According to Article 2 of the Tax Benefits Code, tax benefits are an exceptional measure implemented to safeguard relevant extra-fiscal public interests, involving a tax advantage or tax reduction when compared to the normal taxation regime. In this sense, tax benefits refer to advantages or incentives granted by the Government to reduce applied taxes. There are also other tax mechanisms focused on the promotion of tax exemptions and tax credits, among other forms of tax relief.
Pursuant to the Portuguese tax legislation, Venture Capital / Private Equity funds are covered by a set of tax benefits. One of the main benefits associated with this type of investment consists on exempting these instruments from Corporate Income Tax (CIT), provided that these are established and operated by national legislation, as stipulated in Article 23 of the Tax Benefits Code.
Concurrently with the above and in accordance to the Personal Income Tax (PIT), income derived from Participation Units (PU’s) held in venture capital / private equity funds, paid or made available to their unit holders, enjoy a reduced withholding tax of 10% or 0%, depending on whether the holders of these PU’s are tax residents or non-tax residents in Portugal, respectively. These tax rates are applicable to both individual investors or companies. The exception to this rule lies on the scenario of investors (individuals or companies) residing in countries, territories and regions that provide a more favorable tax regime (blacklisted jurisdictions).
Venture Capital / Private Equity funds are also covered by other tax incentives, such as the below:
- Tax Scheme for Investment Support (RFAI) – scheme that allows companies to deduct a percentage of the investment made in non-current assets (tangible and intangible) from their tax return;
- System of Tax Incentives for Business Research and Development (SIFIDE II) and;
- Regime of Deduction for Retained and Reinvested Profits (DLRR). A tax incentive regime for investment in favor of micro, small, and medium-sized enterprises (SME’s).
Regarding SIFIDE II, it is important to note that the tax benefits that result from this incentive impact companies and not investment funds directly. However, funds are affected based on the nature and purpose of investments made in companies that qualify as eligible for this type of tax incentive. Therefore, the investment in SIFIDE II funds presents as a main tax benefit the possibility of deducting eligible expenses related to R&D activities in the CIT. Hence, leading to a reduction in applicable deduction rates.
In summary, the tax benefits resulting from investments in venture capital / private equity funds allow for:
- Exemption or Reduction of the tax burden on the income received from the investments made, encouraging, and attracting investors to invest;
- Favorable tax treatment for funds, positively determining the investor’s returns;
- Tax Credits for Investments in Startups, as these can represent a percentage of the total investment and help offset the risk associated with investments in early-stage companies;
- Companies investing in Funds may heavily reduce their tax burden if invested in eligible venture capital funds.
Finally, it is important to note that tax benefits and respective incentives are subject to budgetary and fiscal changes.
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