The Corporate Tax Planning Law Review: Portugal

Introduction

Given the latest international developments and the expected repercussions at a global level, the envisaged full recovery of the Portuguese economy after the economic standstill imposed by the covid-19 pandemic situation in the past two years now seems more uncertain.

Notwithstanding the circumstances, 2021 was certainly a year of recovery for the Portuguese economy, as was recently outlined by the OECD Economic Survey for Portugal 2021.2 Economic activity has rebounded sharply after a major contraction in 2020, despite the fact that tax and monetary policies need to remain supportive for crucial sectors such as tourism, which are still far from at pre-pandemic growth levels. Nonetheless, other sectors, such as construction, have not suffered particularly in the past two years as investment in real estate (in particular for housing) continued to grow. Also seeing an increase was the number of foreigner citizens who moved to Portugal in 2021, attracted by safety and the 'non-habitual residents' tax regime that remains in force. Other factors, such as the advantageous tax regime for real estate investment funds, real estate investment companies, and real estate investment and asset management companies, are expected to play an important role in the coming years in the attraction of foreign investment.

Although business investment in general suffered a decline in 2020 and 2021, a significant increase is expected from 2022 onwards with the implementation of Portugal's recovery and resilience plan, which has already been approved by the European Union and which is to be complemented with tax incentives and measures addressing not only boosting the economy but also the capitalisation of companies that are currently struggling after two very difficult years. Although Portugal already provides a broad set of incentives and tax benefits for productive investment, these are expected to be incremented in the State Budget Law for 2022. However, the legislation has suffered an unexpected delay since the Constitutional Court imposed the repetition of the recent election process in respect of the European voting circle, which ultimately means that, unfortunately, there will be no State Budget Law for 2022 before June.

Local developments

i Entity selection and business operations

Under Portuguese law, a legal entity is qualified as resident for tax purposes in Portugal if its corporate seat or place of effective management is in Portuguese territory.

Tax-resident companies and permanent establishments (PEs) of non-resident entities are subject to taxation on their annual profits, determined under the terms of the accounting standards (based on International Financial Reporting Standards) and subject to the corrections imposed by the Corporate Income Tax (CIT) Code. Broadly, the main determinant of the taxable base is the profits of the business as computed according to the principles of commercial accountancy.

In theory, any entity that is not incorporated whose income is not subject to taxation under the personal income tax or CIT regimes (as income of a physical person or a corporation) is subject to CIT. This definition may encompass an unincorporated investment fund as well as a trust operating or managed (hypothetically) from or in Portugal.

That said, the Portuguese CIT regime also foresees the concept of transparent entities. Transparent entities foreseen under the terms of the CIT Code correspond to:

  1. civil companies with commercial capacity;
  2. professional firms;
  3. asset management civil companies whose equity capital is controlled, directly or indirectly, for more than 183 days by a family group or a limited number of members, under certain conditions;
  4. complementary business groupings constituted and operating in accordance with the applicable law; and
  5. European economic interest groupings that are treated as residents.

Under the transparent entities regime, which aims to promote tax neutrality, although income and profit obtained by such entities are determined under the CIT Code rules, they are then directly imputed to the shareholders or participants, regardless of any income distribution, and taxed at the rates applicable to the latter (under personal income tax or CIT itself, as applicable).

The Madeira International Business Centre (MIBC) tax regime was established for entities licensed to operate until 31 December 2014 and extended to entities licensed to operate as from 1 January 2015 until 31 December 2027.

Under certain conditions, these entities benefit from a reduced 5 per cent CIT rate for certain activities and from a 50 per cent deduction to their assessed tax. Non-resident shareholders of these entities may also benefit from a tax exemption on dividends and interest.

Exemptions from stamp duty, property tax, property transfer tax, and regional and municipal surcharges also apply, subject to an 80 per cent limitation per tax and transaction or period.

Tax benefits for MIBC-licensed entities cannot exceed annually the highest of the following limits:

  1. 20.1 per cent of annual gross added value;
  2. 30.1 per cent of annual labour costs; or
  3. 15.1 per cent of annual turnover.

Entities resident in the Autonomous Region of the Azores may also benefit from a contractual regime of incentives for investments with strategic relevance made in that territory.

In 2019, a new vehicle was created for real estate investment, the Real Estate Investment and Management Companies (SIGI) regime, which follows the tax regime for investment funds, but it has yet to gain traction: in the first 2.5 years of its existence, only one has been incorporated.

At a national level, there is also a contractual regime for granting tax benefits for relevant investment projects, together with non-contractual (automatic) tax incentives for investments.

A notional interest deduction to taxable profits applies upon the incorporation of an entity or a capital increase, either in cash or through the conversion of credits deriving from shareholder loans or third-party loans, or through reinvesting the profits for that same tax period. The deduction corresponds to 7 per cent of the capital contribution, up to a limit of €2 million. This deduction applies for the tax period in which the capital contribution is made and the following five tax periods, as long as:

  1. the company's taxable profits are not determined through indirect methods; and
  2. the beneficiary company does not reduce its equity by returning it to shareholders in the first relevant tax period and the following five tax periods.

This regime does not apply if it has been applied for the same tax period or the previous five tax periods to entities that hold, directly or indirectly, a shareholding in the beneficiary entity or to entities that are held, directly or indirectly, by the same entity, up to the amount of the capital contributions of the entities that have previously benefited from this regime.

In 2016, Portugal adopted the international recommendations on intellectual property (IP) and patent box regimes deriving from the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) Action 5, and thus amended the special tax rules applicable to corporate income deriving from patents and other industrial property rights. The regime provides for a 50 per cent reduction of the qualifying taxable IP income. A limit was established that is a function of the total costs incurred in developing the asset protected by the IP right.

There are also special regimes for:

  1. investment funds (focused on taxing at the distribution level);
  2. securitisations (income tax, stamp duty and value added tax (VAT));
  3. casinos; and
  4. shipping (an optional special regime for the taxable profits of shipping companies, to be assessed as a function of ship tonnage, and a special regime for ship crew).

Following the transposition of the EU Merger Directive, the Portuguese tax law foresees a special tax neutrality regime for certain operations performed as part of group reorganisations, including mergers, demergers, contributions in kind and exchanges of shares. Among other conditions, this regime applies only to operations performed for economic reasons. Under certain conditions, restructuring operations are automatically exempt from property transfer tax, stamp duty and emoluments, and legal fees. However, such exemptions might not be automatic in cases of an operation that is subject to the prior approval of the Portuguese Competition Authority.

There is also a participation exemption regime under which dividends and capital gains are exempt if the Portuguese company is not tax transparent and holds, directly or indirectly, a minimum of 10 per cent of the capital or voting rights of its subsidiary for a minimum period of one year. The participated company cannot be resident in a blacklisted jurisdiction and must be subject to and not exempt from CIT or, if EU resident, from a tax mentioned under Article 2 of Directive 2011/96/EU or, if resident outside the EU, from a tax similar to CIT, provided, additionally, that the rate applicable under such tax is not less than 60 per cent of the Portuguese CIT rate.

Finally, corporate taxpayers in certain activity sectors may be subject to additional taxes, such as:

  1. the contribution for the banking sector, whose tax revenue is intended to benefit a resolution fund created to address the systemic risks of Portuguese banks;
  2. the extraordinary contribution for the energy sector, established for the purpose of financing mechanisms to promote the systemic sustainability of the sector, with revenue allocated to a fund that aims to reduce the tariff debt and fund social and environmental energy policies; and
  3. the extraordinary contribution for the pharmaceutical industry, whose tax revenue is intended to benefit the public health service.

None of these additional taxes can be deducted for CIT purposes.

Entity forms

The specific form of the entity should be assessed according to the specific situation, depending on the purposes of investment and the shareholders' characteristics (how many or how few shareholders, whether it is to operate as a closely held company or as (now or in the near future) a public company, etc).

The most common business vehicles used are companies incorporated under the form of (potentially) public limited liability companies (SA) and under the form of limited liability companies (SQ), the latter being particularly well suited to operating as a closely held company.

The share capital of an SA is represented by shares, which may be bearer or nominative shares, represented by certificates or materialised in a book entry. There may be different categories of shares, granting different rights to the respective shareholders. As a rule, an SA must be incorporated by at least five shareholders (individuals or legal entities), and this minimum number of shareholders must be maintained during the life of the company. The minimum share capital of an SA is €50,000, divided into shares, which are negotiable securities.

SQ is the most common legal form of companies in Portugal because it is most suitable for small and medium-sized undertakings due to many factors, such as (1) the fact that it admits only one shareholder with a minimum share capital of €1; (2) as a rule, it is also a limited liability company; (3) it grants a higher degree of control to the shareholders; and (4) the simplicity of its incorporation procedure (it can be incorporated following the expedited procedure of the 'company in one hour initiative').

From a tax perspective, SAs and SQs are subject to the same CIT rules. Although for many years, SAs had an advantage for real estate investments in Portugal as the transfer of their shares was not subject to property transfer tax, the State Budget Law of 2021 extended the application of the property transfer tax to the transfer of a shareholding in an SA that owns real estate assets located in Portugal, as it already did with the transfer of a shareholding in an SQ. As such, under the regime that is currently in force, the transfer of a shareholding in an SA, an SQ and partnerships that own real estate in Portuguese territory might trigger property transfer tax if the following conditions are met: (1) more than 50 per cent of the company's asset value is derived (directly or indirectly) from real estate located in Portugal; (2) this real estate is not allocated to an agricultural, industrial or commercial activity (excluding the purchase and sale of real estate); and (3) by means of the share transfer, any shareholder increases its shareholding to at least 75 per cent, or the number of shareholders is reduced to two shareholders who are married or in a non-marital partnership.

As a rule, upon a divestment by an entity resident in Portugal, capital gains obtained in Portugal by a resident entity are subject to the general 21 per cent CIT rate, whereas the capital gains obtained in Portugal by non-resident entities are subject to a 25 per cent CIT rate (unless and to the extent that this may be limited by provisions of a double tax treaty (DTT)). However, capital gains obtained by a non-resident entity without a PE in Portugal to which the gains are attributable from the sale of shares, securities, autonomous warrants and derivative instruments traded on a regulated market benefit from a tax exemption unless (1) more than 25 per cent of the share capital of the non-resident entity is directly or indirectly held by Portuguese-resident entities (there are exceptions to this exception), (2) the non-resident entity is located in a blacklisted country or territory, (3) the capital gains are obtained from the sale of shares in Portuguese corporations in which more than 50 per cent of their assets corresponds to real estate located in Portuguese territory or from the sale of shares in Portuguese holding corporations that control Portuguese corporations in which more than 50 per cent of their assets corresponds to real estate located in Portuguese territory, or (4) the non-resident entity obtains capital gains from the sale of shares in another non-resident entity whose value is derived, directly or indirectly, in the 365 days preceding the sale, more than 50 per cent, from real estate located in Portuguese territory, except if the relevant real estate is allocated to an agricultural, industrial, or commercial activity that does not consist of the simple acquisition and sale of real estate (taxation on the latter situation may be excluded by an applicable DTT).

The following companies are subject to a mandatory tax transparency regime under the CIT Code: (1) civil companies that have not adopted the form of commercial companies; (2) companies engaged in listed professional activities; (3) asset management companies that are either controlled by a family group or fully owned by no more than five shareholders; and (4) European economic interest groups and complementary enterprise groups. In the latter case, losses are also imputed to the shareholders, whereas in the other situations losses can be carried forward and used only by the transparent entity.

Portuguese securities (and real estate) investment funds benefit from a special tax regime. Although, as a general rule, CIT at the standard rate of 21 per cent applies on their annual taxable profits, investment and real estate income, as well as any capital gains, are not subject to CIT unless the income is distributed or due by companies resident in a blacklisted country or territory or results from the transfer of a shareholding in such a company. Stamp tax also applies on the funds' net value at a rate of 0.0125 per cent or, for securities investment funds investing in money market instruments or deposits, at a rate of 0.0025 per cent. Income earned by a Portuguese-resident company from units held in Portuguese securities investment funds is subject to 25 per cent withholding tax on account of the final tax due, and an exemption applies to income paid by a securities investment fund to, and capital gains obtained by, non-resident individuals, as well as to non-resident companies (provided that the income is not attributable to a PE in Portugal). The exemption should not apply to investors resident in a blacklisted country or territory and in some other situations – namely if more than 25 per cent of the share capital of the investor company is held, directly or indirectly, by Portuguese-resident companies or resident individuals, unless the non-resident company is resident in another EU Member State, an European Economic Area (EEA) state or in a country with which Portugal has a DTT that foresees exchange of information procedures. Real estate investment funds are subject to the same tax regime as described, except in cases of income paid to, or capital gains obtained by, non-resident investors, in which case a final tax of 10 per cent applies.

Branches are subject to CIT on the income attributable to them, and the remittance of income to the head office does not trigger taxation (no need to apply the participation exemption regime). The sale of a branch, however, might trigger stamp duty at the rate of 5 per cent.

Domestic income tax

Portuguese tax-resident taxpayers are subject to taxation on their worldwide income, whereas non-resident taxpayers without a PE in the Portuguese territory are subject to taxation only on income deemed to be obtained in Portugal. Portuguese PEs of non-resident entities are subject to taxation on the profits attributable to them.

As such, tax-resident companies and PEs of non-resident entities are subject to taxation on their annual profits, determined under the terms of the accounting standards (based on International Financial Reporting Standards) and subject to the corrections imposed by the CIT Code. Broadly, the principal determinant of the taxable base is the profits of the business, as computed according to the principles of commercial accountancy.

The normal CIT rate is 21 per cent for the mainland (the rate stands at 14.7 per cent for the Autonomous Region of the Azores and the Autonomous Region of Madeira). However, resident taxpayers certified as small or medium-sized companies may benefit from a reduced 17 per cent rate (11.9 per cent in the Autonomous Region of Madeira and in the Autonomous Region of the Azores) for the first €25,000 of taxable income. A municipal surcharge of up to 1.5 per cent of taxable income also applies. A state surcharge further applies as follows:

  1. 3 per cent for taxable profits from €1.5 million to €7.5 million;
  2. 5 per cent for taxable profits from €7.5 million to €35 million; and
  3. 9 per cent for taxable profits in excess of €35 million.

Autonomous taxation applies at different rates to certain expenses incurred by corporate taxpayers that are deemed not to be totally or partially connected to their activity or are deemed to be an informal fringe benefit for the employees.

Non-residents with income not attributable to a PE in Portugal are usually taxed through withholding tax, but some relevant exemptions apply as described above. This is described further below.

International tax

Non-resident corporate taxpayers with a PE in Portugal are subject to taxation on their taxable profits attributable to the PE. Non-resident corporate taxpayers without a PE in the Portuguese territory are subject to taxation only on income deemed to be obtained (sourced) in Portugal.

Payments made by corporate taxpayers to non-resident entities related to dividends, interest, royalties, rental income and services are usually subject to withholding tax, normally at a 25 per cent CIT rate, which may be reduced to between 5 per cent (or even zero per cent, for services that are deemed 'other income', for example) and 15 per cent under the terms of an applicable DTT, as long as certain formalities are complied with at the date on which tax is due.

Dividends may not be subject to withholding tax in Portugal due to the application of the participation exemption regime (the EU Parent–Subsidiary Directive provisions were transposed by the CIT Code, in some instances with less stringent requirement), if the conditions set out under this regime are met.

Interest and royalties may also be exempt from withholding tax under the terms of the EU Interest and Royalties Directive transposed by the CIT Code, if certain conditions are met.

An exemption applies to:

  1. interest on bond issues (including public debt) held by non-residents and not attributable to a PE in Portugal, subject to controls as provided for in the relevant legislation;
  2. interest on loans and to rents on leasing of imported equipment (not attributable to a PE in Portugal) from non-resident entities to certain public bodies;
  3. gains and interest (not attributable to a PE in Portugal) obtained by non-resident financial institutions in swap and forward operations (and connected operations) with certain public bodies, subject to some anti-avoidance provisions; and
  4. interest on loans and gains on swaps (not attributable to a PE in Portugal) obtained by non-resident financial institutions in operations with resident credit institutions.

Investment income paid to entities that are tax resident in backlisted countries or territories is subject to an increased withholding tax of 35 per cent.

In general, when applied to income obtained by non-resident entities, withholding tax is definitive and liberates those entities from the obligation to file a tax return in Portugal.

Where a DTT applies, the tax credit for outbound income may not exceed the tax that should have been paid abroad according to the terms foreseen under the DTT. However, in the absence of a DTT, the CIT Code foresees a unilateral tax credit for the purposes of eliminating double taxation, which must correspond to the lowest of the following amounts:

  1. income tax paid abroad in respect of relevant income that is also subject to tax in Portugal; or
  2. the CIT fraction assessed before the deduction, corresponding to the net income that may be taxed in the respective country.

As mentioned, there is a participation exemption regime under which dividends and capital gains are exempt if the Portuguese company is not tax transparent and holds, directly or indirectly, a minimum of 10 per cent of the capital or voting rights of its subsidiary for a minimum period of one year. The participated company cannot be resident in a blacklisted jurisdiction and must be subject to and not exempt from CIT or, if EU resident, from a tax mentioned under Article 2 of Directive 2011/96/EU or, if resident outside the EU, from a tax similar to CIT, provided, additionally, that the rate applicable under such tax is not less than 60 per cent of the Portuguese CIT rate.

A patent box regime applies to corporate income derived from patents and other industrial property rights, which provides for a 50 per cent reduction of the qualifying taxable IP income. A limit was established that is a function of the total costs incurred in developing the asset protected by the IP right.

The CIT Code foresees an exit tax regime applicable to tax-resident companies (including Societas Europaea companies and European cooperative societies) that transfer their head office and effective management abroad. Under this regime, CIT will apply to the taxable gain or loss corresponding to the difference between the market value of the assets and their respective tax basis (even if they are not expressed in the company's accounting records), as of the date on which the activity closes, except for assets and liabilities remaining in Portugal as part of a Portuguese PE of the transferring company, if certain conditions are met. If residence is transferred to a Member State of the EU or (under certain conditions) to a third country party to the EEA agreement, the transferor may choose to pay the tax due according to one of the following methods:

  1. full payment in one immediate instalment upon the transfer of residence; or
  2. payment in equal instalments over a five-year period, plus interest.

Capitalisation requirements

Specific thin capitalisation rules were revoked following the adoption of rules for the limitation on the deductibility of financing expenses.

Portuguese tax-resident entities and PEs of non-resident entities are allowed to deduct net financing expenses up to the higher of the following limits: (1) €1 million or (2) 30 per cent of the earnings before depreciation, amortisation, taxes and net financing expenses, adjusted for tax purposes.

Financing expenses not deductible in a certain fiscal year may be deductible in the following five fiscal years, provided that the above-mentioned limits are not exceeded.

ii Common ownership: group structures and intercompany transactions

Ownership structure of related parties

A group of companies resident in Portugal may choose to be taxed on their aggregate taxable basis, under the tax consolidation regime, if the following conditions are met:

  1. the dominating company must, directly or indirectly, own 75 per cent or more of the subsidiaries' share capital, provided that the shareholding confers more than 50 per cent of the voting rights;
  2. the place of effective management of all the companies is in Portugal;
  3. the income of all companies is fully subject to the standard CIT regime at the higher tax rate (currently 21 per cent);
  4. the dominating company must hold a shareholding in the subsidiaries for more than one year before the year in which the regime starts to apply, except in the case of subsidiaries incorporated by the dominating company less than one year before the beginning of the regime. If the participation is acquired via a merger or division, the period in which the merged or divided companies held the shareholding is taken into account to ascertain whether the holding period requirement is met;
  5. 75 per cent or more of the dominating company may not be held, directly or indirectly, by another Portuguese company that holds more than 50 per cent of its voting rights that is eligible for the tax consolidation regime; and
  6. the dominating company cannot have waived the application of the tax consolidation regime in the previous three years.

The taxable income of a tax group must be declared and assessed by the dominating company, corresponding to the arithmetical sum of the taxable income and tax losses assessed by each company in the group.

With reference to financial expenses, whenever there is a group of corporations, the deduction limits are applied to each company of the group considered individually, unless the dominating company of the group elects to apply the limits to the net financing expenses of the group (and not to each company of the group).

Specific rules also apply to the deduction of tax losses incurred by the group, as the application of this tax regime normally allows the group to offset losses incurred by one company against profits of another company. Tax losses obtained prior to the beginning of the tax grouping can be carried forward and offset only up to the company's taxable income.

The controlled foreign company (CFC) rules apply when a Portuguese-resident corporate entity directly or indirectly holds (through a representative, fiduciary or intermediary) at least 25 per cent of the shares, voting rights or rights over the income obtained on the assets held by the CFC. It does not apply to legal persons resident in either the EU or the EEA, in the latter case subject to some conditions (e.g,, if the incorporation and activities of the controlled entity are based on valid economic reasons and the entity carries out agricultural, commercial, industrial or service-based activities).

Non-residents are also exempt from the CFC rules if the sum of the income arising from one or more of the following categories does not exceed 25 per cent of the company's total income:

  1. royalties or other income arising from intellectual property rights, image rights or similar rights;
  2. dividends and income arising from the transfer of securities representing the share capital of a company;
  3. income arising from financial leasing;
  4. income arising from transactions commonly performed within banking activities (even if not performed by credit institutions), insurance activities or other financial activities, entered with related parties qualified as such for the purposes of the applicable transfer pricing rules;
  5. income arising from invoicing companies that obtain commercial and services income from goods and services bought and sold from and to related entities qualified as such for the purposes of the applicable transfer pricing rules; and
  6. interest or other investment income.

Domestic intercompany transactions

A participation regime applies where dividends and capital are excluded from taxation and capital losses are not tax deductible. This tax irrelevance does not apply where the assets of the company whose shares are transferred are composed of more than 50 per cent of real estate located in Portugal and not allocated to a commercial, agricultural or industrial activity.

Intercompany transactions have more stringent tax rules: transfer pricing rules and more specific rules, such as non-deductibility of capital losses with the assignment of shares even if the participation exemption regime does not apply, if in past years it was applied and to the extent (e.g., amount of dividends deducted) it was applied.

Care should also be taken with losses on intercompany loans, because the way they are realised and accounted for might impact on their tax deductibility.

International intercompany transactions

In light of the recent international developments in the area (namely regarding BEPS), Law 119/2019 of 18 September 2019 introduced changes to the transfer pricing and penalties regimes (in particular Articles 63, 130 and 138 of the CIT Code and Article 117 of the General Tax Infringement Law) to apply from 1 October 2019. This law reinforced that the terms and conditions of all commercial or financial transactions carried out between related parties (both resident and non-resident) must comply with the arm's-length principle, including the following transactions:

  1. business restructurings;
  2. renegotiations and terminations of intra-group agreements;
  3. sales and transfers of assets;
  4. transfers of rights to intangibles; and
  5. compensation for loss of profits or damages.

In 2019, a legal provision was introduced expressly stating that the transfer pricing rules are applicable to corporate restructuring transactions whenever they include the transfer of tangible or intangible assets, rights on intangible assets, or compensation payments for damages or loss of earnings.

In addition, the Portuguese law makes special reference to transactions referring to rights over real estate, share capital of non-listed companies, credit rights and intangibles as transactions to which unspecified methods might be the best solution.

In 2016, the CIT Code established the country-by-country reporting requirements for multinational groups, as recommended by the OECD in Action 13 of the OECD BEPS Action Plan, including on the information to be reported.

Payments to entities in low-tax jurisdictions are not tax deductible, and expenses paid to low-tax jurisdictions are subject to an autonomous taxation at the rate of 35 per cent (which might increase to 55 per cent), unless the taxpayer proves that they relate to actual operations or transactions, that they are normal transactions or operations, and that the price is not excessive.

Capital losses with shares (and shareholders' contributions that qualify as equity) in entities in low-tax jurisdictions are not tax deductible.

Investment income paid to entities established in low-tax jurisdictions are subject to withholding tax at a rate of 35 per cent.

As previously mentioned, CFC rules apply.

A participation exemption regime also applies.

iii Third-party transactions

Sales of shares or assets for cash

On the transfer of business units, stamp duty may apply at a rate of 5 per cent, to be paid by the acquirer. However, no similar tax is levied on the transfer of shares. Capital gains on the transfer of shares may or may not be taxed, and capital losses may or may not be relevant: as discussed above, there is a participation exemption regime whereby additional restrictions may apply if the shares are in a company in a low-tax jurisdiction, and for non-residents without a PE in Portugal to which the gain may be attributable an exemption may apply. Taxation may further be prevented by an applicable DTT.

If an asset acquisition occurs (e.g., a business unit acquisition), this operation might result in a step-up in the acquired asset basis for tax purposes (as it will be registered for accounting purposes, taking into consideration its new acquisition value), thus allowing for a higher tax depreciation (which includes depreciation of the goodwill in a concentration of business activities), unless a tax neutrality regime applies (company reorganisations).

On the other hand, in the case of the acquisition of a company (or shares in a company), there is no step-up in the tax basis of the assets of the company (and the goodwill concerning the shares is never tax deductible).

In the past, in times of high inflation, a step-up in the asset basis for tax purposes was recurrently provided for.

For companies under privatisation, a step-up in the asset basis for tax purposes has also been provided for.

In 2016, an optional one-off step-up in the asset basis was provided for in exchange for a 14 per cent tax on the increase in the tax basis (i.e., pay tax now in exchange for a lower tax rate tomorrow – a synthetic loan, in substance).

The gains on the sale of some assets (e.g., intangible and tangible fixed assets) that have been held for at least one year may benefit from a 50 per cent exemption if the proceeds of the sale are reinvested in assets of the same kind.

Tax-free or tax-deferred transactions

As previously mentioned, following the transposition of the EU Merger Directive, the Portuguese tax law foresees a special tax neutrality regime for certain operations performed as part of group reorganisations, including mergers, demergers, contributions in kind and exchange of shares. Among other conditions, this regime applies only to operations performed for economic reasons. Under certain conditions, restructuring operations are automatically exempt from property transfer tax, stamp duty and emoluments, and legal fees. However, these exemptions might not be automatic in cases of an operation that is subject to the prior approval of the Portuguese Competition Authority.

There is also a participation exemption regime under which dividends and capital gains are exempt if the Portuguese company is not tax transparent and holds, directly or indirectly, a minimum of 10 per cent of the capital or voting rights of its subsidiary for a minimum period of one year. The participated company cannot be resident in a blacklisted jurisdiction and must be subject to and not exempt from CIT or, if EU resident, from a tax mentioned under Article 2 of Directive 2011/96/EU or, if resident outside the EU, from a tax similar to CIT, provided, additionally, that the rate applicable under such tax is not less than 60 per cent of the Portuguese CIT rate.

International considerations

As mentioned above, a participation exemption regime applies, and a tax neutrality regime applies for company reorganisations at EU level.

Following Council Directive (EU) 2016/1164, as amended, provisions were introduced in 2020 to deal with hybrid mismatches – namely double deductions and deduction without inclusion or taxation on the other side of the transaction, and tax residency mismatches.

iv Indirect taxes

VAT applies to:

  1. the supply of goods and supply of services for consideration;
  2. the importation of goods; and
  3. intra-EU acquisitions of goods.

The rates of VAT are as follows:

  1. standard rate of 23 per cent (22 per cent in the Autonomous Region of Madeira and 16 per cent in the Autonomous Region of the Azores);
  2. intermediate rate of 13 per cent (12 per cent in the Autonomous Region of Madeira and 9 per cent in the Autonomous Region of the Azores); and
  3. reduced rate of 6 per cent (5 per cent in the Autonomous Region of Madeira and 4 per cent in the Autonomous Region of the Azores).

To the extent that the output of a corporate taxpayer is subject to VAT and not exempt, or is exempt but with a right to deduct the VAT on inputs (e.g., exporting activity), the VAT will not be a final burden (financial effect only).

There are also other indirect taxes, such as:

  1. the tax on fuel, electricity and energy products (with exemptions, subject to some requirements, where these are used to produce energy, for example);
  2. stamp duty on loans and interest (with some exemptions for loans between financial institutions and some intra-group loans);
  3. stamp duty on insurance policies;
  4. stamp duty on some transfers of business units;
  5. transfer tax on real estate; and
  6. autonomous or separate taxation of car expenses, representation expenses and travel expenses (potential mixed-use expenses, incurred both for company activity and for the private benefit of the employee), to the extent that they are not subject to personal income tax as fringe benefits.

International developments and local responses

i OECD-G20 BEPS initiative

As an OECD member country, Portugal has progressively implemented BEPS recommendations, reinforced by Portugal's adhesion to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Each of the BEPS Actions has been implemented according to the following schedule and measures:

  1. Action 1: implementation of VAT on business-to-customer digital services – already implemented;
  2. Action 2: anti-hybrid provisions following BEPS recommendations, which have now been strengthened with the Anti Tax Avoidance Directive (ATAD) I and II – already implemented.
  3. Action 3: Portugal already had CFC legislation – already implemented and amended in May 2019, in the context of the implementation of the ATAD;
  4. Action 4: the existing legislation already has limitations on deductibility of financing costs, through the implementation of earnings stripping rules, in line with the equivalent provision of the ATAD;
  5. Action 5: Portugal enacted its 2016 Budget via Law No. 7-A/2016, which amends its existing patent box regime to be compliant with the OECD BEPS Action 5 recommendations;
  6. Action 6: Portugal has several limitation of benefits clauses in the network of DTT – in particular focused on treaty shopping and abuse of residence;
  7. Action 7: Portugal has introduced significant changes to the concept of PEs with the State Budget Law for 2021, which in some respects goes beyond OECD's recommendations;
  8. Actions 8–10: provisions relating to intra-group transactions are being reviewed in line with the recent publication of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations – in progress;
  9. Action 12: disclosure obligations relating to aggressive tax planning structures – already implemented;
  10. Action 13: Portugal's Budget Law for 2016 introduced a country-by-country reporting obligation for multinational enterprises that is intended to provide additional information of their activities for risk assessment purposes; and
  11. Action 14: waiting for the implementation of a binding arbitration procedure, to which Portugal is bound – in progress.

ii EU proposals on taxation of the digital economy

On 19 November 2020, the Portuguese government published Law No. 74/2020, in force from 17 February 2021 onwards, which transposes the provisions of Directive (EU) 2018/1808 into Portuguese law, introducing two new taxes relating to cinematographic and audiovisual activities.

This includes an exhibition tax of 4 per cent on the price paid for audiovisual commercial communication included in video sharing platforms and due by advertisers on income obtained in Portugal. This tax should be included in the invoices issued by the video sharing platform and integrates the taxable amount for VAT purposes.

The law also foresees an annual tax of 1 per cent on income of providers of subscription video-on-demand services, due by service providers on relevant income obtained in Portugal associated with subscriptions or occasional transactions for video-on-demand services. An exception is provided for service providers with low turnover (less than €200,000 of annual relevant income) or with a small audience (less than 0.5 per cent of active subscribers).

iii Tax treaties

Portugal has signed 79 DTTs for the elimination of double taxation on income based on the OECD model, of which 77 are in force.

In addition, Portugal entered into agreements for the exchange of information with 15 countries (Andorra – which was recently eliminated from the Portuguese blacklist – Antigua and Barbuda, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Dominica, Gibraltar, Guernsey, the Isle of Man, Jersey, Liberia, Saint Kitts and Nevis, Saint Lucia, and Turks and Caicos), of which seven are in force.

Moreover, Portugal entered into Mutual Administrative Assistance agreements with Brazil, Cape Verde and Mozambique, allowing the automatic exchange of information.

Portugal has also entered into an agreement for the automatic exchange of information on financial accounts with the US (which entered into force on 10 August 2016) in accordance with the US Foreign Account Tax Compliance Act.

Notable typical or model provisions

Conventions for the elimination of double taxation signed by Portugal follow the OECD Model Tax Convention, thus generally foreseeing reduced withholding tax rates for interest, dividends and royalties if certain conditions are met.

Recent changes to and outlook for treaty network

With effect from 1 January 2022, Sweden terminated the convention signed with Portugal for the avoidance of double taxation and the prevention of fiscal evasion in respect of taxes on income, signed on 29 August 2002, due to the practical effects of the 'non-habitual resident' tax regime on the taxation of Swedish pensioners moving to Portugal. In fact, the application of this Portuguese tax regime, along with the rules of the convention, resulted in practice in a double non-taxation of the pension income paid in Sweden and obtained by Swedish pensioners benefiting from the non-habitual resident tax regime in Portugal. Even though the Portuguese government introduced in the State Budget Law for 2020 a 10 per cent rate applicable to such pension income, Sweden decided to move forward with its decision to terminate the agreement.

Recent cases

i Perceived abuses

There is a general anti-abuse rule (GAAR) in Portuguese law, which was implemented in 1999 in the General Tax Law.

In recent years, the tax authorities have made a relevant effort to enforce the GAAR more often (e.g., in situations in which the taxpayer opts for realising a capital gain instead of receiving a dividend, indirectly maintaining the shareholding). GAAR enforcement has been litigated, and the tax authorities have initially had a low rate of success, but recently they have been having some important wins.

But the most important GAAR is still the informal one: the general provision that governs the deductibility of costs, which the tax authorities prefer to apply to try to circumvent the demanding requirements of the GAAR. There is also arbitral and judicial litigation on several specific anti-abuse rules – namely regarding the deduction of costs incurred within the activity of the company and the autonomous taxation on certain expenses deemed to be incurred outside the scope of the company's activity.

ii Recent successful tax-efficient transactions

In 2020, a court decision upheld the exemption of dividends received by a Portuguese company under the following structure: the Portuguese company provides loans qualified as equity to a subsidiary established in the MIBC, which uses this cash to provide loans to companies outside Portugal whose interest is exempt of CIT under the MIBC regime.

Structures transforming dividends to be received by physical persons in another item have been having mixed results.

Interest deduction after inverted mergers, in which the interest from the financing to purchase the subsidiary is set off against revenue of the subsidiary once the inverse merger is completed, has also been having mixed results. And the European Court of Justice has already said that excluding the deduction of this interest does not violate EU law (Case C-438/18).

Interest deduction after merger of the acquired subsidiary into the acquiring parent company has usually been upheld.

Interest deduction borne by a holding company with exempt income (dividends and capital gains), in loans to finance, with no interest charged to them, its subsidiaries, is increasingly being upheld by the tax courts. Usually, the holding company and its subsidiaries are in a tax group – hence the relevance of the interest tax deductibility.

On the transfer tax on real estate side, some taxpayers have been contributing real estate in kind to their subsidiaries, in exchange not for share capital (which would trigger taxation) but for other items of equity (hybrids between share capital and loans). The courts upheld that this does not trigger transfer tax, and it is now expected that the next State Budget Law will extend taxation to this contribution in kind.

The Portuguese courts have been deciding in favour of taxpayers regarding the different tax treatment that is given to foreign investment in Portugal through collective investment undertakings (CIUs) resident in other EU Member States.

The subject discussed was whether Portuguese legislation was in violation of the principle of free movement of capital stated in Article 63 of the Treaty on the Functioning of the European Union, because there was a different tax treatment of dividends distributed to Portuguese CIUs (no withholding tax) compared with dividends distributed to CIUs in other states (withholding tax).

Another level of the litigation, still pending, is the tax credit that resident investors in Portuguese CIUs were granted, in contrast to non-resident investors in Portuguese CIUs.

Outlook and conclusions

Following the OECD model, the Portuguese tax system is quite competitive, given the extended network of DTTs currently in force, along with several favourable and attractive tax regimes at a corporate level, such as the participation exemption regime.

At a national level, recent Portuguese legislation has been focused on minimisation of the effects of the covid-19 pandemic, such as the extension of deadlines to comply with several declarative and ancillary obligations, and no significant tax reforms have been introduced since the Proposed State Budget Law for 2022 previously presented by the Portuguese government was rejected by Parliament, thus giving rise to the recent elections. Although the new State Budget Law for 2022 is still not known and should be approved at the end of the first quarter of 2022, it is likely that it will include additional tax measures and incentives aimed at increasing business and productive investment.

At the international level, in 2022, the EU is likely to implement the international agreement on minimum taxation (of 15 per cent) for multinationals, which is expected to come into force in early 2023, thus giving an incentive and opportunity for the revision of the Portuguese statutory corporate tax. It is urgent, for competitive reasons, to eliminate the CIT state surcharge mentioned above, along with keeping the important tax incentives (contractual and non-contractual) for investment in Portugal in the industrial sector.

Footnotes

1 António Fernandes de Oliveira is the founding lawyer and Mónica Respício Gonçalves is a lawyer at AFDO.

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