Portugal: Types of Company
Comparison with Danish Holding Companies
Since Denmark is currently the benchmark holding company jurisdiction which other holding company jurisdictions seek to emulate a comparative assessment of the 2 jurisdictions is a useful exercise:
i) Withholding Taxes on Incoming Remittances: Many countries consider Madeira an offshore haven and not an integral part of Portugal for the purposes of double taxation treaties and the EU parent-subsidiary directive. Accordingly they have introduced anti-avoidance legislation with the consequence that Madeira holding companies often do not enjoy the reduced withholding taxes on incoming dividends which should otherwise apply to them by reason of Portuguese double taxation treaties or by reason of the provisions of the EU parent-subsidiary directive. Even where anti avoidance legislation is not in place Portugal's network of around 50 double taxation treaties is limited in comparison with the number executed by other holding company jurisdictions such as the UK or Denmark.
Denmark by contrast is not considered a tax haven and so is generally able to benefit from the provisions of the EU parent-subsidiary directive and its extensive double taxation treaty network to reduce withholding taxes on incoming remittances. In this respect Danish holding companies enjoy a significant advantage over Madeira holding companies.
ii) Incoming Dividends & Double Taxation Treaties: In Denmark dividend income received by a Danish holding company from a foreign subsidiary is exempted from Danish corporate income tax provided that the Danish holding company meets the "participation exemption criteria" in that for a minimum period of 12 months prior to the dividend distribution it holds at least 10% of the shares of the foreign subsidiary (which subsidiary must not be deemed a "financial company"). The Madeira holding company is either exempted from or pays 1.25% corporate income tax on dividends received provided that it has held at least 10% of the shares in the foreign subsidiary for a minimum period of 12 months prior to the distribution. In this respect neither jurisdiction has an advantage over the other although the Danish participation exemption criteria have traditionally been marginally harder to meet. However, from Janbuary 1, 2010, the Danish 12-month holding requirement is to nbe abolished.
iii) Capital Gains Tax On The Sale Of Shares: A Danish holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held at least 25% (but see above) of the foreign subsidiary shares for a minimum period of 3 years prior to the disposal of those shares and provided the foreign subsidiary is not a "financial company". A Madeira holding company is not exempt from capital gains tax on the profitable sale of shares in a foreign subsidiary but it is entitled to defer payment of tax on the capital gains if it re-invests the sale proceeds in other shareholdings ("roll over relief"). Roll over relief is sometimes described as the temporary or indefinite postponement of capital gains tax. This makes the Danish holding company a considerably more attractive entity than its Madeira counterpart (N.B. the capital gains taxation of Danish shares is being overhauled as part of which the 3-year holding requirement is being abolished).
iv) Withholding Taxes on Outgoing Dividends: In Denmark no withholding taxes are deducted from outgoing dividends irrespective of the existence or non existence of a double taxation treaty and provided the ultimate foreign parent corporation holds the designated percentage of the shares in the Danish holding company for a minimum period of 12 months (the 12-month holding period is being abolished as of January 1, 2010). In Madeira no withholding taxes are deducted from outgoing dividends irrespective of the existence or non-existence of a double taxation treaty and (generally speaking) provided the income from which the dividends are being paid does was not earned in Portugal and provided the shareholder to whom the remittance is being paid is not a Portuguese resident. In this respect there is little to distinguish both jurisdictions.
NB: The Tax Reform Act of December 2000 somewhat reduced the tax advantages of both Pure and Mixed Holding Companies, particularly for Portuguese residents.