Flash News NA 11/2021

United Kingdom – IRC(CIT) exemptions

The United Kingdom is no longer considered a Member State with the withdrawal of the European Union, this fact makes it impossible, from the outset, to apply the exemption provided for in the IRC Code for the receipt of dividends, interest and royalties paid by a Portuguese entity.

The United Kingdom is no longer a member state of the European Union, which, among other things, has brought about profound changes in the assumptions to be fulfilled by the entities that have their headquarters there, so that they can continue to benefit exemptions from IRC on the receipt of dividends, interest and royalties paid by a Portuguese entity.

For an entity to benefit from the exemption on interest and royalties, it is now required that, in addition to other requirements, the beneficiary entity be resident in a Member State of the European Union and to assume one of the permissible legal forms.

With the withdrawal of the United Kingdom from the European Union, it is no longer considered a Member State, which immediately precludes the application of the exemption provided for in the IRC Code.

Consequently, entities with headquarters in the United Kingdom who obtain this type of income in national territory, they have the right to invoke the Convention to Avoid Double Taxation signed between Portugal and the United Kingdom, to reduce the retention rate at source, whose domestic law sets at 25%.

Even so, in the best-case scenario, the application of the Convention to Avoid Double Taxation represents only a reduction of the withholding tax rate to 10% in the case of interest and 5% in the case of royalties.

Contrary to what was verified for interest and royalties, despite the United Kingdom's departure from the European Union, an entity that has its head office in that territory can still apply the IRC exemption in national territory in relation to the dividends that are obtained here, not under the designated "Mothers and Daughters" Directive, but under the provision of the IRC Code that provides for tax exemption in Portugal (by withholding tax), if four key requirements are cumulatively fulfilled.

However, it is in the verification of two of these requirements, the beneficiary's residence, and taxation, that the beneficiary entities residing in the United Kingdom may have to prove their eligibility for the purposes of the exemption provided for in Portuguese law.

Until the United Kingdom left the European Union, the residence requirement was verified by the simple fact that the company benefiting from the profits is resident in another Member State, from now on, for its verification, that entity must be resident in a State with which a Convention to Avoid Double Taxation is in force, which provides for the exchange of information, as is the case in the United Kingdom.

Regarding the taxation requirement, the beneficiary entity will have to demonstrate that it is subject to and is not exempt from a tax of a similar nature to the IRC and whose legal rate is not less than 60% of the IRC rate, when, until the date of departure, it would only have to demonstrate that it is subject to, and not exempt from, a corporate profits tax.

About the remaining requirements, namely the holding of more than 10% of the paying entity's share capital or voting rights, in an uninterrupted manner, during the year prior to the distribution of profits, its application remains unchanged, so there is no glimpse of additional complexity.

On the other hand, this exemption from IRC is no longer applicable to profits paid or made available to a permanent establishment located in the United Kingdom of an entity eligible for the purposes of the "Mothers and Daughters" Directive, as will be the case, for example, of a branch in the United Kingdom of a Spanish company that holds shares in a Portuguese company.

In other words, although the company may be eligible for the purposes of the application of the directive, the UK branch of that company will no longer be able to take advantage of the exemption from taxation on profits paid to it by the Portuguese company, as has been the case to date the UK's exit from the European Union.

 

At Nominaurea we can help you and your company to clarify any doubts about the changes caused by the United Kingdom's departure from the European Union.We are looking forward for your contact!