Draft CIT reform – Participation exemption regime

October 2013

Portugal designs a true and complete “participation exemption” regime.

According to the Draft CIT reform, distributed profits and reserves (to a CIT taxable entity with head office or place of effective management in Portugal)

and capital gains and losses arising from the disposal of corporate rights or other equity instruments associated to those rights, will not be relevant for tax purposes.

This is applicable provided certain conditions are met.

With respect to outbound dividends, profits and reserves that a Portuguese tax resident entity distributes to a non-resident entity are exempt from CIT, as long as the beneficiary meets certain conditions.

This regime is also applicable when the profits and reserves are distributed to a PE located in an EU Member State.

The Draft CIT Reform also proposes the introduction of an underlying tax credit in order to eliminate international double economic taxation in case the participation exemption regime does not apply.

As regards international juridical double taxation, the Draft proposes reinstating the ability to carry forward, for five years, the portion of international tax credit which exceeds the tax liability of a given tax year.

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