Portugal: New tax regime for loan funds - A milestone for Portuguese financial sector

In 2019, Loan Funds were recognized as a form of alternative investment funds, triggering the interest of international investors. Unfortunately, the enactment of the regulatory framework was not matched by a corresponding tax framework. The special tax regime applicable to Loan Funds was finally enacted this Summer, paving the way to a new form of lending to Portuguese borrowers.

Loan Funds in a nutshell

Loan Funds are classified as alternative investment funds and are authorized to grant and acquire credits, including both performing and non-performing loans (NPLs). They can also participate in loans, subject to certain exceptions. The initial enthusiasm in the Portuguese lending market is now boosted by a clear and favourable tax regime for these vehicles and respective investors.

Loan Funds’ tax regime

According to the new regime, Loan Funds benefit from the same tax treatment as Venture Capital Funds (fundos de capital de risco), which is the most favorable tax regime available in Portugal for fund structures.

Taxation of the Fund

• Corporate Income Tax Exemption: Loan Funds are fully exempt from Corporate Income Tax on any income or gains.
• Stamp Duty Exemption: Unlike ordinary investment funds, which are subject to Stamp Duty on their net asset value periodically, Loan Funds will not be subject to this taxation. In practice, Loan Funds will operate as a tax neutral collective investment vehicle.
   

Taxation of the Investors

• Non-Resident Investors: Non-resident investors benefit from a full withholding tax exemption on distributions made by Loan Funds and on capital gains realized upon the redemption or disposal of participation units in the Loan Fund. This exemption does not apply to investors that are (i) legal entities directly or indirectly owned more than 25% by Portuguese-resident investors, or (ii) entities resident in blacklisted jurisdictions.
• Resident Investors: Resident investors can also invest in Loan Funds. For natural persons, a flat tax rate of 10% will apply to distributions and capital gains realized upon redemption or disposal of participation units, compared to the standard tax rate of 28%. For corporate resident investors, the primary benefit is the deferral of taxation, which will only occur upon distribution or disposal of participation units.
   

The enactment of this tax regime underscores Portugal’s commitment to fostering a dynamic and competitive financial sector. It represents a highly competitive funding mechanism, particularly when compared to the tax implications of cross-border financing structures taking into consideration that interest paid abroad pursuant to a bank facility is subject to withholding tax at a rate ranging from 10% and 25%.

If you wish to discuss these topics, please contact:

Vieira de Almeida (VdA)