These type of activities can be developed either trough the pure holding companies the mixed holding companies and the shipping companies. What distinguishes these type of companies is mainly the corporate purpose, apart from the tax regime in respect of the pure holding companies.
1) Mixed Holdings
Mixed holding companies normally have a very ample corporate purpose in terms of allowing the development of any kind of trading activity. Furthermore the management of the portfolio securities is part of the corporate purpose.
These type of companies benefit of the following tax benefits:
- Exemption, until 2011, from corporate taxes on the income obtained from operations carried out exclusively with other entities established within the legal frame work of the International Business Centre or with non residents in the Portuguese territory.
- Exemption from corporate taxes on the interests from loans contracted by entities licensed within the legal framework of MIBC provided the loan is used within the same frame work and as long as the lenders are non residents in the Portuguese territory.
- Shareholders non residents in Portuguese territory are exempt, until 2011, from corporate and individual taxes in relation to:
- dividends from the income of these entities obtained trough their operations within the legal framework of MIBC, excluding the proportion of the income not exempted from operations carried out in the Portuguese territory.
Exemption of withholding tax on the distribution of the dividends to the shareholders income from interests and other forms of loans, bonds, and advances of capital given to these entities.
2) Pure Holdings
A holding company, known as a "SGPS - Sociedade Gestora de Participacoes Sociais", can be incorporated as a corporation or as a private limited company and has as its exclusive social purpose the management of a portfolio of shares in other companies as a form of indirectly carrying out an economic activity. It may also provide technical, administrative and management services to these companies, under certain circumstances.
The regime of the pure holding companies (SGPS) subjects these type of companies to corporate tax on the dividends received.
Although SGPS companies are taxed in Portugal, the effective corporate tax rate applicable to the dividends received are of 1.8%, due to the fact that only 5% of the dividends received are subjected to the normal Portuguese corporate tax, presently 36% (36%*5%=1.8%), which allow a Madeira SGPS to request the application of the European Union (EU) Parent/Subsidiary Directive no. 93/435/CEE of 23rd July 1990, which permits on the Art. 5th the exemption at the source, of withholding tax on the distribution of dividends from a EU subsidiary company to a parent U.E. company, which represents a highly competitive tax regime.
The application of the referred directive, is however dependent on certain conditions to be applicable. The conditions are the following:
the parent and the subsidiary must be EU companies. A Madeira SGPS company is for all the effects a U.E. company.
The parent company and the subsidiary companies must be incorporated according to the UK and Portuguese legislation. A Madeira SGPS company fulfils this requirement.
The parent company must be compulsory subject to taxation. Madeira SGPS are subject to a tax rate of 1.8% on the dividends received from the EU affiliated.
Under the general provisions applicable to all companies, capital gains of an "SGPS" on the sale or exchange of its financial assets may qualify for "roll-over relief" if the sale proceeds are reinvested in other shares or quotas of resident companies or in government securities. However, unlike other companies, a "SGPS" does not have to hold its financial assets, acquired after 1 January 1989, for a period of least twelve months prior to their sale, to benefit from the incentive referred to above.
A "SGPS" may be incorporated without any additional formalities, being subject only to the need prove compliance with the legal requirements for the related tax benefits.
The pure holding company (SGPS) tax incentives are:
- Exemption, until year 2011, from corporate taxes on the dividends obtained from the capital participation in other companies within the legal framework of MIBC and or located outside EU territory.
- Dividends received from Portuguese or EU affiliates are subjected to a low taxation of 1.8% on such dividends.
- Exemption from taxes on the interests of loans contracted by entities licensed within the legal framework of MIBC provided the loan is used for operations within the same framework and as long ad the lenders are non residents in the Portuguese territory.
- Exemption of withholding tax on the distribution of the dividends to the shareholders.
- Shareholders who are not resident in Portuguese territory are exempt, until the year 2011, from corporate and individual taxes on the dividends obtained from the income of those entities trough their operations within the legal framework of MIBC, excluding the proportion of the income not exempt obtained from operations carried out in Portuguese territory.
Scheme of the pure holding tax regime distribution of the dividends from the affiliate to the Madeira SGPS
Dividends distributed by EU affiliates to the Madeira SGPS are exempt from withholding tax at the source, according to the parent/subsidiary directive 90/435/CEE.
Dividends distributed by a Portuguese affiliate to the Madeira SGPS are exempt from withholding tax at the source.
Dividends distributed by a non EU affiliate will be subjected to withholding tax according to the tax legislation of the source. If the state of the affiliate is a non EU with which Portugal has a Tax Treaty Against Double Taxation the withholding tax of the tax treaty will be applicable.
Taxation of the dividends receive by the Madeira SGPS
The dividends received by the Madeira SGPS will be subjected to 1.8% on the dividends received, considering those dividends are from a EU affiliate or from a Portuguese affiliate.
Dividends received from a non EU affiliate are not subjected to corporate tax.
Taxation on the dividends distributed to the shareholders of the Madeira SGPS
No withholding tax will be charged on the dividends distributed to the Madeira SGPS shareholders.
3) Shipping Companies
The legal frame work of MIBC allows the incorporation of shipping companies which main activity is the development of the maritime transportation and any other activity related with the owning of vessels.
These companies are totally exempt from income tax and all other tax benefits conceded to the Madeira companies are applicable to the shipping companies.
Shipping companies have a specific derogation regarding the minimum capital requirements, in fact these type of companies can be incorporated without fulfilling the minimum capital requirements established on the Portuguese corporate code, presently PTE 5.000.000 for S.A. and PTE 400.000 for Limited Liability companies.
The main tax advantages applicable to these type of companies are the following:
- No income tax payable on the profits of the shipping company
- No withholding tax on the dividends distributed to the shareholders of the company
- No estate duty is payable on the inheritance of shares in a shipping company.
- No capital gain tax is payable on the sale or transfer of a ship or shares
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information please contact:
Christina Perriera Madeira Fiducia Management LDA Rua 31 de Janeiro No 81-A 5E -9050 Funchal Madeira Portugal
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