Portugal’s Capitalisation of Companies Incentive (Incentivo à Capitalização de Empresas, or ICE), introduced by the 2023 State Budget, was implemented in the broader context of the discussions at EU level surrounding the proposed Debt-Equity Bias Reduction Allowance initiative. The regime promotes equity financing through a notional interest deduction.
By establishing deductibility caps that are significantly more generous than those applicable to net financing costs under the general Portuguese interest barrier rule, the ICE enables a hybrid approach to corporate capitalisation that combines the economic substance of equity with a tax deduction that mirrors the treatment traditionally reserved for debt financing.
The incentive has quickly become one of the most relevant tax tools for companies operating in Portugal.
As a recap of the ICE regime, in its current form, the ICE operates as follows:
Deduction mechanism – the incentive operates by deducting from the taxable profit an amount calculated by reference to the average 12-month Euribor rate of the relevant tax period, plus a spread of 2 percentage points, applied to the net eligible capital increases.
Cumulative base – the deduction is determined by reference to the sum of the net eligible capital increases in the current tax period and in each of the six preceding tax periods. Only net eligible increases occurring in tax periods beginning on or after January 1 2023 are taken into account.
Deductibility cap – the annual deduction cannot exceed the higher of €4 million or 30% of the tax-EBITDA. Unused deductions may be carried forward for five years. By contrast, under the general Portuguese corporate income tax rules, net financing costs are deductible up to the higher of €1 million or 30% of the tax-EBITDA (the interest barrier rule). This incentivises structuring inbound investment through share capital contributions (or a combination of share capital and debt) rather than through pure debt financing. Moreover, the ICE deduction cap accumulates with the general deduction for net financing costs, and companies may therefore benefit from a combined annual tax deduction significantly exceeding what would be possible under a purely debt-financed structure.
Eligible capital increases comprise cash contributions in the incorporation of companies or capital increases; in-kind contributions within a capital increase corresponding to the conversion of credits into capital; share premium; and the allocation of distributable accounting profits to retained earnings, free reserves, or directly to a capital increase. This represents a critical advantage, considering that the ICE deduction applies not only to cash injections but also to the retention and capitalisation of profits, thereby rewarding a company simply for not distributing its earnings.
Clarifying rulings
The Portuguese tax authorities (PTA) have issued several binding tax rulings (informações vinculativas) addressing a range of practical and interpretative uncertainties that had remained open since the regime’s inception. The key takeaways include the following:
Broad concept of eligible contributions – the PTA have confirmed that the conversion of shareholder loans (suprimentos) into share capital qualifies as an eligible capital increase under the ICE. Importantly, the PTA clarified that the scope of “credits” under the ICE is not limited to suprimentos with their permanent character but extends to other forms of shareholder loans; for instance, ancillary contributions (prestações acessórias) that do not follow the regime of supplementary contributions (treated as debt), as well as short-term loans.
Timing of profit allocation – a significant area of PTA guidance relates to the timing at which the application of distributable profits counts as an eligible capital increase. The PTA have consistently confirmed that the relevant moment is the period in which the profits are effectively allocated (applied) to retained earnings or reserves – not the period in which they were generated.
Interaction with prior regimes – the transitional overlap between the ICE and one of the regimes it replaced – the DLRR (Dedução por Lucros Retidos e Reinvestidos) – was a source of practical uncertainty. The PTA confirmed that the two benefits may be cumulatively applied. Accordingly, distributable profits from 2022 allocated to the special reinvestment reserve under the DLRR may simultaneously qualify as eligible capital increases under the ICE in 2023. Additionally, the PTA clarified that reinvestment reserves created in years before 2023 and transferred to free reserves after the mandatory five-year retention period (e.g., on January 1 2023) do not qualify for the ICE, as they do not constitute eligible net increases in equity in a period beginning on or after January 1 2023.
Corporate reorganisations – the PTA have clarified the application of the ICE regime in the context of corporate reorganisations, distinguishing between mergers and transfers of assets for these purposes. In the context of mergers carried out under the tax neutrality regime (with retroactive accounting and tax effects to January 1), the PTA confirmed that the distributable profits of all merging entities may be taken into account for ICE purposes in the surviving entity. The relevant factor is the distributable profits of each entity for the relevant pre-merger period, applied in the year of the merger. In the case of a transfer of assets (entrada de ativos) under the tax neutrality regime, the PTA have ruled that the eligible capital increases generated in the transferring entity’s accounts cannot be “transmitted” to the newly created receiving entity. This distinction between mergers and transfers of assets is conceptually logical but has significant practical implications for structuring corporate reorganisations.
Scope of application – the PTA have confirmed that branches of foreign entities in Portugal cannot benefit from the ICE. The wording of the ICE expressly limits the benefit to entities “with their registered office or effective management in Portuguese territory”, which means that only tax-resident entities qualify. The PTA further noted that, because a branch has no separate legal personality and, crucially, has no share capital and does not distribute profits (it merely allocates them to its head office), the very mechanics of the ICE – which revolve around equity capital increases – are incompatible with the nature of a branch. In relation to credit intermediaries/insurance mediators, although the ICE excludes entities “subject to the supervision of the Bank of Portugal and Insurance and Pension Funds Supervisory Authority”, the PTA have adopted a purposive interpretation, concluding that credit intermediaries acting in an ancillary capacity and insurance mediators should not be excluded from the ICE.
Final comments
The ICE has matured from a promising but untested legislative innovation into a cornerstone of Portugal’s tax incentive framework for corporate capitalisation. Its notional interest mechanism – with a deduction cap significantly exceeding the cap applicable to net financing costs – makes it an attractive tool, particularly for multinational groups structuring inbound investment into Portugal.
The hybrid nature of the ICE – offering the tax benefits of debt while requiring the commitment of share capital – has fundamentally altered Portugal’s corporate financing landscape.
At the same time, the extensive body of binding rulings by the PTA has provided much-needed – albeit not exhaustive – interpretive certainty on a range of practical questions, from the scope of eligible credits to the treatment of restructurings and the regime’s subjective scope.
While some questions remain open, the PTA’s purposive and generally taxpayer-friendly approach – particularly in relation to the exclusion of supervised entities – has brought a welcome degree of predictability to the regime, even as the formalistic stance on asset transfers serves as a reminder that careful structuring remains essential.
