Would Portuguese CFC rules apply to UK entity, UAE entity

[walako]

Hi all!
I am confused by some basic CFC rules in Portugal and its interpretation.

1) Would Portuguese CFC rules apply to a UK Holding Co, if that owned by a Portuguese tax resident?
Or if the UK tax authorities impose 25% CIT rate - that eliminates that the non-resident entity is a subject to a clearly more favorable tax regime? In my understanding the UK entity has no tax privilege comparing 25% UK CIT rate vs 21% Portugal CIT rate, so the owner of CFC does not seek a lower tax. Is that correct? No need to report?

I do not speak Portuguese, so I was just using some interpretations on consultancy web sites:

Portuguese CFC legislation applies when a Portuguese resident entity, directly or indirectly, holds a participation of 25% or more in a non-resident entity subject to a clearly more favorable tax regime, or 10% or more of its capital where more than 50% of the capital is owned (directly or indirectly) by Portuguese resident participants (effective 4 May 2019, the condition of 10% has been repealed).

2) Free tax UAE zone entity owned and managed by Portuguese resident - would be by default a CFC (regardless that it is a trading co with real b2b activity)?

Thank you!

 

[JustAnotherNomad]

CFC rules aren't your only problem. If you do any kind of work (incl. management activities) for the foreign company from Portugal, Portugal can tax the company like a local company. It has nothing to do with CFC rules.
That's a very standard thing, as otherwise everyone would live wherever and register their company in a tax-free country and not pay taxes where they live.
So far, many NHR residents have simply hired cheap nominee directors in the other country (Malta and Cyprus are popular - probably because they are EU countries), so that they can claim that they are only passive investors and not involved in the business at all in Portugal. And so far, it seems like the PT tax authority hasn't come after them.
But in theory, that could change any time. They wouldn't have to change any laws, it would simply be a change in how they enforce the existing rules. Such a nominee setup wouldn't hold up in a proper investigation.

 

[walako]

dear JustAnotherNomad
Thank you for the response!

I am aware about PoEM issue that is super crucial. Most likely that is impossible to avoid, given that the key shareholder/director lives in PT, company rents office there for contractors and top managers.

In the worst case scenario with the PoEM (PE) - does that mean that profits taxed at CIT rate in the UK, and then Portugal applies additional 21%? Can it be set off?

I know about nominees - also can't say that that is cheap meaning that exclusive director costs money in CY and MT, and search of a right person is super complicated. In each case, the company is not aiming to work with nominee, and in none cases chase NHR benefit. I am looking for a solution, which would be an attractive for a potential investor.

I am really stuck with understanding the CFC rules enforcement - firstly I was confident, that UK Holding Co would be a CFC from the Portuguese perspective - with the obligation to pay 28% on undistributed profits, and then after learning some web sites of law firms - looks like there is no tax privilege with the UK entity. So CFC rules won't apply.

 

[JustAnotherNomad]

It's not only about the place of effective management, it's also about permanent establishment.
But if you have an office there and multiple people working as well, yeah, I guess it's pretty safe to say that the company will be taxed in PT.
But is that for your operative business or the holding? Because a holding typically doesn't have a lot of activities, so if you're in the UK from time to time, I guess you could explain to the PT authorities that you only manage the company from the UK (that might not work in other countries, but maybe it would in PT).

I don't know much about PT. Generally speaking, the company would have a tax liability to both countries under their respective domestic law.
So both countries would ask for the taxes. The tax treaty would clarify how that situation should be resolved so you don't pay the same tax twice.
In some cases, you would get credit for tax paid in the other country, but if the company has no operations in the UK, then the UK would most likely agree that taxes should only be paid in PT (see also this thread: The treaty non-resident UK Ltd. - the best-kept offshore secret? ). But it would really depend on the specific tax treaty.
In general, I wouldn't worry too much that you would have to pay tax twice - but there may be a lot of paperwork. The worst case would be that you'd have to pay tax twice and then apply for a refund.
I'm not sure how much fun that is in PT, but I would guess it should work relatively well in the UK at least.

I don't believe it would be a CFC, but it's been a long time since I looked into those rules.

Regarding your other question, I believe CFC rules only apply to companies with 50%+ passive income (unless something has changed)? So if the UAE company has active operations, then it shouldn't be a CFC, and it should also be fine for the NHR since there is a tax treaty with Portugal (or at least there used to be).
The only risk with the UAE company would be for it to be managed from Portugal or to have permanent establishment in Portugal.

But that's just my opinion as a layman - you should really consult with a competent Portuguese tax lawyer.

 

[walako]

Thank you @JustAnotherNomad for elaborating that!
My brain was oversimplifying and perception "PE" and "PoEM" as all the same sh*t, which is apparently different, and now I finally realised the difference.

Main purpose of UK Co is to play a Holding role and accept investments, give loans. No aim to generate profits in general.

I also have very little knowledge about Portugal. On one hand, the tax office is not that strict as German tax authorities, on the other hand there are many risks still. Also, the promoted low tax benefits are so much misleading - I struggle to get the correct point in the complexity of all issues.

Given the circumstances (physical presence of the director, key shareholders, office in Portugal; even lack of UK visa for the SH/Dir as of now) I personally stick with the idea that the Holding Co is very logical option. And going to the UK to create a Holding Co - would mean to create an additional headache. And that should have a clear purpose - if we decide so. Although, I am a lawyer, not a decision maker

Re UAE operating co entity looks true. I was wondering if simply the fact having an entity in the UAE regardless other conditions makes it CFC or not.

Ofc, I will engage formally with local lawyers with a proper advice. As of now I have some time and it is quite an adventure to check the things on myself.

UAE has corp tax rate around 9%, and Portuguese laws require that tax rate for CFC would be at least 60% of PT CIT - 12.6%, so I assume because 9% UAE CIT is lower than Portuguese CIT - that would lead to CFC rules. Regardless if UAE entity has 75% or more active trading income

"Entities domiciled or resident in a blacklist jurisdiction continue to be considered CFCs, regardless of other conditions." from EY website

 

[JustAnotherNomad]

Yes, but countries where there is a tax treaty don't count as blacklisted. There was a case a couple years ago where an NHR resident had a UAE company and wanted to receive the dividends tax free in Portugal (after paying 0% CIT in the UAE). He won over the PT tax authority in court. You can google it...

 

[European]

Yes, but countries where there is a tax treaty don't count as blacklisted. There was a case a couple years ago where an NHR resident had a UAE company and wanted to receive the dividends tax free in Portugal (after paying 0% CIT in the UAE). He won over the PT tax authority in court. You can google it...

Are you perhaps talking about this case (2360/2016) which was an NHR resident with a multi-member US LLC?

https://www.fresh-portugal.com/blog/the-tax-treatment-of-us-llcs-in-portugal
I could not find any with a UAE company. Would appreciate it if you happen to have the link

 

[JustAnotherNomad]

No, UAE. First Google hit:
https://cms.law/en/prt/publication/nhr-regime-dividends-from-dubai
The US LLC article was really interesting though!! Never heard of that before, thanks for that. Bet @Marzio will find it interesting, too.
But wouldn't that be a hybrid mismatch, which the new ATAD stuff explicitly tries to tackle?

 

[Marzio]

Bet @Marzio will find it interesting, too.

Indeed!

But wouldn't that be a hybrid mismatch, which the new ATAD stuff explicitly tries to tackle?

Yes that's exactly what ATAD is trying to fight.

I think the more relevant parts are:

1. Only companies that are professional societies or companies for simple administration of assets could be tax transparent in Portugal

2. Company was neither managed not directed from Portugal

A US LLC that's taxed as a partnership and not managed from PT could be tax exempt under NHR.

Assuming this interpretation will hold, to achieve 0% taxation you need a LLC with at lest 2 partners where the managing partner is tax resident in a 0% jurisdiction (since management needs to be documented)

 

[European]

No, UAE. First Google hit:
https://cms.law/en/prt/publication/nhr-regime-dividends-from-dubai
The US LLC article was really interesting though!! Never heard of that before, thanks for that. Bet @Marzio will find it interesting, too.
But wouldn't that be a hybrid mismatch, which the new ATAD stuff explicitly tries to tackle?

Thanks.
That article does not talk about the management structure of the company in Dubai, which is what I was most interested in.
I guess you do not have the id for the court ruling, or similar, to see the details?

 

[JustAnotherNomad]

No, I don't, unfortunately. Maybe you can contact them? I guess any PT tax lawyer should also be able to find out the case details.