Proposed changes on the mechanisms to avoid the double taxation of dividends

The proposed draft of the 2011 Budget Law ("Proposed Budget 2011") includes relevant changes to the mechanisms to avoid the double taxation of dividends foreseen in Portugal, under the Portuguese Corporate Income Tax ("CIT") Code. Double taxation occurs because corporations pay taxes on their annual earnings and, when these corporations pay out dividends to the shareholders, those dividend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level. In addition, the Proposed Budget 2011 also includes changes to the withholding tax exemption rules on dividends distribution to EU corporate shareholders.