Sole Proprietors (ENI) often face the dilemma of expanding their business while maintaining tax efficiency. Transforming a Sole Proprietorship into a Commercial Company can be a strategic step to optimize business management, separate assets, and improve access to financing. However, without the proper framework, this change can entail high tax costs.
To avoid the immediate taxation of latent capital gains on the company’s assets, Portuguese legislation provides for the Tax Neutrality Regime, as stipulated in Article 73 et seq. of the Corporate Income Tax Code (CIRC).
What is the Tax Neutrality Regime?
The Tax Neutrality Regime allows the conversion of a Sole Proprietorship into a Commercial Company (e.g., a Private Limited Company – Lda.) without resulting in the immediate taxation of the transferred assets. This way, the business can continue its activity with a new legal structure, without unnecessary tax burdens at the time of conversion.
Requirements to Benefit from the Tax Neutrality Regime
For the conversion to occur without immediate taxation, certain conditions must be met:
- Full transfer of the activity – All assets and liabilities of the Sole Proprietorship must be transferred to the new company.
- Maintenance of Shareholdings – The transferred equity must be converted into shareholdings of the Sole Proprietor in the new company.
- Tax Continuity – The assets and liabilities must be maintained at the same book values they had in the Sole Proprietorship.
- Legal Registration and Formalization – The conversion must be carried out through a public deed or a certified private document and duly registered with the Tax Authorities and the Commercial Registry Office.
Advantages of Converting a Sole Proprietorship into a Commercial Company
Opting for a Commercial Company can bring several benefits to the entrepreneur:
✅ Asset Protection – The entrepreneur’s personal assets are separated from the company’s assets, reducing personal financial risks.
✅ Tax Benefits – Greater flexibility in income distribution and potential reduction of the tax burden.
✅ Access to Investment and Financing – Companies with a corporate structure have greater credibility with banks and investors.
✅ Business Continuity – The company can continue its activity even with the entry of new partners or changes in management.
Conclusion
Transforming a Sole Proprietorship into a Commercial Company can be a strategic step to ensure the sustainable growth of the business, taking advantage of the tax and legal benefits of the Tax Neutrality Regime. However, proper planning is essential to ensure that all requirements are met and that the transition occurs efficiently.
If you wish to transform your Sole Proprietorship into a Commercial Company and benefit from this regime, contact FA Accounting & Management, Lda. We are ready to guide you through the entire process and ensure your transition occurs without tax complications.
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