Madeira: Domestic Corporate Taxation
Calculation of Taxable Base
Certain types of income are partially or wholly exempt from taxation; these include:
- Dividends from quoted companies;
- Interest on certain public bonds including those issued before 1991.
All normal commercial costs are deductible from taxable income; the following partial list sets out some only of the more important rules covering deductibility:
- 20% of representation expenses, empoyees' travel allowances, and passenger car expenses are disallowed;
- interest on loans to finance production can usually be capitalised if they last for at least two years;
- social costs up to 15% of an employee's salary are deductible (25% if the employee has no right to social security);
- losses can be carried forward for 6 years as long as there is continuity of business activity;
- group relief is available for 90% subsidiaries;
- bad debt relief is given on a tapered scale; some types of debt are not considered 'bad';
- depreciation is normally on a straight-line basis; there are limits on the depreciation of cars.
Domestic dividends received by a resident company which has owned at least 10% of the paying company or an acqusition value of at least EUR20m for at least one year are exempt from tax. The EU participation exemption applies with similar conditions; but the paying company must be subject to income taxation. If the participation is less than 25%, a 50% tax credit is given.
There are provisions in tax law equivalent to 'Controlled Foreign Company' legislation which kick in for participations of 25% or greater, and apply when rates of tax paid on foreign profits are less than about 20%. General anti-avoidance provisions were introduced as from 1999. Thin capitalisation rules apply in Portugal to indebtedness towards non-resident related parties. A debt-to-equity safe harbour ratio of 2:1 applies. Indebtedness towards non-resident third parties (e.g., banks) but guaranteed or secured by non-resident related parties is also covered by thin capitalisation rules. Interest arising from excessive non-resident related party debt will be disallowed as a deductible tax expense, unless the taxable entity or company is able to demonstrate that its indebtedness level and capital structure is established at arm’s length.
NB: This brief summary of some of the more important aspects of Madeiran (Portuguese) income tax law is given for general information only; it should not be relied upon in actual situations, for which professional tax advice is necessary.