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What's Transparência Fiscal (Fiscal Transparency) Regime?

By Bernardo Barbosa

Published on 22 January 2024

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In a broader sense, fiscal transparency is the extent to which government agencies provide comprehensive and timely information about their fiscal policies, practices, and financial positions to the public. 

In Portugal, however, fiscal transparency is the name given to a specific law separating corporate from personal taxes: the Regime de Transparência Fiscal.

Before looking at how overall fiscal transparency practices impact a government's budgetary objectives and help to fight tax avoidance, let's dive into the particularities of the Regime de Transparência Fiscal to understand how it can affect your Portuguese business.

How Does Portugal's Regime de Transparência Fiscal Work?

Portugal's Regime de Transparência Fiscal ensures that a company's profits are taxed even if such a company doesn't have a dividend distribution system. Despite being members of a company, professionals are expected to pay taxes for their profits not on behalf of the company, but on behalf of themselves as individual taxpayers.

IRS vs. IRC

In a nutshell, the Regime de Transparência Fiscal exists so certain types of Portuguese companies pay personal—instead of corporate—taxes on their profits. While most Portuguese companies must pay a corporate tax (IRC), companies affected by the Regime de Transparência Fiscal are expected to pay a personal tax (IRS).

Who is Affected by the Regime?

In Portuguese law, companies are classified as "Sociedades" and divided into various categories. The Regime is mandatory for three types of Portuguese Sociedades:

1. Sociedades de profissionais: Societal structures formed by professionals who perform intellectual, scientific, artistic, or technical services.

2. Sociedades civis não constituídas sob a forma comercial: A type of Sociedade in which the end goal is not to sell services, but rather to cooperate for a specific social, associative, and cultural goal.

3. Sociedades de simples administração de bens detidas por grupos familiares ou cujo capital social pertença a um número de sócios não superior a cinco e nenhum deles seja pessoa coletiva de direito público: Portuguese Sociedade in which business operations are centered around asset management, be it of real estate property, investments, or other financial assets.

How do I know if my Company is a Sociedade Profissional?

You should consider your company a Sociedade Profissional in case it fits into one of the following 15 categories:

1. Architects, engineers, and similar technicians.

2. Artists, actors, and musicians.

3. Bullfighters.

4. Economists, accountants, actuaries, and similar technicians.

5. Nurses, midwives, and other paramedical professionals.

6. Lawyers and solicitors.

7. Doctors and dentists.

8. Professors and similar technicians.

9. Notaries.

10. Psychologists and sociologists.

11. Chemists.

12. Priests.

13. Liberal professionals and similar technicians.

14. Veterinarians.

15. Other professionals working in the services sector.

For more detailed guidance regarding each professional category, including the correspondent professional code, consult the Portal das Finanças.

What's the Purpose of the Regime de Transparência Fiscal?

Fiscal transparency is all about helping governments to tax companies more efficiently and fairly. Portugal's Regime de Transparência Fiscal was introduced for three main reasons:

1. Incentivizing fiscal neutrality: It's based on the idea that singular taxpayers are best equipped to pay taxes, and should therefore be at the center of any fiscal system.

2. Reducing tax evasion: Sometimes, establishing a civil society is nothing but an excuse to prevent the members of such a society from paying taxes; the Regime de Transparência Fiscal has put an end to this clever scheme, reducing fiscal corruption in the country.

3. Preventing double taxation: Since members of a Sociedade are taxed at the personal level (IRS) instead of at the corporate level (IRC), double taxation is generally avoided.

In Portugal, tax compliance is ensured by the Autoridade Tributária e Aduaneira.

Is the Regime de Transparência Fiscal Beneficial for Companies?

While the Regime de Transparência Fiscal can be indirectly beneficial for companies, it is mainly designed to strengthen a government's financial position. For the most part, Portuguese Sociedades try their best to avoid this regime.

The explanation is pretty simple. Whereas IRC is collected at a fixed rate of 21%, IRS is collected progressively and can be as high as 48%, translating into higher fiscal obligations for Portuguese businesses.

A Practical Example:

The Portuguese engineers João and Luís decide to start a company together, which legally qualifies as a Sociedade Profissional. Their share in the company is identical, meaning both João and Luís own 50% of their business.

In its first year, João and Luís's company proved to be a massive success, and the two engineers collected a whopping €100.000 in profits. So, how will these profits be taxed?

Without the Regime de Transparência Fiscal, João and Luís's company would pay IRC taxes for €100.000. With the Regime, João and Luís each are expected to pay IRS taxes for €50.000 each.

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Fiscal Transparency Beyond Portugal

As we've seen, fiscal transparency in Portugal refers to a very specific law. However, the broader concept of fiscal transparency is important all over the world, helping to shape tax regulations, improve fiscal forecasting and budgeting, and enhance fiscal reporting.

The IMF's Fiscal Transparency Code

Each nation has its own fiscal transparency practices, highly influenced by the local fiscal culture and country capacity. However, the IMF's Fiscal Transparency Code remains one of the highest-regarded documents designed to improve fiscal transparency and hold governments accountable, especially among IMF member countries.

The IMF's Fiscal Transparency Code relies on four fundamental pillars:

  • Pillar I: Fiscal reporting
  • Pillar II: Fiscal forecasting and budgeting
  • Pillar III: Fiscal risk analysis and management
  • Pillar IV: Resource revenue management

These four pillars coordinate the IMF's Fiscal Transparency Evaluation (FTE), which helps to assess a country's level of fiscal transparency. FTEs provide countries with much of the information they need to make a comprehensive assessment of how they can avoid fiscal risks and enrich their public finances.

Advantages of Promoting Fiscal Transparency

Promoting fiscal transparency is beneficial for the following reasons:

1. Accountability: When citizens have access to clear information about government revenues, expenditures, and policies, they can more effectively hold authorities accountable for how public resources are managed.

2. Market confidence: When citizens perceive that their government is open and honest about its financial activities, it fosters confidence and trust in the overall governance and economy of the country.

3. Resouce allocation: Transparency in budgeting and spending helps ensure that artificial and natural resources are allocated efficiently and effectively.

4. Socioeconomic development: By providing a clear picture of government priorities, spending, and revenue generation, fiscal transparency facilitates long-term planning and fosters an environment conducive to growth.

Good Fiscal Transparency Practices

Last but not least, let's look at some of the practices that respect the fiscal transparency principle:

1. Timely budget publication: Timeliness is crucial to ensure that citizens, businesses, and investors have up-to-date information for planning and decision-making.

2. Comprehensive financial reporting: Governments should issue regular and comprehensive financial reports that present the government's financial position, performance, and cash flows.

3. Public debt transparency: This allows stakeholders to assess the sustainability of the government's debt position.

4. Public participation: Engaging citizens in the budgetary process through consultations, public forums, or other mechanisms fosters inclusivity and allows citizens to provide input on budget priorities.

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Written by Bernardo Barbosa

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