Why CFC Rules Exist

Without Controlled Foreign Company (CFC) rules, companies could shift profits to subsidiaries in low-tax jurisdictions and defer taxation until those profits were distributed to the parent.
CFC rules exist to neutralise this deferral, ensuring that certain undistributed foreign income is taxed immediately in the parent company’s jurisdiction or individual shareholder, even if no dividend has been paid.

CFC Framework in Portugal

A foreign entity is treated as a CFC if:

• The Portuguese tax resident (individual or company) directly or indirectly     controls at least 25% of its capital, voting rights or profits;     and
• The effective tax rate applicable to the foreign entity is less than 50% of     what it would have been under Portuguese CIT rules.

If both conditions are met, the non-distributed profits of that foreign entity may be imputed and taxed in Portugal, as ifearned by the Portuguese shareholder directly.

Key Exceptions

CFC income may be excluded when:

• The foreign entity carries out substantial non-passive economic activity supported by staff, equipment and premises.
• It operates in an EU or EEA Member State with which Portugal has an exchange of information agreement, unless the structure is     artificial or purely tax-driven.

In such cases, taxpayers can rebut the presumption ofartificiality by proving genuine commercial substance.

Practical Impact for Portuguese Investors

CFC risk is particularly relevant for:

• Portuguese residents holding offshore companies (e.g., in Malta, Cyprus, UAE or Caribbean jurisdictions);
• Portuguese parent companies with foreign subsidiaries benefiting from preferential regimes;
• IFICI or NHR taxpayers who assume their foreign income is automatically exempt — since CFC rules can override such exemptions if the underlying     entity qualifies as a CFC.

Takeaway

CFC rules are a preventive mechanism designed toensure that profits artificially shifted to low-tax jurisdictions are taxedas if earned in Portugal.

Before setting up or maintaining foreign structures, Portuguese investorsshould assess CFC exposure carefully — ideally with detailed modellingof effective tax rates, control thresholds, and substance tests.

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