Contents:
- Corporate Capitalisation Incentive (“ICE”)
- Tax Incentive for Wage Increases
- Participation Exemption: Corporation Tax exemption on dividends and capital gains
- Corporate Capitalisation Incentive (“ICE”)
Framework and operation
The ICE allows companies with their registered office or effective management in Portugal to deduct from their corporation tax an amount calculated by applying the 12-month Euribor (period average, calculated on the basis of the last day of each month), plus a spread of 2%, to the net increases in eligible equity recorded during the tax period.
In 2025 and 2026, the deduction will be increased by 50% and 20%, respectively.
Eligible taxpayers
This tax benefit applies to commercial companies or civil law entities operating as commercial entities, cooperatives, public enterprises and other legal persons, provided that:
- They do not carry out financial or insurance activities;
- They maintain organised accounts and comply with sectoral rules;
- They do not determine profit using indirect methods;
- Their tax and social security affairs are in order
Limits
In 2025 and 2026, the deduction may not exceed the greater of the following amounts:
- €4,000,000; or
- 30% of taxable EBITDA (profit for the period before depreciation, amortisation, net finance costs and taxes).
Any amount exceeding the limit set out in point (b) may be deducted over the following five periods, after the deduction for the period in question and subject to the same limits.
Eligible capital increases
Under the law, the following shall constitute eligible increases in equity:
- Cash contributions upon the formation or increase of capital;
- Contributions in kind through the conversion of receivables into capital;
- Share premiums;
- The allocation of distributable accounting profits, in accordance with company law, to retained earnings, reserves or a capital increase.
With regard to point (iv), it should be noted that profits are only distributable, and thus only relevant, after losses have been covered and the statutory reserve (or other statutory reserves) has been established.
Finally, a net increase is also required, meaning that eligible increases must exceed outflows (capital reductions, asset distributions and distributions of reserves or retained earnings).
Exclusions
The following are not considered eligible capital increases:
- Cash contributions financed by eligible equity increases in another entity;
- Cash contributions from entities in special relationships financed by loans granted by the taxpayer (or by related entities) in the same period or in the six preceding periods, unless it is proven that the loans were used for other purposes.
2. Tax Incentive for Wage Increases
The tax incentive for wage increases takes the form of a scheme whereby the tax-deductible amount for payroll costs associated with wage increases is doubled, allowing these costs to be treated as 200% of their actual amount for the purposes of calculating taxable profit. In practical terms, eligible costs are doubled for tax purposes, thereby amplifying the impact of wage increases on the calculation of taxable profit.
Structure of the incentive
The incentive is based on an individualised increase per employee. When it is stated that the costs are considered at 200%, this means that the value of the cost is doubled exclusively for tax purposes. The scheme is applied on an employee-by-employee basis, with only the individually calculated costs for employees who meet all legal requirements being increased; there is no overall or automatic increase at company level.
Contributions covered by the scheme
For the purposes of the incentive, the contributions borne by the company in respect of employees’ basic pay and the social security contributions associated with that pay are relevant. Annual basic pay includes twelve months’ basic salary, as well as holiday pay and the Christmas bonus.The calculation of eligible costs is based on the actual annual basic salary paid, plus the corresponding social security contributions borne by the employer, excluding one-off payments, special bonuses or any non-recurring remuneration components.
Requirements regarding salary increases and average annual basic salary
Eligibility for the incentive depends on the cumulative fulfilment of two distinct requirements, both relating to salary trends compared to the previous period and operating on different levels.
Firstly, for the 2025 tax year, the increase in the company’s average annual basic salary must be at least 4.7%, with this threshold falling to 4.6% in 2026. This requirement assesses the overall evolution of the company’s salary structure, using the average of the annual base salaries paid at the end of the previous period as a reference.
Secondly, the increase in the annual base salary of employees earning salaries equal to or below the company average must also be at least 4.7% in 2025 and 4.6% in 2026. This criterion acts as an internal balancing mechanism, ensuring that pay rises are not concentrated solely at the highest pay levels.
The company’s average annual basic salary corresponds to the arithmetic mean of the annual basic salaries in force at the end of the previous period, calculated on the basis of the basic salaries actually paid. This calculation takes into account all employees, regardless of their role, hierarchical level or the nature of their duties.
Eligible employees
The incentive applies only to employees on permanent contracts (or contracts of indefinite duration), as well as to those on fixed-term contracts that have been converted to permanent contracts. Furthermore, only employees covered by collective labour agreements concluded or updated within the last three years are eligible, a requirement that remains in place for both 2025 and 2026.
Collective labour agreement
The law requires that pay rises be set out in collective labour agreements (IRCTs). These may be negotiated or non-negotiated. For the purposes of the Wage Enhancement Tax Incentive, only negotiated IRCTs are considered, specifically collective labour agreements, adhesion agreements and arbitral awards in voluntary arbitration proceedings. However, there is consensus regarding the inclusion of extension orders (non-negotiated IRCTs).
Exclusions and the maximum limit on contributions eligible for the surcharge
Certain employees do not generate contributions eligible for the surcharge, particularly in situations where the employee exercises significant control over the company (holding, directly or indirectly, a stake of at least 50% of the share capital or voting rights) or where there are direct family ties with the employer.
Furthermore, the scheme sets an annual ceiling on the contributions eligible for the surcharge, defined by reference to the guaranteed minimum monthly wage. In 2025, with the guaranteed minimum monthly wage set at €870, the annual limit on allowable expenses per employee is €4,350. In 2026, with the guaranteed minimum monthly wage set at €920, the annual limit will be €4,600.
Contributions exceeding this amount remain a standard tax-deductible expense, albeit without the surcharge.
3. Participation Exemption: Corporation Tax exemption on dividends and capital gains
As a rule, company profits are subject to corporation tax. The problem arises when these same profits are taxed again upon distribution to another company within the group (dividends) or when there are capital gains on the sale of shares. This is where the participation exemption regime comes into play, created to avoid so-called economic double taxation.
Put simply: the same profit cannot be taxed twice simply because it circulates within a corporate group, even if it is in different forms and involves different taxpayers.
What is the participation exemption regime?
This is a tax regime that allows dividends received by a Portuguese company, as well as certain capital gains resulting from the sale of shareholdings, to be excluded from the calculation of taxable profit for corporate income tax purposes, provided that certain legal conditions are met; it applies to companies with their registered office or effective management in Portugal.
When are dividends exempt from corporation tax – requirements
Profits and reserves distributed by a company are not subject to corporation tax if all of the following requirements are met cumulatively:
- The beneficiary entity holds at least 10% of the share capital or voting rights of the entity distributing the profits (dividends);
- That holding has been held continuously for at least one year (i.e. maintained until that period is reached);
- The beneficiary company is not subject to the tax transparency regime;
- The entity distributing the profits is subject to, and not exempt from, corporation tax (IRC), or an equivalent tax, with a statutory rate of not less than 60% of the general corporation tax rate (19% for 2026), i.e. 11.4%;
- The entity distributing the profits is not resident in a country or territory considered a tax haven.
What about capital gains?
The scheme is not limited to dividends. Capital gains realised on the sale of shares may also qualify for the participation exemption, provided that essentially the same requirements applicable to dividends are met.
There is, however, a significant limitation: there is no exemption where the company whose shares are being sold has more than 50% of its assets comprising property situated in Portugal, unless such property is used for an economic activity other than the mere purchase and sale of property.
Situations in which the regime does not apply
The law expressly excludes the application of the participation exemption where:
The distributed profits correspond to deductible expenses at the level of the paying entity;
The corporate structure has no valid economic reasons or does not reflect real economic substance;
The reporting obligations to the Central Register of Beneficial Owners (RCBE) have not been met, or where the beneficial owners are located in tax havens, without sufficient proof of the existence of valid economic reasons or real economic substance.
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