Capitalising a company can also be a tax decision
For many years, the tax system treated debt and equity very differently.
Interest borne by a company on bank financing may, within the applicable rules, constitute a tax-deductible expense. Capital invested by shareholders does not generate an equivalent cost.
The Business Capitalisation Incentive, commonly known by its Portuguese acronym ICE, seeks to reduce part of that difference.
The principle is relatively simple: when a company strengthens its equity through certain eligible transactions, it may benefit from a deduction from taxable profit for Portuguese corporate income tax purposes.
The true relevance of ICE is not limited to taxation. It lies in the possibility of integrating profit distribution, capitalisation and financing decisions into a broader financial strategy.
How does ICE work?
Under the rules currently in force, the deduction is calculated by applying a rate equal to the average 12-month Euribor for the tax period, plus 2 percentage points, to the amount of net increases in eligible equity.
There is an important difference between ICE and certain other tax benefits.
ICE is a deduction from taxable profit, not a direct deduction from the tax payable.
In other words, the benefit reduces the amount on which corporate income tax will subsequently be calculated.
This also means that the effective economic value of the benefit depends, among other factors, on the corporate income tax rate applicable to the company.
What can qualify as an increase in eligible equity?
The legislation covers different forms of capitalisation.
These may include:
- cash contributions upon incorporation or in share capital increases;
- conversion of debt into equity;
- share premiums;
- allocation of distributable accounting profits to retained earnings, reserves or share capital increases.
The last option is particularly relevant because a company does not necessarily need to receive new cash from shareholders to benefit from the mechanism.
The decision to retain and reinvest profits in the company, rather than distribute them, may itself contribute to the calculation of eligible equity.
This turns an apparently straightforward dividend decision into an issue that may have tax consequences over several financial years.
Why are the increases described as "net"?
Because it is not enough to look at amounts added to equity.
Certain outflows to shareholders must also be taken into account.
Capital reductions, distributions of reserves or retained earnings, and other outflows provided for in the legislation may reduce the eligible increases considered for the benefit.
This prevents a company from capitalising at one point to obtain the benefit and returning the same amounts to shareholders shortly afterwards without affecting the calculation. ICE should therefore be analysed over several years.
A benefit that may have an impact over several years
Another important feature of ICE is this time dimension.
The calculation of net increases in eligible equity takes account of the amounts recorded in the current year and in the six preceding tax periods.
In practice, a capitalisation decision may continue to influence the tax benefit in subsequent years, provided that the conditions established under the regime remain satisfied.
This is another reason why ICE should not be considered only when the accounts are closed.
Advance modelling of the company's profits, dividends and capital policy may be appropriate.
Are there limits?
Yes. In each tax period, the deduction is subject to the higher of the following limits:
- EUR 4 million; or
- 30% of earnings before depreciation, amortisation, net financing expenses and tax, under the terms established in tax legislation.
Part of any deduction that cannot be used may also be carried forward to subsequent periods, subject to the statutory conditions.
For companies with significant increases in equity, these limits should form part of the financial analysis of the benefit.
Can every company benefit?
Broadly speaking, the regime covers entities whose principal activity is commercial, industrial or agricultural, provided that they satisfy certain requirements.
Among other conditions, they must keep properly organised accounts, must not have their taxable profit assessed through indirect methods and must have their tax and social security affairs in order. Specific exclusions also apply, notably to certain financial and insurance entities.
The analysis must therefore be performed company by company.
ICE or dividend distribution?
This may be one of the most interesting questions. Consider a company that generates significant profits and whose shareholders do not need to withdraw all available cash immediately.
The decision is no longer simply, "Do we distribute dividends or not?" It may become, "What is the right capital structure for the company, how much capital should we retain to finance growth and what is the tax impact of that decision?" These are different questions, and they lead to more strategic financial management.
A company planning growth, acquisitions or productive investment may benefit simultaneously from a stronger equity base, greater debt capacity and the potential tax benefit associated with ICE.
Capitalisation should not be driven by tax alone
As with any incentive, tax should not determine a financial decision in isolation.
It makes no sense to retain capital the company does not need solely because a benefit is available.
However, when there is a genuine need to strengthen equity, finance growth, improve financial autonomy or prepare a future transaction, understanding ICE may improve the efficiency of the chosen solution.
At Fenix Capital Partners, this is precisely how we view capitalisation: not as an exclusively accounting or tax decision, but as part of the company's financial structure. Equity, debt, profit distributions, investment and incentives should be analysed together, because the best capital structure is not simply the one that minimises tax. It is the one that enables the company to finance its strategy with balance and efficiency.