Income is reported in different categories: A) Salaries, B) Sole Traders, E) Capital, F) Property, G) Capital Gains and H) Pensions and is taxable in Portugal regardless of its origin. For non-residents, only income actually arising in Portugal is subject to assessment.

When assessing Company profits, taxation occurs in a two-stage process: first, the Company pays Corporate Income Tax on its profits (IRC), then Shareholders pay Individual Income Tax on these distributed profits (now called dividends in IRS). This assessment procedure is referred to as “economic double taxation”.

Almost all countries in the EU have adopted one of several methods to mitigate “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 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% of reported dividends are subject to marginal income tax rates) minus a tax credit for withholding tax at source. If one elects to have dividends assessed autonomously from other income, the full dividend is taxed at a flat rate of 28% and no tax credits apply

Different Assessment Scenarios

1. Dividends paid by Portuguese Companies
• Tributação Autónoma - Withholding at source at flat rate of 28% (tax is final like bank interest) or
• Englobamento - Reporting together with other income at marginal rates (0 - 48%).
In this case, withholding at source acts as a tax credit applied to final assessment due.

2. Dividends paid by EU Companies
• 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;
• Elimination on “Economic” Double Taxation - 2 options
a) Englobamento - declaring only ½ of Dividend together with other income taxed at marginal rates (0 - 48%) or
b) Tributação Autónoma - Declaring the full dividend - independent flat rate assessment at 28%;
c) Elimination of “International Double Taxation”: apply international tax credit as per DTC;

3. Dividends paid by Companies in other countries worldwide
• Reporting Income: declaring along with other income (englobamento);
• Assessment: at marginal rates (0-48%);
• International Double Taxation - Double Tax Treaty rules apply.


Next: Rental Income

Dennis Swing Greene is an International Tax Specialist and Chairman of euroFINESCO s.a. www.eurofinesco.com