By DENNIS SWING GREENE features@algarveresident.com
Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a.
In this series of articles, we examine different forms of income that must be reported on “IRS” tax declarations:
1. Income from Salaries,
2. Self-Employment – the Simplified Regime,
3. Income from Capital – Bank Interest,
4. Income from Capital – Dividends,
5. Rental Income,
6. Capital Gains on Investment Portfolios,
7. Capital Gains on Real Estate
While one might expect that assessment of dividends to be a routine affair for Finanças, just the opposite proves to be the case.
Legislation has changed repeatedly in recent years; Brussels has mandated change in assessment practices following EU court decisions; Portuguese tax authorities have been slow to adopt a simple, transparent system that meets both national legislation and EU principles.
Background
When assessing company profits, taxation occurs in a two-stage process: first, the company pays Corporate Income Tax on its profits, then shareholders pay individual income tax on these distributed profits (now called dividends). This assessment procedure is called “economic” double taxation.
Almost all countries in the EU have adopted one of several methods to eliminate “economic” double taxation – some via the company, some via the individual.
Regardless of the method, the end result should be the same: dividends reported by the Individual should be after the elimination of any “economic” double taxation.
Subsequently, on “in-bound” dividends (from other EU countries), “international” double taxation (two jurisdictions potentially taxing the same income source twice) is eliminated according to the rules of the respective Double Tax Convention (DTC).
Current practice
To eliminate “economic” double taxation, Portugal has adopted the “Half Income Tax Method” (only 50 per cent of included dividends received by the Individual are subject to marginal income tax rates). If one elects to have dividends assessed independently from other income, the full dividend is taxed at a flat rate of 20 per cent. However, rather than seeing this economic double tax elimination in its full context, current Portuguese fiscal policy confuses the issue by mixing domestic and international double taxation relief.
Sometimes the approach used is as follows: Since Portugal taxes only half of the income, only half of the international tax credit will be conceded.
On other occasions, international tax credits are tacitly conceded on aggregated dividend income but not on autonomously declared dividends, despite the fact that both reporting methods relate to “economic” and not “international” double taxation.
In other words, these inconsistent practices overlook the fundamental fact that two entirely separate and unrelated forms of double taxation are being mixed indiscriminately often with the net result of negating the elimination of international double taxation. While these practices are currently under review, it may be some time before policies are updated and brought into line with EU guidelines.
Different assessment scenarios
I. Dividends paid by Portuguese companies
1) Tributação Autónoma – Withholding at source at flat rate of 20 per cent (tax is final: no further reporting) or
2) Englobamento – Reporting together with other income at marginal rates (0- 42 per cent). In this case, withholding at source acts as a tax credit applied to final assessment due.
II. Dividends paid by EU Companies
1) Tax Withheld at source:
a) Assessment at source is limited
by DTC’s (Double Taxation Conventions);
b) Balance of withholding is to be
refunded as per DTC procedures;
2) Elimination on Economic Double
Taxation – 2 options
a) Englobamento – declaring only
half of dividend together with
other income taxed at marginal
rates (0- 42 per cent) or
b) Tributação Autónoma – Declaring
the full dividend – independent
flat rate assessment at 20 per cent;
+ c) Elimination of International
Double Taxation: apply
international tax credit as per DTC;
III. Dividends paid by Companies in other countries worldwide
1) Reporting Income: declaring along
with other income (englobamento);
2) Assessment: at marginal rates
(0-42 per cent);
3) International Double Taxation – DTC
rules may apply.
Next: Rental Income
Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a. Consultations can be scheduled in Guia (Albufeira) 289561333, Lisbon (Chiado) 21342421 and in Funchal (Sé), Madeira 291221095.
