989, and was approved by Decree-Law n.º 442-B/88, dated November

30th.1 The Portuguese CIT is (i) assessed on an company’s income, not on its assets, (ii) periodic,

since, as a rule, tax is payable annually, (iii) mostly proportional, because the general rate is flat

at 25% (although a progressive State Surcharge is also established), (iv) general, because it

affects all income obtained, (v) and real, that is charged on the income of a company,

without regard to its subjective situation.

The CIT Code marked the introduction in Portugal of a truly modern and comprehensive

corporate income tax system, which superseded the previous schedular tax system

introduced following the 1958-1965 Reform2 and, although mitigated by several exceptions,

adopted the income-accretion notion.

* Visiting Professor at the Nova University Law School. Tax Partner at Morais Leitão, Galvão Teles, Soares da

Silva & Associados, RL.

** Lecturer at the Lisbon University Law School. Tax Lawyer.

*** Adv. LL.M. (Leiden). Tax Lawyer.

1 For an introduction on the historial evolution, see Francisco de Sousa da Câmara «Tax Law» in Carlos

Ferreira de Almeida/Assunção Cristas/Nuno Piçarra Ed. VV. (Coimbra, 2007) Portuguese law – an overview, pp.

131 onwards.

2 At the time that the CIT Code was approved, corporations where subject to a series of schedular taxes that

included not only the more general and broader Contribuição Industrial, but also a tax on agro-industry (Imposto

sobre a Indústria Agrícola), capital gains (Imposto de Mais-Valias), immovable property (Contribuição Predial), capital

(Imposto de Capitais), a complementary tax on the overall income of corporations (Imposto Complementar) and,

partially the Stamp Tax (Imposto do Selo). See J. L. Saldanha Sanches (Coimbra, 2007) Manual de Direito Fiscal,3

pp. 346.

- 2 -

Since the CIT Code was approved significant changes have been introduced in specific

areas, to the extent that arguably a complete revision of the Code has occurred over the

years. Several modifications occurred at different levels – the CIT rate was reduced

significantly from 36.5% to 25% (although is now going up again with additional

surcharges – in some cases, up to 30%), but this was compensated by non-stoppable base

broadening circumstantial reforms; these include much more limitations on the deduction

of capital losses, carry-forward losses and the deductibility of financial costs,3 enhancement

of transfer pricing rules – and new rules were introduced, such as a State Surcharge

(Derrama Estadual), several specific anti-avoidance rules (eg., Exit Tax, Thin Cap, CFC

rules)4 and new Group Relief Taxation. Other recent and relevant changes occurred with

the adjustment of the Code to the international accounting rules adopted by the European

Union and the Accounting Standardisation System (SNC).5

In terms of the personal scope, the CIT Code (Código do IRC) has not been changed at all.

As we will see better below, in the Portuguese CIT Code (Código do IRC), partnerships are

subject to the same treatment as corporations, although a fiscal transparency regime is

applicable for certain resident companies, such as civil law companies, incorporated firms

of professionals and family holding companies.

3 These limitations led to several taxpayers filing claims to the Constitutional Court, citing the constitutional

principle of the full relevancy of profits and losses (princípio da tributação pelo rendimento real) – see decisions

no. 418/2000, no. 451/2002, no. 162/2004 and no. 85/2010. For a commentary on the latest decision see

Nuno de Oliveira Garcia / Andreia Gabriel Pereira «Concorrência da diferença negativa entre as mais-valias e

as menos-valias realizadas mediante a transmissão onerosa de partes de capital em metade do seu valor –

comentário ao Acórdão n.º 85/2010 do Tribunal Constitucioal» in Revista de Finanças Públicas e Direito Fiscal,

Ano 3-III (2010), pp. 349 to 358.

4 The introduction of specific anti-avoidance rules in the mid-1990s started with an international focus, such

as Thin Cap rules (1995), CFC rules (1995) and a series of rules dealing with low-tax jurisdictions, namely

blacklisted jurisdictions. After 1999, Portugal introduced, among other things, rules on Exit Tax (2006) and

dividend stripping (2006), as well as a specific rule on abuse of its participation exemption regime (2005). The

compatibility of such domestic anti-abuse rules (DAARs) with treaty law (and EC law) has not been subject

to serious scrutiny by either the Portuguese authorities or the courts, since its specific application was very

limited and it was mainly restricted to cases where blacklisted jurisdictions were involved (i.e., jurisdictions

with which Portugal has not concluded tax treaties). See Francisco de Sousa da Câmara, José Almeida

Fernandes, «Tax treaties and tax avoidance: application of anti-avoidance provisions», in Cahiers de Droit Fiscal

International, Volume 95a (2010), pp. 651-670.

5 See Decree-Law nº 158/2009, of 13 July, and Decree-Law nº 159/2009, of 13 July.

- 3 -

Notwithstanding the lack of reliable data as to how many corporations exist in Portugal,

CIT returns for FY 2010 were up to 393,891 and, clearly, the setting up of a corporation is

an ordinary way of performing a business activity in Portugal. In other words, the setting

up of a corporation is not limited to large enterprises. The total number of CIT returns for

resident entities with a commercial, industrial or agricultural activity were up to 385,583

(representing 98% of the aggregate amount of returns), returns for resident entities without

a commercial, industrial or agricultural activity total 6,065, whilst returns for non-resident

entities with a PE represent 1,335 and returns for non-resident entities without a PE total

908. The total number of entities under the transparency regime was up to 4,573, and there

were 427 groups of companies representing 3,127 companies.

1.2. Similar taxes and CIT revenue

There are some taxes that share with CIT the taxable base and are legally presented as

additional taxes to it. That is the case of the State Surcharge (Derrama Estadual) and the

Municipal Surcharge (Derrama Municipal). The State Surcharge (Derrama Estadual) payable

due by Portuguese resident entities and by Portuguese permanent establishments of non-

resident entities, which carry out commercial, industrial or agricultural activities as their

main business. The rates are 3% for taxable income from 1,500,000 EUR to 10,000,000

EUR and 5% for taxable income from 10,000,000 EUR (from 7,500,000 EUR in 2013).6 A

municipal Surcharge (Derrama Municipal) may be levied by municipalities on up to 1.5% on

the taxable profit of the year before the deduction of tax losses.

From 2007 tax revenue has dropped considerably as a result of the economic crisis. 2009

was the worst year in terms of tax revenue, but since 2010 Portuguese tax revenue has

registered some improvement. For a more detailed evolution, please see the chart below.

6 The State Surcharge (Derrama Estadual) is paid upon filing the CIT return. The payment corresponds to the

difference between the State Surtax (Derrama Estadual) assessed and the amount of the three additional

payments on account made during the previous year. A refund arises in case the additional payments on

account exceed the amount of the State Surcharge (Derrama Estadual) that would be due.

- 4 -

Source: Pordata / PWC

In 2011, total taxes in Portugal were up to 34,350,000,000 EUR. CIT (IRC) revenue was

over 5,100,000,000 EUR, while PIT (IRS) revenue was 9,830,000,000 EUR and VAT

(IVA) accounted for 13,050,000,000. The ratio total tax revenue /GDP is expected to be

20.1% for 2011, meaning that the ratio CIT/GDP will be around 3%.

For a more detailed evolution of the CIT revenue, please see the figure below.

For a more detailed view of the evolution of the structure of revenues, please see the table

below:

- 5 -

Source: Eurostat

For a detailed analysis of the evolution of the relative importance of CIT on the total

taxation of revenues, please see the table below:

- 6 -

2. Legislative technique and domestic entities

2.1. First approach

In Portugal the taxable entities subject to Portuguese CIT (IRC) are directly defined in the

Portuguese CIT Code (Código do IRC).7 In addition, the Portuguese CIT Code (Código do

IRC) enumerates the entities subject to CIT (IRC) using a list of entities which fall under

corporate taxation. Although there is not a general criterion, such as legal personality,

lucrative goal, commercial activities or other, the scope of CIT (IRC) is rather

comprehensive.8

The list of entities that fall under CIT (IRC) includes:

(i) Commercial companies having their head-office or effective management in the

Portuguese territory, which are considered to be resident, including trading

companies, civil companies under commercial form, co-operative companies,

public enterprises and other corporate entities of public or private law;

(ii) Unincorporated entities having their head-office or effective management in

Portuguese territory (deemed to be resident) deriving income not liable to

personal income tax or corporate income tax in the hands of both individuals

and corporate persons forming part thereof, namely, inheritance in abeyance

(hereditas jacens), corporate persons in relation to which there is a declaration of

invalidity, unincorporated civil companies and associations as well as

commercial companies or civil companies in commercial form prior to their

final registration; and,

(iii) Incorporated or unincorporated entities without their head-office or effective

management in Portuguese territory (deemed to be non-resident) with income

not liable to PIT (IRS).

7 See article 2.º, chapter 1, of the CIT Code (Código do IRC). There is no other provision regarding this matter

in the tax code or outside the tax code.

8 Article 7.º of the CIT Code (Código do IRC) establishes that gambling income obtained by companies is not

subject to CIT (IRC); it is instead subject to Gambling Tax (Imposto sobre o Jogo).

- 7 -

According to article 3.º of the CIT, those entities that carry out a commercial, industrial or

agricultural activity are subject to taxation on their profit. As a rule, the profit tax of these

entities is the sum of net profit for the accounting period and the accretions to and

decreases in net worth suffered in the same period and not reflected in this result, based on

accounting records and possibly adjusted in accordance with CIT.

Entities that do not carry out such activities are subject to taxation on the aggregate

amount of the income subject to PIT (IRS), together with gratuity income (for these

entities see Advance Ruling n.º 325/2005 dated November 14th).9

The referred list does not coincide with the annexes to the Parent-Subsidiary directive, the

Interest-Royalty Directive and the Draft CCCTB Directive. In fact, the scope of the CIT

Code (Código do IRC) is broader than the scope of the directives, which is limited to

commercial companies or civil law companies having a commercial form, cooperatives and

public undertakings incorporated in accordance with Portuguese law. There are neither

public Reports nor rulings explaining the specific options adopted by the legislator in these

matters. On the other hand, the updated list of companies covered by the Parent-

Subsidiary Directive is much more specific than the CIT Code (Código do IRC) as it refers to

co-operatives, mutual companies, certain non-capital based companies, savings banks,

funds, associations with commercial activity, the European Company and the European

Co-operative Society. No relevant case law has been produced regarding this matter.

For Portuguese CIT purposes, partnerships are subject to the same treatment as

corporations, although a fiscal transparency regime (transparência fiscal) is applicable to

certain resident companies, such as civil law companies not incorporated under a

commercial form, incorporated firms of professionals and holding companies the equity

capital of which is controlled, directly or indirectly, during more than 183 days by a family

group or a limited number of members, under certain conditions.

For CIT (IRC) purposes, a transparency regime also applies to Complementary Business

Groupings (ACEs) constituted and operating in accordance with the applicable law and to

European Economic Interest Groupings (AEIEs), as long as they are treated as resident.

For both Prof. Teixeira Ribeiro10 and Prof. Saldanha Sanches11 there are no reasons why

other entities (partnerships in general) in which the capital factor is not crucial – together

9 See also, Casalta Nabais (Coimbra, 2010) Direito Fiscal,6 p. 562.

- 8 -

with the civil law companies and incorporated firms of professionals – are not subject to

the fiscal transparency regime in order to avoid double economic taxation.12

The Portuguese transparency regime is essentially characterized by attributing to the shareholders

or members of the transparent entity its taxable amount (or, in the case of ACE or AEIE,

respective profits or losses), even in case of undistributed profits. Thus, as a rule,13 the

transparent entity is not liable to CIT (IRC), and the amounts attributed to the taxable

income of its shareholders or members being therefore embodied for CIT (IRC) or PIT

(IRS) purposes, as the case may be. In relation to PIT (IRS), such amounts are taken into

account as net incomes in category B – business and professional income. Where the shareholders

or members of companies covered by the fiscal transparency regime are non-resident, there

shall be considered derived income attributed to them through a permanent establishment

situated within the Portuguese territory14.

In Portuguese academic literature, the contrast between the opacity of corporations and

transparency of partnerships is explained by the lesser importance of the capital factor on

partnerships. According to Prof. Saldanha Sanches, CIT (IRC) is basically a tax on capital

10 According to Prof. Teixeira Ribeiro, writing at the time that CIT was approved in 1989, the Portuguese

Constitution does not allow taxation on all companies and partnerships should only be taxed over the

personal income of the owners. See José Joaquim Teixeira Ribeiro (Coimbra, 1989) A Reforma Fiscal, pp. 197

and 198.

11 See J. L. Saldanha Sanches (Coimbra, 2007) Manual de Direito Fiscal,3 pp. 293 and 294.

12 For the discussion regarding double economic taxation in the years that followed the approval of CIT

Code, see J. C. Gomes Santos, «Crédito do IRC (art.72.º do CIRC). Atenuação da Dupla Tributação

Económica ou Benefício Fiscal ?» in Fisco, 23 (1990), p. 3 to 6. Prof. Manuel H. de Freitas Pereira clarifies that

double economic taxation may not occur if the CIT is not economically bearable by the shareholders or

partners, a situation that may take place when the cost of CIT is shifted to the value of the goods or services

provided by the company by means of an increase of prices – see Manuel H. de Freitas Pereira (Coimbra,

2011) Fiscalidade,2 p. 100 and 101. Another situation where CIT may not be economically bearable by the

shareholders or partners is the maintenance of low wages in the company in order to always retain a

significant income after tax of the shareholders or partners – for this, see Rui Duarte Morais (Coimbra, 2007)

Apontamentos ao IRC, pp. 5 and 6. 13

Transparent entities are, however, subject to autonomous taxation («penalty tax») at corporate level on several items (such as unsubstantiated expenses, entertainment expenses or related with vehicles) and at different tax rates.

14 See Article 5.º, no 9 of the CIT Code.

- 9 -

which is charged to companies as a practical technique for the anticipation of the PIS (IRS)

over the shareholders or partners.15

Another question is that of whether the transparent entities are subject to CIT (IRC) but

exempt, or are those entities not subject to taxation at all at a CIT level.16 The CIT Code

(Código do IRC) – article 12.º – is not clear on this matter, but since the transparent regime

do not aim to achieve non-budgetary goal, as it usually happens in fiscal expenses (such as

exemptions), transparent entities are considered as not subject to taxation at all (although

subject to other forms of obligations towards the Tax Authorities such as cooperation

duties).17

2.2. More details

As above stated, the CIT Code (Código do IRC) refers to commercial company, including

one-person companies, and the definition of a commercial company is found at the

Portuguese Commercial Companies Code (Código das Sociedades Comerciais).18 The other

entities subject to CIT (IRC) do not depend upon company law definitions.

It is not necessary to enjoy legal personality to be subject to Portuguese CIT, and some

entities without legal personality have to pay CIT (IRC), namely inheritance in abeyance

(hereditas jacens), corporate persons in relation to which there is a declaration of invalidity,

unincorporated civil companies and associations as well as commercial companies or civil

companies in commercial form prior to their final registration.19 In order for these entities

to fall under the scope of CIT (Código do IRC) they must have (i) their head-office or

effective management in Portuguese territory (deemed to be resident), (ii) income not liable

15 See J. L. Saldanha Sanches (Coimbra, 2007) Manual de Direito Fiscal,3 pp. 292 and 293.

16 Please note that transparent entities are still subject to autonomous taxation on certain expenses.

17 See J. L. Saldanha Sanches (Lisboa, 1991) Princípios Estruturantes da Reforma Fiscal,3 pp. 51 and 52.

18 See article 1.2 of the Portuguese Commercial Companies Code according to which commercial companies

are those whose purpose is to exercise commercial activities and wish to take the legal form of partnerships,

private limited companies, public companies, limited partnerships, or limited partnerships with share capital.

19 According to Prof. Soares Martínez this regime is due to the fact that, even though inheritance in abeyance

and invalid corporation are not companies for corporate law purposes, it would be incorrect not to

considered that those entities, if entered into tax relations, do not have a tax personality – see Soares Martínez

(Coimbra, 1998) Direito Fiscal,10 (reimp.) p. 575.

- 10 -

to personal income tax (IRS) or corporate income tax in the hands of both individuals and

corporate persons forming part thereof (transparency).

Charitable organizations and associations may be subject to CIT in Portugal. These entities

benefit from a general exemption, but excluding income from self-employment derived

from the exercise of activities outside the scope of statutory purposes.20 Charitable

organizations and associations subject, but exempt, to CIT (IRC) include: (i) private social

solidarity institutions and related entities as well as any persons assimilated thereto under

the law, (ii) mere public interest entities having as their main object scientific, cultural,

charitable, assistance, beneficent, social solidarity or environmental protection purposes,

subject to an Official Decision by the Minister of Finance defining the extent of the

exemption.

Charitable organizations and associations are subject to, but exempt from, CIT (IRC) if the

following criteria is met: (i) effective exercise of the activities foreseen in the scope of

statutory purposes; (ii) the use of at least 50% of the total net income subject to taxation in

the activities foreseen in the scope of statutory purposes; and (iii) the inexistence of any

gain for the board members derived from the activities foreseen.

2.3. Miscellaneous on CIT subjects

Trusts in Madeira International Business Center

Although Portugal follows the civil law tradition whereby no recognition of trusts is

provided, a specific regime of trusts exists and was recognized in Portugal in the context of

the Madeira International Business Center, which was enacted aimed at providing

additional options to attract investment in the region at the end of the 1980s by providing

the possibility of using legal structures usually employed in other jurisdictions.

The said special trust regime was introduced with the caveat that «this law thus relates to

the recognition of the institution of trusts only as far it operates offshore, or

20 Specifically for entities without a commercial, industrial or agricultural activity, see Advance ruling n.º

739/2004, dated June 21st, 2004.

- 11 -

extraterritorially, without any interference in the judicial system and it exclusively applies to

corporate persons – trust companies that shall be subject to the present law».21

From a taxation perspective, the trust as provided for in the Madeira International Business

Center is not expressly treated as a separate taxpayer for Portuguese tax purposes and

hence as a CIT subject (sujeito passivo de IRC). From the above mentioned Decree Law no.

352-A/88, October 3, it seems that the law looks at the trustee with respect to taxation and

there is no «look through» approach to tax either the trust and/or the beneficiaries, the

latter of which are only subject to tax on effective distributions. However, the Portuguese

Tax Authorities have sustained in particular cases that where the identity of the settlor and

beneficiary of the trust is not known, the Madeira IBC’s trusts should be said to have a

place of effective management therein and be treated as a CIT subject.

In this sense, the treatment of the trust as a CIT subject would be akin to that of

investment funds, which are legally considered to be a “património autónomo” (independent

portfolio/assets). Albeit considering that as a rule a trust should not be seen as a CIT

subject, the fact is that without knowledge of the settlor and beneficiary’s identities the Tax

Authorities are apparently unable to ascertain whether the settlor and/or beneficiary are

taxed on the trust’s income, which actually leads such authorities to treat trusts in this

particular case as a CIT subject.

The said interpretation is highly debatable and has been contested, inter alia, because (i) it is

unclear where the law allows for such a distinction of being a CIT subject or not on the

basis of knowledge of settlor and beneficiary identities; (ii) the fact that article 11.º of

Decree Law no. 352-A/88, October 3rd, especially determines the confidentiality of settlor’s

and beneficiary identity as a legal requirement; and (iii) also the fact that before 2012 trust

income would be exempt on the basis of the applicable tax regime of the Madeira IBC22.

Also, treating the trust as a CIT subject would be contrary to the legislator’s purpose in

allowing for trusts to be accepted as legal alternative to attract investors to the Madeira

IBC. Therefore, given the current legal background, the authors believe that it is extremely

21 See Decree Law no. 352-A/88, October 3rd.

22 Currently, the Portuguese Tax Authorities seem to have taken the view that a trust activity is a financial activity and as a result a Madeira IBC trust cannot benefit from the current special regime which has expressly excluded financial activities from its application (see Article 36, no 7 of the Tax Incentives Statue). The Tax Authorities finding seems highly debatable as the activity of a trust should not be as a rule equivalent to that of a financial institution and it is in stark contradiction with the legislator intention to present the trust as an alternative vehicle for investment within the Madeira IBC.

- 12 -

questionable that Madeira IBC’s trusts should be treated as CIT subject, irrespective of the

more general discussion of how to treat trusts for Portuguese tax law purposes.

Nonetheless, irrespective of whether they are considered a CIT taxable subject, each trust

must have its own accounts prepared by the trustee together with its own accounts. This is

clearly an issue to be revisited by the legislator and the sooner the better considering the

high level of uncertainty for both taxpayers and the State.

Special Tax Regime for Groups of Companies

The Special Tax Regime for Groups of Companies (Regime Especial de Tributação dos Grupos

de Sociedades) established in the CIT Code (Código do IRC) restricts the possible CIT tax

subjects that can form part of a group. The qualifying companies that can be a parent and

controlled subsidiaries of a group for tax purposes must have the legal form of a

corporation (sociedade anónima), a limited liability company (sociedade por quotas) or a

partnership limited by shares sociedade (sociedade em comandita por acções).

The parent and controlled subsidiaries do not lose tax personality as a result of forming

part of a group.23 Each group member determines in its tax return the taxable profits or

losses concerning each fiscal year, as well as being liable on an individual basis to a

municipal and State surcharge applicable on its taxable profits, as well as an autonomous

tax on certain type of expenses (tributação autónoma).

In what concerns the CIT liability (responsabilidade tributária), all taxable profits and losses of

the group members as determined at an individual level in their respective tax returns are

then pooled. The resulting CIT tax liability of the group will be then assessed at the parent

level, albeit all the controlled subsidiaries are jointly liable for such tax liability.

On a procedural basis, the fact that the CIT tax liability is assessed at the parent level

results in subsequently the legal standing before the Tax Authorities and Courts is of the

parent, which might also include assessments and adjustments determined at an group

member individual level due to possible implications of the tax liability of the group.

23 See Supreme Administrative Court, Process no. 0138/08, of July 2nd, 2008, expressly affirming a controlled

subsidiary tax personality within a group for tax purposes.

- 13 -

Tax planning

The fact that partnerships are subject to a transparency regime and that PIT tax rates have

traditionally been significantly higher than that of CIT (IRC) has led to a clear preference

for the use of a corporation as opposed to choosing a partnership.

Traditionally, partnerships have been used where there are regulatory mandatory

obligations for certain professionals to adopt such a form (v.g., lawyers); currently, however,

partnerships might not be considered even the majority of professionals services providers.

Typically, such type of services providers would generally adopt a corporation as the

preferred legal form to provide services, even through the use of a corporation with a sole

stakeholder (sociedade unipessoal) when rendering such services on a merely individual basis.

The fact that on a factual basis the corporation legal form has been overwhelmingly

preferred over that of a partnership has not prompted significant discussion on the

advantages or disadvantages of electing to use one or other option, in particular in the last

decade. From a government perspective, the issue has been raised under not a standpoint

of neutrality of taxation between legal forms (i.e., corporation versus partnerships), but

rather on the possible use of a corporate form to avoid taxation at the PIT level. This is, in

fact, in line with the concern stated by the legislator of the CIT Code (Código do IRC) that

already established that such code could subject to tax transparency other legal persons

«when reasons of justice or the prevention of evasion or tax fraud recommend that it

should be considered irrelevant, for tax purposes, the attribution of a corporate tax

personality».24

3. Cross-border situations

Non-resident entities as CIT subjects

24 See article 17.º, n.º 3 of Law n.º 106/88, of September 17th. The rationale and policy goals underlying the

Portuguese transparency regime under the CIT is detailed in the Center for Fiscal Studies (Ministry of

Finance) Opinion n.º 18/89, by Maria de Lourdes Correia e Vale e H. Freitas Pereira, published in Ciência e

Técnica Fiscal, no. 354 (1989), pp. 275-286.

- 14 -

Under the CIT Code (Código do IRC), a non-resident «entity» is deemed as CIT subject on

the basis of obtaining income in Portuguese territory and not being considered resident for

tax purposes in such territory, irrespective of whether or not it has legal personality.25

The legal form under which such «entity» develops its activity seems irrelevant for the

purposes of ascertaining CIT tax liability and hence to determine if it is necessary to resort

to a resemblance test to characterize such entities for a CIT (IRC) perspective26. The option

expressed by the Portuguese legislator, to consider irrelevant the existence of legal

personality and the respective legal form27 was based on it seems practical reasons, namely

to avoid cases of a «legal vacuum, because of the difficulty on ascertaining, for tax

purposes, the legal personality of such entities».28 Therefore, the question of whether a

non-resident is considered as a CIT subject rests more on source rules and whether such

income is considered taxable or not under the PIT rules.

Irrespective of a non-resident being considered a CIT subject (sujeito passivo de IRC), the fact

that Portuguese tax law, in some cases where income obtained by such non-resident is

taxable by a final withholding tax at source29, establishes that the withholding agent is also

to be considered a CIT subject30 concerning that same income31 and as a result bears the

CIT liability of a third party, has led to academic discussions. Notably, whether such rules

are compliant with the constitutional principle of ability-to-pay, as «the payer becomes

25 See article 2, no. 1, item c) of the CIT Code.

26 The need for some sort of «resemblance test» obviously merits a different appraisal when one considers the

rules applicable to compute the non-resident entity taxable income and its actual taxation due in Portugal.

27 The CIT Code definition of a CIT subject where non-residents are concerned was criticized in academic

literature has having «unclear contours». See J. L. Saldanha Sanches (Fisco, 1991) Princípios Estruturantes da

Reforma Fiscal, pp. 65.

28 See Código do IRC – Comentado e Anotado, Direcção-Geral das Contribuições e Imposto, 1990, p. 75.

29 See for instances article 98.º, no 7 of CIT Code, dealing with cases where a certificate of residence or of

compliance with the Parent-Subsidiary Directive requirements was not presented in due time to the

withholding agent, which established that the latter is then considered liable for CIT that should be withheld

that corresponds in fact to the CIT liability of the non-resident.

30 According to Prof. Alberto Xavier, on a technical level, in this case there are not two CIT subjects, but only

one CIT subject and that is the entity with the obligation to withheld tax – see Alberto Xavier (Coimbra, 2009)

Direito Tributário Internacional,2 p. 519.

31 Sustaining also that in the case of a final withholding tax only the withholding agent is the CIT subject

(sujeito passivo) of such income, see João Menezes Leitão, «A Substituição e a Responsabilidade Fiscal no

Direito Português», in Ciência e Técnica Fiscal, no 388 (1997), pp. 135 and 144.

- 15 -

liable to pay the taxes of third parties32 who received the gross income» because «the payer

of such income [is] to be identified as the person liable for the tax (and the related

compensatory interest), not withheld at source».33

Also, under Portuguese tax law, non-resident entities cannot elect whether taxation should

be made on an opaque or transparent basis. An election is only available for entities

resident in a EU Member State or EAA State (if administrative cooperation in tax issues is

equivalent to that of the EU) to be treated as residents for certain type of income (typically

income subject to withholding taxes), as a result of the implementation in the CIT Code of

the existing ECJ case law on this topic.34

Subject to CIT condition

The interpretation of the CIT condition in the Parent Subsidiary Directive has been

extensively discussed in Portuguese literature, in particular after its implementation and

considering specific cases. First,several discussions occurred on the requirements for

benefiting from the domestic regime for the elimination of economic double taxation.

Second, at an EU level there has been discussion as to the question of whether

corporations within the Madeira International Business Center (when they could benefit

from no taxation at CIT level, which is no more the case; from 2012 these entities are

subject and effectively tax with rates from 4%), would be entitled to benefit from the

application of the Parent-Subsidiary Directive.35

32 Contrary, some authors believe that CIT liability of the withholding agent in these cases arises from the

non-fulfillment of its obligations to withhold tax and hence it cannot be construed as a liability to pay the

taxes of third parties. See Ana Paula Dourado, «Substituição e Responsabilidade Tributária», in Ciência e

Técnica Fiscal, no 391 (1998), p. 73. Most recently, see Nuno de Oliveira Garcia / Andreia Gabriel Pereira

«Notas sobre Intermediação, Substituição e Responsabilidade Tributária» in VV. (Coimbra, 2012) Estudos em

Homenagem a Miguel Galvão Teles, Vol. I, p. 441 onwards.

33 See Francisco de Sousa da Câmara, «Practical issues in the application of double tax conventions –

Portugal», in Cahiers de Droit Fiscal International, Volume LXXXIIIb (1998), pp. 580-581.

34 See article 71.º, no. 8, 9, 10 and 11, ex vi article 94.º, no. 9 of the Portuguese CIT Code (Código do IRC).

35 See Francisco de Sousa da Câmara, «Analysis of Article 2(C) of the Parent-Subsidiary Directive - Madeira

holding companies and their status under the Parent-Subsidiary Directive: another view», in The EC Tax

Journal, Vol. 1, no. 3 (1995), pp. 215-223.

- 16 -

The common interpretation in academic literature, which also relies on the Portuguese Tax

Authorities interpretation of similarly worded domestic tax rules36 has been that an

exemption for CIT (IRC) that would not allow a taxpayer from benefiting from the Parent-

Subsidiary would be only one which would be a total, subjective and permanent exemption.

Therefore, qualifying companies that might benefit from certain tax exemption on a partial,

objective and/or temporal basis, would still benefit from the Parent-Subsidiary Directive as

the benefit of such exemption would not deem it as akin to the «possibility of an option or

of being exempt». As a result, Portuguese holding companies (sociedades gestoras de participações

sociais) or companies registered and benefiting from the Madeira International Business

Center tax regime would benefit from the application the Parent-Subsidiary Directive,

irrespective of the fact that the benefit of exemptions might lead to actually no tax liability

arising in a said fiscal year for those companies.

Differently, in what concerns the possibility of applying the Parent-Subsidiary Directive to

transparent entities that might be considered eligible based on the Portuguese list in the

Annex (i.e., civil law companies having a commercial form), the fact that under the

Portuguese transparency regime entities are actually not liable to CIT (IRC)37 has led

authors to question the possible benefit from the said Directive.38

36 See Center for Fiscal Studies (Ministry of Finance) Opinion n.º 101/90, by H. Freitas Pereira, in «Sentido e

alcance da expressão ‘entidades […] sujeitas e não isentas de IRC’ constante do n.º 1 do artigo 45.º do Código

de IRC», in Ciência e Técnica Fiscal, pp. 347-357. Currently, article 51.º, no. 1, item a) of the CIT code still uses

the wording «subject and not exempt from CIT» as a requisite for a qualifying distributing company for the

purposes of applying the domestic participation exemption regime. According to the same author, the final

wording of the Directive referring to «without the possibility of an option or of being exempt» was actually prompted

by an observation of the Portuguese delegation [see Ciência e Técnica Fiscal, no. 361/355, Doc. 9774/88 Fisc

109 of December 5, 1998, Doc 4599/89, Fisc 18, February 6, 1989: Doc 4769/89. Fisc 24 February 22, 1989

and Doc 9774/88, Fisc 109, December 5, 1988].

37 See article 12.º of the CIT Code (Código do IRC).

38 See Francisco Sousa da Câmara, op. cit. at fn. 35.