When a Portuguese company distributes profits to its shareholders, that income — known as a dividend — is subject to tax. However, how that tax is calculated depends heavily on one key factor: is the shareholder a Portuguese tax resident or not?
In this article, we explain in simple terms how dividend taxation works in each of these scenarios.
What Are Dividends?
Dividends are the portion of a company’s profits distributed to its shareholders. For the recipient, they are classified as capital income and are therefore subject to personal income tax, known as IRS in Portugal.
Shareholders Resident in Portugal
If the shareholder lives and pays taxes in Portugal, the company is required to withhold 28% of the dividend amount before payment — this is known as withholding tax. This amount is paid directly to the Tax Authority by the company itself, with no action required from the shareholder.
In practice, if the company decides to distribute €10,000, the shareholder receives €7,200 and the remaining €2,800 goes to the State.
What If the Shareholder Wants to Pay Less Tax?
In some cases, it may be advantageous to opt for aggregation, known in Portugal as englobamento, meaning the dividends are combined with other income and subject to the progressive IRS rates. This option makes sense for those with lower total income — but bear in mind it requires aggregating all capital income for the year, not just dividends.
In this case, provided the company has paid corporate tax, known as IRC in Portugal, on its profits, only 50% of the dividends are taxed, which can result in a lower overall tax burden.
Shareholders Not Resident in Portugal
When a shareholder lives outside Portugal, the general rule is similar: the company withholds 28% at source, and this tax is considered final — the shareholder does not need to submit a Portuguese IRS return.
Countries with a Tax Treaty with Portugal
Portugal has tax agreements with more than 80 countries, known as Double Taxation Conventions. These agreements can significantly reduce the withholding tax rate, typically to between 5% and 15%, depending on the shareholder’s country of residence and the size of their stake in the company.
To benefit from the reduced rate, the shareholder must present the company with the RFI form — duly certified by the tax authorities of their country of residence — before receiving the dividends.
Countries Without a Tax Treaty with Portugal
When the shareholder’s country of residence has no tax agreement with Portugal, Portuguese domestic law applies in full, meaning the company withholds 28% on the total dividend amount, with no reduction possible.
In these cases, there is a real risk of double taxation: the shareholder pays tax in Portugal and may also have to declare and pay tax on the same income in their country of residence. Without an agreement between the two countries, it falls to each country’s domestic law to determine whether any relief mechanism exists, such as a tax credit for taxes paid abroad.
The practical result can be a significant tax burden, making dividend distributions less attractive for shareholders residing in such countries. In these situations, advance planning and exploring alternative approaches is especially important.
Shareholders Resident in the EU or European Economic Area
Shareholders residing in another EU or EEA country, such as Norway or Iceland, may, under certain conditions, elect to be taxed as if they were Portuguese residents, benefiting from the same rules — including the 50% reduction on aggregated dividends.
Residents in Tax Havens
If the shareholder resides in a territory classified as a tax haven, listed in an official list published by the Portuguese government, the withholding tax rate increases to 35%, with no possibility of any reduction.
Summary
| Resident in Portugal | EU/EEA Resident | Treaty Country | No Treaty / Tax Haven | |
|---|---|---|---|---|
| Withholding rate | 28% | 28% or reduced rate | 28% or reduced rate | 28% / 35% |
| Double tax risk? | No | No | Low | Yes |
| Treaty reduction? | — | Yes | Yes | No |
| Aggregation option? | Yes | Yes, under certain conditions | No | No |
Planning Ahead Makes a Difference
Dividend taxation may seem straightforward on the surface, but it involves several nuances — from the need to submit documents before payment, to assessing whether income aggregation is beneficial, to the risk of double taxation when no tax treaty exists between countries.
If you are a shareholder in a Portuguese company and have questions about optimising profit distributions, there may be solutions tailored to your specific situation.