Decree-Law 192/05 issued on 7 November 2005 provides for amendments affecting the taxation of dividends.

(a) Background. The law amending the Budget Law for 2005 (see TNS-356 (2005)) included an authorization for the government to enact changes to the income tax laws designed to counter situations of dividend stripping (also known as dividend washing). The discrepancy between the withholding tax rate for dividends paid to resident (15%) and non-resident (25%) shareholders, coupled with the exemption on capital gains realized by non-residents, led to a number of dividend stripping transactions. The authorization also covered the measures to eliminate the differences on the tax treatment of dividends depending on the source of the income.

(b) Scope. Decree-Law 192/05 sets out the following amendments to income tax laws, applicable as of 1 January 2006:

The dividend withholding tax rate is set at the uniform rate of 20% for resident and non-resident shareholders alike. This withholding is a final tax, unless a resident individual elects to treat the withholding as a payment on account of regular income tax (in which case, the dividends are aggregated with the other taxable income but only for 50% of the gross amount).

Since the above-mentioned abusive transactions were undertaken through resident entities, which benefited from exemptions, a withholding tax at a rate of 20% is enacted to cover situations where a minimum holding period of 1 year is not fulfilled by such exempt entities.