Portugal has the ninth highest taxation on dividends of OECD countries
Taxes on dividend payouts to shareholders in Portugal are the ninth highest from the OECD countries.
IRS tax on dividends is set at 28% for individual investors, 23 percentage points below Ireland – the country that has the highest tax on dividends at either 20% or 40% depending on tax bracket.
However, Portugal is four points above the average according to a report from the same organisation.
The average tax on dividends for the OECD countries is 24%, 27 percentage points below Ireland, the country that taxes the most. Ireland is also the only country that takes 51% or just over half of shareholder payment.
Denmark and the United Kingdom follow, at 42 percent and 39.4 percent, respectively. Estonia and Latvia are the only European countries covered that do not levy a tax on dividend income. This is due to their cash-flow-based corporate tax system. Instead of levying a dividend tax, Estonia and Latvia impose a corporate income tax of 20 percent when a business distributes its profits to shareholders.
Of the countries that do levy a dividend tax, Greece has the lowest tax rate at 5 percent, followed by Slovakia at 7 percent.
In many countries, corporate profits are subject to two layers of taxation: the corporate income tax at the entity level when the corporation earns income, and the dividend tax or capital gains tax at the individual level when that income is passed to its shareholders as either dividends or capital gains. Some countries, however, have integrated their taxation of corporate and dividend/capital gains income to eliminate such double taxation.
In the case of internationally listed companies, the situation is more complex given that taxes are levied in the country where the company is registered for tax purposes at a specific rate and also in the country where the investor pays taxes (double taxation) and this is the case with Portugal.
“Dividends distributed by overseas companies to their shareholders are capital gains subject to taxation at source in the country where they are paid out, in accordance with the current tax rate applied in that country, and in the taxpayer’s tax domicile”, a tax specialist from Portuguese consumer watchdog Deco Proteste, Ernesto Pinto told the business daily Negócios analysing the tax on dividends.
This means that the situation will only increase the amount of tax paid by the investor on their shares held by a company based overseas.
To avoid this double taxation situation, the Portuguese Government has signed tax agreements with several countries to either eliminate or mitigate double taxation, a case in point being the US.
Portugal has double taxation agreements with Algeria, Andorra, Angola, France, Switzerland, Tunisia, Turkey, UAE, UK, Uruguay, UA, Ukraine, Venezuela and Vietnam and many other countries – 79 all told.
However, the process is not automatic and quite bureaucratic. In order to avoid double taxation you have to ask the Portuguese tax authorities for a certificate of tax domicile that has to be given to the company that pays the dividends or ask for a tax credit when filling out your IRS.