Portugal: CFC Rules in Portugal

Last Updated: 12 January 2011
Article by Inga Kilikeviciene

A basic outline of the Portuguese CFC measures

The Portuguese CFC rules follow the path of other European countries: assessing the shareholding threshold in a non-resident company, verifying its location in the low-tax jurisdiction, evaluating profit generating activity and taxing on the income before dividend distribution.

The first anti-abusive norms in the Portuguese legislation were introduced back in 1995, by Decree-Law No. 37/95 aiming to tackle international fiscal fraud and evasion. The measures were based on limiting the use of tax heavens and preferential fiscal regimes through companies established in privileged tax jurisdictions. The actual Portuguese legislation maintains the core measures.

CFC Definition and Profit Allocation

A company is resident if it is incorporated in Portugal or if its place of central management and control is in Portugal.

The Portuguese CFC measure provides for the allocation of the derived profit of companies resident in countries with a privileged tax regime, regardless of its distribution or not, to the members of a company who are resident within the Portuguese territory; such company members are those holding a share in the company of at least 25 per cent, which is reduced to 10 per cent in case if the non-resident company is held by more than 50 per cent by resident members.

Thus, for the Portuguese tax purposes a controlled foreign company is a corporation meeting two criteria:

  1. company's location in a clearly more favourable tax jurisdiction; and
  2. holding: a) at least 25% shares; or b) at least 10% of a non-resident company where 50% or more of the share capital is held by resident shareholders.

It is important to note that the apportions above apply both to direct and indirect shareholding. The conditions are cumulative, i.e., if one of them is not met, CFC rules are not applicable.

Portuguese CFC legislation is applicable both to companies and individuals. For profit allocation, the term "entidade", or "entity", was initially used but later the confusing wording was clarified. In English, "entity" implies a corporate or collective person, and does not include an individual. In Portuguese, the term is broader and extends to individual persons. In order to avoid possible misinterpretations, the law was amended and now it clearly refers to corporations' profit only. Moreover, such profit shall necessarily be derived from a business activity of the corporations.

A company is considered located in a clearly more favourable tax jurisdiction if it is resident in a country included in the list approved by Order of the Minister of Finance. Equally, not only the companies resident in the listed countries are considered privileged tax-wise but also those not subject to the IRC or analogous tax, or the amount of tax paid is less than or equal to 60% of the tax that would be due to a shareholder resident in the Portuguese territory.

The allocation corresponds to the after-tax profit obtained by the non-resident company determined in accordance with the tax rules of the country of its residence.

Like in many other jurisdictions, the Portuguese CFC rules apply to apportion a non-resident company's income to the parent company subject to current taxation in the parent company's country without reference to the dividend distribution. In other words, a resident shareholder of a CFC is taxed directly on the company's income before its distribution.


Non-resident companies are excluded from the CFC measures in the following cases, cumulatively:

  • at lest 75% of the allocated profit is derived from the exercise of an agricultural, industrial or commercial activity; in the commercial activity case, no  counterpart resident in the Portuguese territory shall be involved,  or, if so, the commercial activity is mainly aimed at the market of the company's location.
  • the main business of the non-resident company does not consist, in particular, in banking operations, insurance of goods located outside the company residence territory or persons not residing in that territory; transactions in shares or securities, intellectual or industrial property rights, information supply on know-how in industrial commercial or scientific areas, or the provision of technical assistance; asset lease except real estate located in the territory residence of the CFC.

In its essence, the profit bears both active and passive nature: active, when it is related to agricultural business activity in the country of the company registration, and passive in all the other cases.

Tax Credit and Control

The tax credit shall be limited to the amount of the income tax, with allowed deductions, paid for the taxable period of the allocated profit derivation and any excess may be paid within following five years.

In the application of the special tax regime for shareholders resident in Portugal and meeting CFC conditions, attribution is made directly to the first entities in the chain of ownership resident in that country and subject to the general tax regime, regardless their share in the capital of the non-resident company.

The last update on the CFC rules in Portugal was made in 2009 and is in force since January 1st, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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