As a general rule, regarding resident entities that are engaged in a commercial, industrial or agricultural activity, no segregation applies in the determination of the taxable income.

The most important items of income that are exempt from tax are domestic and foreign dividends and capital gains qualifying for the participation exemption regime.

Participation Exemption for Capital Gains

Capital gains and losses realized on the transfer of shares or assets by resident companies, are eligible for exemption under the participation exemption regime, provided the following requirements are met:

• The shares are held for a consecutive period of at least one year prior to the transfer;
• The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the entity whose shares are transferred;
• The taxpayer is not covered by the Portuguese tax transparency regime;
• The entity whose shares are transferred is not resident in a tax haven/ black-listed jurisdiction; and
• The assets of the entity from which shares are transferred are not directly or indirectly comprised of more than 50% of real estate located in Portugal and acquired on or after 1 January 2014.

Participation Exemption for Dividends

Dividends received by resident companies are eligible for exemption under the participation exemption regime, provided the following requirements are met:

• The shares are held for a consecutive period of at least one year;
• The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the distributing entity;
• The taxpayer is not covered by the Portuguese tax transparency regime;
• The distributing entity is not resident in a tax haven/ black-listed jurisdiction; and
• The distributing entity is subject to tax at a rate that is not lower than 60% of the Portuguese nominal tax rate (except in the case it meets the business-test requirement).

The exemption applies whether the distributing entity is a Portuguese company, an EU/ EEA entity, or an entity located in other countries, provided the conditions of the participation exemption regime are fulfilled.

In this regard, the Court of Justice of the European Union (CJEU) in a decision dated 1 September 2022, held that dividends received from subsidiary entities located in countries outside the EU/ EEA may be denied the participation exemption if the country of residence of the distributing entity does not have a treaty with Portugal providing for tax information exchange. Since the exemption is subject to a condition relating to the tax liability of the distributing company in the third country, the Court reasoned a Member State is not required to grant the taxpayer the option to produce the evidence to show that the necessary conditions to obtain the deduction are satisfied where, due to the absence of a treaty obligation, that Member State cannot verify the veracity of that evidence with the country of residence of the distributing entity.

Anti-abuse Amendment

Effective 1 January 2016, the Portuguese government implemented anti-abuse amendments made to the EU Parent-Subsidiary Directive into its domestic law. The law introduces the concept of non-genuine arrangements, which include those that are not carried out for valid economic reasons or do not reflect economic reality. If a non-genuine arrangement is put in place with the main purpose, or one of the main purposes, of obtaining a tax advantage, then Portugal withholding tax exemption for dividends paid or the participation exemption for dividends received will not apply.