The Incentive to the Capitalisation of Companies (Incentivo à Capitalização de Empresas – “ICE”), introduced by the 2023 State Budget, was implemented in the broader context of the discussions at EU level surrounding the proposed Debt-Equity Bias Reduction Allowance (DEBRA) initiative, by promoting equity financing through the introduction of a notional interest deduction – the tax incentive. By establishing a "notional interest" deduction system with deductibility caps that are significantly more generous than those applicable to net financing costs under the general Portuguese interest barrier rule, the ICE has effectively enabled a hybrid approach to corporate capitalisation – one that combines the economic substance of equity with a tax deduction that mirrors the treatment traditionally reserved for debt financing. 

As a relatively recent incentive, it quickly became one of the most relevant tax tools for companies operating in Portugal.

As a brief recap of the ICE regime, in its current form – following the amendments introduced by Laws 20/2023, 82/2023 (State Budget for 2024), and 45-A/2024 (State Budget for 2025) – the ICE operates as follows:

  • Deduction mechanism: The incentive operates by deducting from the taxable profit an amount now calculated by reference to the average 12-month Euribor rate of the relevant tax period, plus a spread of 2 percentage points, applied to the net eligible capital increases.

  • Cumulative base: The deduction is determined by reference to the sum of the net eligible capital increases in the current tax period and in each of the six-preceding tax periods. Only net eligible increases occurring in tax periods beginning on or after 1 January 2023 are taken into account.

  • Deductibility cap: The annual deduction cannot exceed the higher of EUR 4 million or 30% of the tax-EBITDA. Unused deductions may be carried forward for five years. By contrast, under the general Portuguese CIT rules, net financing costs are deductible up to the higher of EUR 1 million or 30% of the tax-EBITDA (“interest barrier rule”). This creates a remarkable incentive for structuring inbound investment through share capital contributions (or a combination of share capital and debt) rather than through pure debt financing. Moreover, the ICE deduction cap accumulates with the general deduction for net financing costs, and, therefore, companies may benefit from a combined annual tax deduction significantly exceeding what would be possible under a purely debt-financed structure.
  • Eligible capital increases comprise: (i) cash contributions in the incorporation of companies or capital increases; (ii) in-kind contributions within a capital increase corresponding to the conversion of credits into capital; (iii) share premium; and (iv) the allocation of distributable accounting profits to retained earnings, free reserves, or directly to a capital increase. This feature represents a critical advantage, considering that the ICE deduction applies not only to cash injections but also to the retention and capitalisation of profits, thereby rewarding a company simply for not distributing its earnings – a powerful signal in favour of organic capitalisation.

More than two years later, the landscape has evolved considerably, with the Portuguese Tax Authorities (“PTA”) having issued a body of binding tax rulings (informações vinculativas), addressing a range of practical and interpretative uncertainties that had remained open since the regime’s inception. Some of the key takeaways include:

  • Broad concept of eligible contributions: the PTA has confirmed that the conversion of shareholder loans (“suprimentos”) into share capital qualifies as an eligible capital increase under the ICE. Importantly, the PTA went further, clarifying that the scope of "credits" under the ICE is not limited to suprimentos with their structural/permanent character, but extends to other forms of shareholder loans as well – for instance, ancillary contributions (“prestações acessórias”) that do not follow the regime of supplementary contributions and which may, as a general rule, be treated as debt, as well as short-term loans. 
  • Timing of profit allocation: a significant area of PTA guidance relates to the timing at which the application of distributable profits counts as an eligible equity increase. The PTA has consistently confirmed that the relevant moment is the period in which the profits are effectively allocated (applied) to retained earnings or reserves – not the period in which they were generated.
  • Interaction with prior regimes:  the transitional overlap between the ICE and the two regimes it replaced – the DLRR (“Dedução por Lucros Retidos e Reinvestidos”) and the RCCS (“Remuneração Convencional Capital Social”) – was a source of practical uncertainty. Regarding the DLRR, the PTA confirmed that the two benefits may be cumulatively applied. Accordingly, distributable profits from 2022 allocated to the special reinvestment reserve under the DLRR may simultaneously qualify as eligible capital increases under the ICE in 2023. This is because the legislator only expressly prohibited cumulation with the RCCS (via article 12(2) of Law 20/2023) but did not introduce a similar restriction vis-à-vis the DLRR. Additionally, the PTA clarified that reinvestment reserves created in years prior to 2023 and subsequently transferred to free reserves after the mandatory five-year retention period (e.g. on 1 January 2023) do not qualify for the ICE, as they do not constitute eligible net increases in equity in a period beginning on or after 1 January 2023.
  • Corporate reorganisations: the PTA has clarified the application of the ICE regime in the context of corporate reorganisations, distinguishing between mergers and transfers of assets for these purposes: (i) Mergers: In the context of mergers carried out under the tax neutrality regime (with retroactive accounting and tax effects to 1 January), the PTA confirmed that the distributable profits of all merging entities – including the absorbed entities – may be taken into account for ICE purposes in the surviving entity. The relevant factor is the distributable profits of each entity for the relevant pre-merger period, applied in the year of the merger; and (ii) Transfers of assets (entrada de ativos): By contrast, in the case of a transfer of assets under the tax neutrality regime, the PTA has ruled that the eligible capital increases generated in the transferring entity's accounts cannot be "transmitted" to the newly created receiving entity. The ICE benefit remains with the entity in whose legal sphere the eligible equity increases were recorded and cannot accompany the transfer of the business unit. This distinction between mergers and transfers of assets is conceptually logical – in a merger, the absorbed entity ceases to exist and all rights and obligations transfer to the surviving entity, whereas in a transfer of assets the contributing entity continues to exist – but has significant practical implications for structuring corporate reorganisations.
  • Scope of application - Branches and supervised entities: the PTA has unequivocally confirmed that branches of foreign entities in Portugal cannot benefit from the ICE. The wording of the ICE expressly limits the benefit to entities "with their registered office or effective management in Portuguese territory", which means that only tax-resident entities qualify. The PTA further noted that, because a branch has no separate legal personality and, crucially, has no share capital and does not distribute profits (it merely allocates them to its head office), the very mechanics of the ICE - which revolve around equity capital increases – are incompatible with the nature of a branch. 
    In relation to credit intermediaries / insurance mediators, although the wording of the ICE excludes entities "subject to the supervision of the Bank of Portugal and Insurance and Pension Funds Supervisory Authority (ASF)", the PTA has adopted a purposive interpretation, concluding that credit intermediaries (intermediários de crédito) acting in an ancillary capacity – such as car dealers or opticians offering consumer financing – and insurance mediators – including agents and brokers – should not be excluded from the ICE.
  • Other relevant clarifications: the PTA has also issued guidance on a number of additional interpretative matters, including the application of the regime to taxpayers with tax periods not coinciding with the calendar year, particularly in light of the transitional wording initially included in the 2023 State Budget Law. Although such transitional issues are no longer currently relevant, these rulings contributed to clarifying the practical application of the regime in its initial years.

Overall, the ICE has matured from a promising but untested legislative innovation into a cornerstone of Portugal's tax incentive framework for corporate capitalisation. Its notional interest mechanism – with a deduction cap significantly exceeding the cap applicable to net financing costs – has made it a genuinely attractive tool, particularly for multinational groups structuring inbound investment into Portugal.

The hybrid nature of the ICE – offering the tax benefits of debt while requiring the commitment of share capital – has fundamentally altered the landscape of corporate financing in Portugal. 

At the same time, the extensive body of binding rulings issued by the PTA since 2024 has provided much-needed – albeit not exhaustive – interpretive certainty on a range of practical questions, from the scope of eligible credits to the treatment of restructurings and the subjective scope of the regime. While some questions remain open and a number of areas may yet benefit from further clarification, the PTA's purposive and generally taxpayer-friendly approach – particularly in relation to the exclusion of supervised entities – has already brought a welcome degree of predictability to the regime, even as the formalistic stance on asset transfers serves as a reminder that careful structuring remains essential.

Authors:
Nicolle Barbetti, Associate at Pérez-Llorca