Have you heard of the Tax Transparency Regime? This regime applies to several types of businesses in Portugal and can raise a number of questions when it is applied for the first time.

To clarify the main issues, we explain how this regime works in practice and the key aspects you should be aware of.

Tax Transparency Regime: What is it and who does it apply to?

The Tax Transparency Regime, or TTR, is provided for in the Portuguese Corporate Income Tax Code (CIRC), namely in Article 6.

In force in Portugal since 1989, its main objectives are to promote tax neutrality, eliminate the economic double taxation of distributed profits and combat tax evasion.

In practice, the TTR provides that income earned by certain companies is not taxed at the company level under IRC, including:

• civil companies not incorporated in a commercial form;
• companies engaged in the simple administration of assets, where the legally defined criteria are met;
• professional companies.

What does this mean in practice?

It means that the taxable income calculated by these companies is attributed directly to their partners or shareholders, whether they are individuals or legal entities.

In simpler terms, the TTR provides for the taxable income to be attributed to the partners or shareholders and, where they are individuals, taxed under Personal Income Tax (IRS) as Category B income.

Therefore, there is generally no IRC taxation at company level, except in situations specifically provided for by law.

Who does the regime apply to?

The Tax Transparency Regime applies mainly to three types of companies:

• civil companies not incorporated in a commercial form;
• professional companies;
• companies engaged in the simple administration of assets, owned by family groups or whose share capital is held by no more than five partners, provided that none of them is a public-law legal entity.

Under Article 980 of the Portuguese Civil Code, civil companies not incorporated in a commercial form are companies whose corporate purpose is not the performance of commercial acts, although they may still have a profit-making purpose.

Professional companies, as provided for in Article 6(4) of the Corporate Income Tax Code, are established to carry out a specific professional activity included in the list of activities set out in Article 151 of the Personal Income Tax Code.

In addition, all partners in this type of company must be individuals who practise the relevant profession.

Examples include architects, engineers, musicians, accountants, nurses, lawyers, doctors and other professionals.

Finally, a company engaged in the simple administration of assets is one whose activity is limited to managing assets or values held as reserves or for enjoyment, or to acquiring properties intended for the residence of its partners.

This definition also covers companies that carry out other activities simultaneously and whose income from asset administration represents, on average over the previous three years, more than 50% of their total income.

How should this obligation be reported?

Where a partner is an individual, income covered by the Tax Transparency Regime must be reported in the Modelo 3 IRS tax return.

In this case, Annex D – Attribution of Income must be completed.

Where the partner is a company, it must submit the IES, together with Annex G.

The Tax Transparency Regime is a broad and sometimes complex subject. The best way to ensure that all your tax obligations are properly complied with is to seek advice from a certified accountant.

For more information about the Tax Transparency Regime, contact us!