In a world of mobility and migration, entrepreneurs often relocate to other countries, taking their businesses with them. When that happens, it is important to assess the tax impact of the move not only on the shareholder, but also on the company they own.
For Australian business owners relocating to Portugal, moving from Australia to Portugal tax issues may involve personal income tax, dividend and capital gains taxation, exit tax issues in Australia, and possible corporate tax consequences if the company’s place of effective management shifts to Portugal.
Moving From Australia to Portugal Tax: Why Business Owners Need to Plan Ahead
For business owners, moving from Australia to Portugal tax planning should cover both the shareholder’s personal tax position and the company’s possible exposure to tax in Portugal.
1. What happens to a shareholder’s tax position if he or she relocates from Australia to Portugal?
Dividends and capital gains on shareholdings
If a shareholder owning an Australian company relocates from Australia to Portugal, he or she will generally become a tax resident of Portugal for purposes of Portuguese personal income tax (IRS).
As a Portuguese tax resident, dividends received from Australian companies are typically taxed at a flat rate of 28%, unless aggregation applies. Capital gains on shares are also generally taxed at 28%, subject to exemptions, reliefs or treaty provisions.
No automatic step-up for capital gains
Upon relocation to Portugal, there is generally no automatic step-up in the tax basis of shares to fair market value.
This means that capital gains realised after becoming a Portuguese tax resident may include gains accrued prior to immigration. For that reason, pre-relocation planning is particularly important.
No step-up for dividends
Dividends distributed by Australian companies to a Portuguese resident shareholder are fully taxable in Portugal.
Australia may levy withholding tax on dividends, generally up to 30%, but often reduced to 15% under the Portugal–Australia tax treaty, and potentially 0% for fully franked dividends. Any withholding tax may be creditable in Portugal, subject to limitations.
Controlled foreign company (CFC) rules
Portugal’s CFC rules may apply depending on the effective taxation and nature of the Australian company’s income.
Although Australia is not considered a low-tax jurisdiction, certain structures or income types could still trigger CFC inclusion of undistributed profits in the hands of the Portuguese resident shareholder.
Anti-abuse provisions and shareholder transactions
Transactions between the shareholder and the Australian company, such as loans or other financial arrangements, must comply with arm’s length principles.
Portuguese tax authorities may recharacterise arrangements that are considered artificial or lacking economic substance.
Deemed employment or management income
If the shareholder performs management or executive functions from Portugal for the Australian company, remuneration may be taxable in Portugal as employment or self-employment income at progressive rates of up to 48%, plus applicable surcharges.
The Portugal–Australia tax treaty will be relevant in determining the allocation of taxing rights.
Non-Habitual Resident (NHR) regime / transitional regimes
Although the traditional NHR regime has been phased out for new applicants as of 2024, transitional or replacement regimes may still apply.
Historically, certain foreign-source income could benefit from exemptions, but eligibility now depends on specific transitional provisions.
Australian exit tax considerations
Australia applies a form of exit tax when individuals cease to be tax residents.
This generally involves a deemed disposal of certain assets, unless a deferral is elected, triggering capital gains tax on unrealised gains at the time of departure.
2. What happens to an Australian company’s tax position if its shareholder relocates to Portugal?
Managing dual residence
An Australian company is generally considered tax resident in Australia if it is incorporated there or if its central management and control is in Australia.
If the place of effective management shifts to Portugal, for example due to relocation of key decision-making, it may also be considered tax resident in Portugal. This could result in dual residence and potential double taxation on worldwide profits.
Single residence based on the Portugal–Australia tax treaty
The Portugal–Australia tax treaty provides tie-breaker rules to resolve dual residence situations, typically based on the place of effective management.
In practice, resolution may require agreement between the tax authorities of both countries.
Corporate exit tax in Australia
If a company ceases to be tax resident in Australia, it may be subject to deemed disposal rules for certain assets, potentially triggering capital gains tax on unrealised gains.
The specific implications depend on the company’s structure and asset profile.
3. What would be the Australian company’s tax position once it has become a tax resident of Portugal?
Corporate Income Tax
Once the company is considered tax resident in Portugal, based on its place of effective management, it becomes subject to Portuguese corporate income tax (IRC) on its worldwide income.
The standard rate is 21%, potentially increased by municipal and state surcharges, leading to an effective rate of up to approximately 31.5%.
Step-up for assets and liabilities
Portugal may allow a step-up in the tax basis of assets and liabilities, including goodwill, upon migration, depending on how the relocation is structured.
This ensures that only gains accrued after becoming Portuguese tax resident are subject to taxation.
Depreciation and amortisation
Assets recognised at fair market value may be depreciated or amortised in accordance with Portuguese tax rules, generating deductible expenses over their useful life.
Dividend withholding tax
Dividends distributed by a Portuguese tax resident company are generally subject to a 25% withholding tax, which may be reduced under the Portugal–Australia tax treaty.
As in other cases, there is typically no step-up for retained earnings accumulated prior to migration.
4. What would be an Australian entity’s tax position if its residence is relocated to Portugal?
If an Australian entity transfers its place of effective management to Portugal, it may become tax resident there, potentially leading to dual residence issues.
Portugal does not provide a straightforward mechanism for re-domiciling an Australian company into a Portuguese legal entity, such as a Sociedade por Quotas (Lda). Therefore, restructuring options, such as incorporating a new Portuguese entity or reorganising the business, should be carefully evaluated.
Migration may trigger tax consequences in Australia, including exit taxation and other adjustments depending on the structure and nature of the business.
Final remarks
Relocation as an individual to another country has significant personal income tax consequences. However, if the individual is also a business owner, the business itself may effectively relocate as well, resulting in a higher level of tax complexity.
This additional corporate tax dimension requires thorough analysis of the impact of the owner’s relocation on the company’s legal and tax status. For that reason, moving from Australia to Portugal tax planning should be addressed well ahead of the relocation itself.
If you have any questions, please feel free to contact us. We would be more than happy to share our international expertise on the legal and tax matters related to the cross-border relocation of business owners and their businesses.