Portuguese tax incentive to the capitalisation of companies
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Portuguese tax incentive to the capitalisation of companies


Mariana Morais Teixeira of Morais Leitão overviews Portugal’s new tax incentive regime designed to boost the country’s capital-depleted private sector.

The State Budget Law for 2023 introduced a new Incentive to the Capitalization of Companies (ICE), replacing and reshaping two incentives with similar scope, establishing a new tax deduction for Portuguese companies financed via equity. Some changes to the incentive were published very recently (Law 20/2023, May 17), and we will address them below.

The ICE aims to anticipate, at least in part, the adoption of the proposal for a Directive on laying down rules on a debt-equity bias reduction allowance (DEBRA). Currently, the ICE is not accompanied by any additional limitation on the deduction of financing costs, beyond the thin capitalisation regime in force.

The ICE applies to entities tax resident that, during the tax period in question, are engaged in a commercial, industrial, or agricultural activity and that cumulatively:

  • Do not belong to the financial or insurance sector (as recently amended);

  • Have their accounts duly organised and legally compliant;

  • Do not have their taxable profit determined by indirect methods; and

  • Have their tax and social security situation in order.

The incentive operates by deducting from the taxable profit an amount corresponding to 4.5% (5% if companies qualify as MSME or small mid cap) of the amount of the net increases in eligible equity.

The deduction shall be determined by reference to the sum of the amounts cleared, according to the latest changes, in the tax period itself and in each of the previous nine tax periods (zero being considered if the sum of these equity capital movements is negative). Nevertheless, only the net increases in eligible equity occurring in tax periods beginning on or after January 1, 2023, are relevant.

The deduction cannot exceed, in each tax period, the greater of the following limits: €2M, or 30% of the tax-EBITDA. The part of the deduction that exceeds the latter limit is deductible for the determination of the taxable profit of one or more of the five subsequent tax periods, after the deduction for that period, and must observe the same limits.

For this purpose, “increases in eligible equity” are:

  • Cash contributions in the incorporation of companies or within the capital increase of the beneficiary company, or the nominal amount of conversions of credits into capital;

  • Share premium; and

  • The allocation of the distributable accounting profits recorded in the year concerned, in accordance with the commercial legislation, in retained earnings or, directly, in free reserves accounts, or in the capital increase. It has now been clarified in Law 20/2023, May 17, that the first accounting profit covered shall be the profit of the 2022 period.

As to “net increases in eligible equity”, the law refers to the difference, positive or negative, between “increases in eligible equity”, and outflows in cash or in kind, in favour of the owners of the share capital. This is by way of reduction of the share capital or distribution of assets, as well as distributions of reserves or retained earnings. As the law is silent, it is questionable whether outflows by way of distribution of dividends of the tax period should have a negative influence on the computation of the net increases.

Excluded from the regime are increases resulting from:

  • Contributions in cash, within the incorporation of companies or capital increases, which are financed by increases in eligible equity in another entity;

  • Contributions in cash, within the incorporation of a company or capital increase of the company benefiting from the ICE by a related entity, which are financed through loans granted by the beneficiary itself or by another related entity of both the beneficiary and contributor; and

  • Cash contributions, within the company incorporation or capital increase, by an entity that is not resident for tax purposes in another EU member state or the EEA or in another state where a tax treaty or an exchange of information agreement is in force.

These exclusions are intended to prevent abuse through mechanisms created to multiply tax deductions or using entities established in non-cooperative jurisdictions.

Having been clearly designed to provide a substantial incentive to the capitalisation of the chronically capital-depleted Portuguese private sector, the cumulative nature of the regime will surely make a positive contribution. However, there are still some uncertainties regarding the scope and practical application of the ICE, even after having been amended. Namely: the assessment of net increases in eligible equity, the need to clearly define the concept of credits (to be converted into capital) or the scope of the exclusions. Besides, the position of the Portuguese tax authorities on this regime is not yet known. We remain alert to any future developments on this matter.

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