Duties of the Directors in Portuguese Companies and their Tax Liabilities

9 February 2022

Teresa Arriaga e Cunha, Sérgio Varela Alves

Incorporating a Company in Portugal may be a way to obtain Residency for several non-EU citizens who choose Portugal to reside or invest. It may also be a natural step for residents who decide to undertake their professional activities in a corporate structure.

It is important to understand the implications of becoming a Director of a Portuguese Company, starting with the main duties imposed by law as well as highlighting the liabilities associated to this role.

The directors of Portuguese Companies must fulfil several requirements under Portuguese law, which consist in acting diligently according to the duty of care and duty of loyalty, as follows:

Duty of Care

As stipulated in subparagraph a), no. 1 of article 64 of the Commercial Companies Law (“CSC”), the director is required to act with “diligence in a judicious and orderly manner” in the performance of his/her duties, more precisely, in the way he/she deals with the various situations inherent to the core of the corporate activity. The fiduciary duty of care arises as a consequence of the management contract, and directors are expected to act diligently regarding the exercise of the activity.

Hence, the directors are required to seek information, acting with the required diligence, not only in the search for all the information necessary for making each business decision, but also on the company's activity, to be able to deliberate on a rational, informed, and prudent way. It is also a requirement of the duty of care that directors are available, in the sense of dedicating themselves primarily to the tasks to which they are bound. Furthermore, it is essential that the director is free and available to face his/her responsibilities.

Therefore, the directors, having to act in accordance with the duty of care, must strongly commit themselves to their own and constant updating, so that in the face of each decision-making, they can better discern different options for the company whose interests they defend.

Portuguese doctrine is uniform regarding the fact that the duty of monitoring or supervising the company's activity is also included in the duty of care. The duty of supervision or “organisational-functional oversight” presupposes the monitoring of the company's activity, which ends up making it necessary to “establish an internal control system,” when dealing with large companies. A kind of "permanent audit".

Duty of Loyalty

On the one hand, the duty of loyalty is materialised in non facere duties (negative duties), from which arise actions prohibited to directors: prohibition of competition; prohibition to disclose corporate secrets; prohibition (an austere restriction) to accept credit from the company itself; prohibition of taking advantage of business opportunities for one's own benefit; prohibition of taking decisions or collaborating on them, when there are situations of conflict of interest; prohibition or strong restriction regarding the execution of business with the company to which it provides services; prohibition of discrimination against shareholders, committing themselves to respect the duty of neutrality; prohibition of tying public offering for acquisition of shares considered hostile.

On the other hand, the duty of loyalty can also be read in a positive sense, “as the duty to contribute to the maximisation of benefits for the interest of the company”, warding off any type of personal interests or those of third parties.

The directors' duty of loyalty to the company goes beyond the measure of conduct required by good faith. However, it is not prohibiting the pursuit of one's own interests as long as there are not in conflict with those of the company itself, its shareholders and stakeholders.

The directors, when taking decisions, must consider the long-term interests of the shareholders, so as not to vitiate the company in a search for immediate profits, always having as a background the reflection on the long-term impact of current decisions.

Whenever a director, when making a particular business decision, puts his/her own interests at the forefront of those of the company, he/she is clearly violating his/her duty of loyalty. Unfair conduct is one in which the director, in the exercise of his/her functions, puts his/her and/or third parties' interests at the forefront, taking advantage of the information or business opportunities he/she is aware of in the exercise of his/her functions.

Therefore, the duty of loyalty is like a general clause that requires an adequate management, devoid of conflicts of interest on the part of the directors, whose primary objective is the pursuit of the corporate object.

Tax Implications

The abovementioned duties are also associated to tax liabilities.

The no. 1 of article 24 of the Portuguese General Tax Law (“LGT”) states, that the directors, managers, and other persons who exercise even if only in fact (de facto), management functions in legal persons (i.e., companies) and/or fiscally equivalent entities (i.e., permanent establishments, like branches) are co-liable responsible in relation to these persons and jointly with each other.

Namely:

a) For tax debts whose constitutive event occurred during the period of exercise in office or whose legal term for payment or delivery expired after this, when, in either case, it was their fault that the assets of the legal person or a fiscally equivalent entity had become insufficient (or inexistent) for their satisfaction, plus,

b) For tax debts whose legal term for payment or delivery expired during the period in which they hold office, when they do not prove that the lack of payment was not attributable to them.

This co-responsibility presupposes that the legal person does not have the financial means to comply with its tax obligations and can only take place after the execution of its patrimony.

Nevertheless, and being that patrimony insufficient or inexistent to comply with the obligations (i.e., to pay the due tax), the directors may be called upon to pay the reminiscent debt.

If there are two directors, either can be demanded to fully comply with the due obligations, even if afterwards one can ask from the other for his/her share of the payment.

To verify that the lack of payment was not attributable to the director, someone will have to prove or disprove his/her diligence, namely, to (dis)prove he/she complied with his/her duties of care and loyalty.

The company is not his/her own and he/she is managing third’s property.

The aforementioned burden of proof will fall upon the directors when the term to comply with the tax obligations occurred during their mandate (as per subparagraph b), or upon the Portuguese Tax Authorities (as per subparagraph a) when they were no longer holding office.