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Portugal unveils new collective investment undertakings tax regime

Portugal unveils new collective investment undertakings tax regime

Portugal’s new regime for the taxation of UCIs (undertakings for collective investments) aims to increase the attractiveness of using the securities and benefit in particular foreign investors. Only the future will tell if the purposes of these changes have in fact been achieved.

The Portuguese Government has approved a new tax regime applicable to collective investment undertakings (CIUs), including real estate investment funds, securities investment funds, pensions investment funds and real estate and securities investment companies.

The CIU’s taxation reform shows a clear political willingness to bring more competitiveness to, and increase the attractiveness of, Portuguese UCIs in the international arena.

The UCI regime in Portugal has shown little appeal for foreign investors, for. the key reason that UCIs were taxed on their income and therefore, though there was no exit taxation for foreign investors, their benefits always had a hidden tax in them.

The key modification relates to the implementation of an exit tax system, meaning that most UCI’s income will not be taxed at the UCI’s level, and taxation will only be possibly at the UCI investor’s level.

CIU Taxation

Up to now CIU income was taxed at different rates depending on the specific nature of the incomes.

With the new regime, there will be no taxation at the UCI level of capital gains, capital incomes and property incomes. This exemption may not be applicable if the income originated in blacklisted countries.

The CIUs may, however, be taxed for other types of incomes, being subject to the general rules of the corporate income tax. They are also exempt from the state and municipal surtaxes (Derrama Estadual e Derrama Municipal).

The new regime allows CIUs to carry forward their tax losses for a 12-year period, limited to 70% of their year taxable base, and benefit from the fiscal neutrality regime in cases of mergers, split-offs and subscriptions in kind.

However, CIUs will be subject to stamp duty on their incomes, assessed on their year net assets at a rate of 0.0025% or 0.0125%, depending on the type of investment they take. When CIUs invest exclusively in monetary market instruments and bank deposits, the applicable stamp duty rate will be 0.0025%. On the other hand, when CIUs invest in any other type of investments a 0.0125% tax rate will be levied instead.

Non-resident investors taxation

As in the past, incomes distributed by CIUs to individual and corporate non-residents are fully exempt, with the exception of real estate CIUs in which case there will be 10% taxation.

The fact that there will be almost no taxation on CIUs means that the profitability of Portuguese UCIs for foreign investors will increase compared with the previous tax regime. Attracting foreign investment, therefore, is clearly the main purpose of the changes.

To benefit from such an exemption, non-residents must submit proof of their non-resident status, and this tax exemption is not applicable when the foreign investor is resident in a blacklisted country.

The tax exemption will not apply either when the incomes are distributed to companies that are more than 25% owned, directly or indirectly, by a Portuguese resident.

Portuguese-resident investors taxation

Conversely, Portuguese-resident investors are taxed according to personal income tax or corporate income tax rules, and corporate investors will be taxed under general corporate tax rules.

Individuals will be taxed at 28%, but may choose to aggregate all of their income, thus being subject to the general progressive tax rates.

Due to the implications of the changes, the Portuguese Government has decided the new rules will enter into force on July 1 2015.

This article was written by Nuno Azevedo Neves, partner, and Joana Pires de Melho, associate, at ABBC - Azevedo Neves, Benjamim Mendes, Carvalho & Associados in Portugal.

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