Registration – Classification of Companies; Taxation
The concept of ‘pure holding companies’ has been introduced to the Portuguese companies legislation. ‘Sociedade de Gestão de Participações Sociais’ (‘SGPS’) were first instituted by Decree-Law 494/88 of 30 December 1998, were later amended by Decree-Law 318/94 of the 24 December 1994 and were last amended by Decree-Law 378/98 of 27 November 1998.
Highlights of the ´Sociedades de Gestão de Participações Sociais´ Legal Framework
SGPS are defined in Art 1 of the applicable law as:
´Companies that have as a main exclusive object to hold shares in other companies and to administer them as an indirect form of exercising an economic activity´.
SGPS are fundamentally characterised in the Portuguese legal system by the limits to the percentage of the share capital they can hold in other companies, the impossibility of exercising activities other than administrating participation held in the share capital of other companies and their very specific and advantageous fiscal regime.
In relation to the first aspect (the percentage limits of the shares they can hold) Art 1 (2) stipulates that: ?As a consequence of the exercise of an indirect economic activity (the prerequisite of the “SGPS” companies object as per Art 1 (1) ) SGPS will hold at least 10% of the share capital, with the right to vote, in the participated companies´. This participation cannot have a temporary character, and as a result, must be held for a period of more than two consecutive years.
However in certain circumstances, as those stipulated in Art 4, the company can hold smaller proportions of the share capital of other companies.
´SGPS´ cannot carry out other activities than those foreseen in Art 1 (1) and certain specific activities are expressly forbidden in Art 5.
In certain circumstances as those stipulated in Art 4 however, they will be able to sign contracts for the supply of specialised technical services.
Finally with regard to the tax regime of ´SGPS´ companies, Art 7 stipulates that 95% of the profits distributed by the participated companies to the SGPS are tax exempt, the remaining 5% being taxed at the normal rate of 34%. The sale or exchange of shares will be exempt from capital gains tax if the (resulting net gains) are reinvested within the next two years.
Article 3 sets out the conditions that must be observed in case of holding less than 10% in the share capital of the participated company. This Article was first amended by Decree-Law 318/94 and is now amended by Decree-Law 378/98 so that SGPS companies will be able to hold less than 10% of the share capital, with a right to vote, in the following cases:
1. If the total proportion of the shares carrying a right to vote does not exceed 30% of the financial investments of the holding company based on the last approved balance sheet. In the year of constitution of the company, this amount will be reported in the balance sheet of that year. If for whatever reason such percentage is exceeded, than the company will have six months from the date of its verification to bring such amount within the authorised legal limits;
2. If the value of the acquisition of each participation is not less than 1 bn escudos (US$5.6m) in accordance with the last approved balance sheet;
3. If the acquisition comes as a result of merging or division of the participated company; or
4. If the shares are held in a company with which the holding company has signed a subordination agreement.
As already outlined above, in the conditions laid out by Art 4 of the law in question, the SGPS can sign contracts for the supply of specialised technical services. Contracts can fundamentally be signed with subsidiary related companies and companies with which the holding company has a subordination contract. The present law determines that such contracts must be in the form of a written agreement containing a specific identification of their remuneration.
Article 5 specifies the type of activities in which an SGPS company cannot engage. Amongst others, an SGPS may not sell, or any otherwise dispose of, shares held for less than one year. Exception is made for those shares where the proceeds of the transaction is reinvested by the end of the second accounting period, following the date of the transaction in question.
Article 8 determines that SGPS companies engaging in activities other than ones stipulated in Art 1, or any other types of companies acting as SGPS´s, although not being legally constituted as such, will be wound up by the court.
Article 9 deals with the obligation of delivering annually to the tax inspection department (Inspeccao Geral de Finanças) a declaration of the analysis of the financial investments included in the last approved balance sheet. Failure to comply with this requirement will result in an official notification by the said legal department to do so in ten days.
Violation of the dispositions of the Decree-Law as amended will result, as per Art 13, in the application of fines and, in certain cases, the winding up of the company.