Businesses generally adopt a corporate form, with the most commonly used being joint-stock companies (Sociedades Anónimas, or S.A.) and limited liability companies (Sociedades por Quotas, or Lda). Portuguese company law also establishes other forms, used less commonly. In general, joint-stock companies and limited liability companies are taxed according to similar rules, with both being treated for legal purposes (including tax) as separate entities, unless the tax transparency regime applies.
Joint-stock companies are subject to a minimum share capital of EUR50,000, represented by shares. The capital is divided into shares and the shareholders’ liability is limited to the value of the shares subscribed.
Limited liability companies are formed by at least two shareholders (although limited liability companies with a single shareholder are also admitted). There is no minimum share capital required. Shareholders may be jointly responsible up to the amount of initial paid-in capital agreed in the articles of incorporation. Limited liability companies may be held by a single shareholder (Sociedade Unipessoal por Quotas), either upon formation or upon the redemption of the interest held in the company by other shareholders. In general, the same rules apply as for limited liability companies.
Partnerships – whether de facto or in the form of limited partnerships or limited liability partnerships – have not been recognised as such or established in either the company laws or the tax laws of Portugal. Accordingly, Portuguese tax law does not provide a comprehensive set of rules establishing how resident or non-resident partnerships/partners are taxed. Furthermore, no clear guidance is provided regarding how foreign partnerships should be respected as such or taxed as separate entities.
Notwithstanding, the Portuguese Corporate Income Tax Code (the "CIT Code") establishes a transparency regime that applies, inter alia, to certain family-owned companies dedicated to asset management, to certain companies that fall into the definition of Professional Services Firms, and to certain joint venture entities such as complementary groups of companies (Agrupamento Complementar de Empresas) and European Economic Interest Groups (Agrupamento Europeu de Interesse Económico).
Complementary groups of companies can be formed by a group of corporate entities/individuals, generally to facilitate collaboration between members in a specific business venture. A complementary group of companies has separate legal personality from its members. These entities are not subject to minimum registration capital, and members are jointly liable for the entity’s debts.
European Economic Interest Groups are meant to facilitate or develop the economic activities of their members via a pooling of resources, activities or skills, and can be formed by legal entities governed by public or private law that have been formed in accordance with the laws of an EU country and have their registered office in the EU, as well as by individuals developing an industrial, commercial, craft or agricultural activity, or providing professional or other services in the EU. They must have at least two members from different EU countries. Each member of a European Economic Interest Group has unlimited joint and several liability for the entity's debts.
In addition, Portuguese Collective Investment Vehicles apply taxation schemes that privilege investor-level income taxation to fund-level income taxation (see 2.3 Other Special Incentives).
Portuguese tax residency of corporate entities is determined based on the location of the head office or place of effective management.
The general CIT rate applicable on the Portuguese mainland is 21%, while the applicable tax rate in the Madeira Archipelago is 14.7% and in the Azores Archipelago it is 16.8%.
On the Portuguese mainland, entities qualifying as small and medium enterprises (SMEs) are subject to a 17% rate, which applies to the first EUR25,000 of taxable profit. The remaining profit is subject to the applicable general rates.
A state surtax applies to taxable profits exceeding EUR1.5 million, as follows:
Local surtax up to 1.5% of taxable profits is levied by municipalities.
Certain expenditures incurred by entities subject to CIT are separately subject to Autonomous Taxation (Tributação Autónoma) at varied rates, such as undocumented expenses, entertainment expenses and expenses incurred with vehicles.
Generally, taxable income derived from businesses operated directly by individuals is subject to personal income tax (PIT) and taxed as business income (Schedule B income) at progressive rates ranging from 14.5% to 48% and to a solidarity surcharge, also levied at progressive rates (2.5% to 5%), applicable to taxpayers with taxable income over EUR80,000. (See 3.2 Individual Rates and Corporate Rates).
Taxable profits are defined in the CIT Code as the sum of profits and losses (p&l) as well as the net variations in equity not reflected in p&l, as accrued and determined for accounting purposes, subject to the adjustments set forth in the CIT Code. These adjustments include:
The Portuguese patent box grants a deduction corresponding to 50% of the income derived as consideration from the disposal or temporary use of certain industrial property rights (patents, industrial models and copyright on computer software), including income from the violation of such rights ("qualifying income"). Qualifying income is defined as the net positive balance between the revenues and gains derived in a given taxable year as consideration from the disposal or use of qualifying industrial property rights and the research and development (R&D) expenses or losses incurred or borne in the same period by the taxpayer in connection with the industrial property right from which the gain is obtained.
This regime does not apply to any services supplied that are ancillary to a qualifying disposal or temporary use of industrial property.
Portuguese tax law establishes several tax incentives aimed at promoting certain behaviour (eg, savings) or stimulating certain activities, industries and sectors. Notable sector-specific incentives include those granted to capital markets and to the financial sector in general, to real estate development and rehabilitation, to the shipping industry, wine production, sports and cultural activities, cinema, forestry management, patronage, philanthropic activities and the co-operative sector.
Generally, pension funds established according to Portuguese law are exempt from Portuguese CIT and the municipal transfer tax applicable to the sale of real estate. This tax treatment may be extended to pension funds established under the law of another EU/EEA jurisdiction, provided the latter is bound by administrative co-operation or mutual assistance in taxation matters, when the following requirements are met:
Collective Investment Vehicles (CIVs)
Investment funds in securities, real estate investment funds, investment companies in securities and real estate investment companies established according to Portuguese law are technically subject to CIT on their taxable income; however, income typically derived by CIVs – including interest, dividends, capital gains and rents, as well as certain fees and commissions – is generally excluded from CIT. This exemption does not apply when the income is paid by an entity resident in a blacklisted jurisdiction. CIVs are exempt from municipal and state surcharges.
In addition, stamp duty applies on the net asset value of these funds on a quarterly base (at a rate of 0.0025% or 0.0125%, depending on the investment policy pursued).
Investors resident in Portugal are subject to tax on distributions, redemptions and the disposal of units or shares issued by CIVs (at different rates). Non-resident investors are exempt, except with respect to investments in real estate investment funds and companies, in which case a 10% rate applies.
Portuguese REITs and their shareholders have an income tax regime similar to real estate investment funds and companies, with the particularity that income from the sale of real estate is only excluded from tax when the immovable property has been held for renting purposes for at least three years.
Exemptions Applicable to Foreign Financial Entities
Interest payments made by resident financial institutions towards Portuguese resident financial institutions without a PE in Portugal are generally exempt from CIT (blacklisted entities as well as non-resident financial institutions substantially held by resident entities are excluded). Also, gains realised by non-resident financial institutions, in the context of swap transactions entered into with a resident financial entity, are also generally exempt from CIT (similar exclusions apply).
Exemption Applicable to Debt Instruments
Non-resident entities and individuals (except those that are resident in blacklisted Jurisdictions) are exempt from CIT and PIT otherwise due on interest and capital gains derived in connection with qualifying debt instruments that benefit from the regime set forth in Decree Law 193/2005.
Debt instruments qualifying for this regime include bonds issued by public and private sector entities, money market instruments (namely treasury bills and commercial paper), perpetual bonds, convertible bonds, other convertible securities, and tier 1 and tier 2 capital instruments, regardless of the currency of issue. Qualifying instruments must be integrated in a centralised system managed by a Portuguese resident entity or by an entity established in the EU/EEA that manages an international clearing system (in the latter case, provided that the state of establishment is bound to administrative co-operation for tax purposes equivalent to the rules in force in the EU).
The beneficiaries of this exemption include central banks and government agencies, international organisations recognised by Portugal, and entities resident in a country or jurisdiction that has entered into a double tax treaty or an exchange of information agreement with other entities that are not resident in a blacklisted jurisdiction.
Tonnage Tax and Seafarer Schemes
Following approval by the European Commission, two new schemes have been implemented:
For resident entities, there is no distinction between ordinary income/capital gains and ordinary losses/capital losses. The carry-forward of losses is available for five years, unless the entity is a certified SME, in which case the carry-forward of losses is available for 12 years. For each year, the deduction of tax losses is limited to 70% of the taxable profit. Carry-back is not allowed.
Portuguese law establishes a general anti-loss trafficking rule, under which, loss carry-forward is not allowed if more than 50% of the entity’s ownership (share capital or voting rights) has changed between the taxable year in which such losses were generated and the end of the taxable year in which the deduction is claimed. However, several exceptions apply to the general rule (eg, when the ownership is converted from direct into indirect or from indirect into direct, and when an interest is exchanged between entities whose share capital or voting rights are held directly or indirectly by a common entity).
When no exception applies, the Minister of Finance may approve the transfer of losses to the extent that a motion is filed with the tax authorities and it is considered that there is a recognised economic interest in authorising such transfer.
In the case of non-resident entities, no carry-forward of losses is available for business income unless such entities have a PE in Portugal. Non-residents that derive Portuguese-source capital gains and do not have a PE in Portuguese territory to which such gains are attributable are subject to tax on the balance of Portuguese-source capital gains and losses. In the case of securities, exemptions may apply (see 7 Anti-avoidance for more details).
In general, business expenses, including interest, are deductible for tax purposes to the extent they are necessary to obtain or guarantee income subject to CIT. There are, however, certain limitations that are applicable to interest expenses deductibility.
Interest Barrier Rule
Net interest expenses may be deducted up to the greater of the following limits:
It is possible to carry forward excess interest deductions and unutilised limits for five taxable years. Excess interest deductions and unutilised carry-forwards are applied on a first-in, first-out basis, after the current year’s interest is deducted. Rules similar to the anti-loss trafficking rules detailed above also apply to excess interest deductions and unutilised limits.
Companies taxable under the Special Regime of Group Taxation (Regime Especial de Tributação dos Grupos de Sociedades, or RETGS) may elect to apply these rules on a group basis. Likewise, certain rules limit the deductibility of interest as well as the application of excess limits pertaining to pre-grouping or post-grouping taxable years.
Transfer Pricing and Shareholder Loans
In addition to the above, transfer pricing rules may limit the deductibility of interest in the case of debt arrangements entered into between related parties, as defined for tax purposes, to the extent such interest is not established according to the arm’s-length principle.
Unless transfer pricing rules apply, interest and other forms of compensation agreed under financial arrangements, qualified as shareholder loans (suprimentos), cannot be deducted in excess of the rate established in a ministerial decree issued by the Minister of Finance.
The RETGS is not a consolidation regime, but rather an optional tax regime under which the "Dominant Company" of a "Group of Companies" may elect to aggregate the taxable profits and losses of any other company pertaining to the same group of companies ("Member Companies").
Under the RETGS, a Group of Companies exists when a company (the Dominant Company) directly or indirectly holds 75% of the share capital of another company or companies (the Member Companies), as long as such interest provides the Dominant Company with the majority of the voting rights in each of the Member Companies.
An election to apply the RETGS can only be filed when certain conditions applicable to the Dominant Company and to the Member Companies are cumulatively fulfilled.
The RETGS ceases to apply when any of the mandatory requirements concerning the Dominant Company are no longer fulfilled, or when the taxable profits of any of the entities forming the Group of Companies are determined according to an indirect assessment. When a Dominant Company becomes controlled by another Portuguese company that fulfils the requirement to be considered a Dominant Company (other than the requirement with respect to losses during the three previous tax periods) during the application of the RETGS, the latter may elect to continue to apply the RETGS.
Specific and strict rules apply to the carry-forward of losses during the application of the RETGS, including in cases where a non-recognition transaction occurred. Also, pre and post-RETGS loss carry-forward is limited.
In general, capital gains are considered taxable profits and are taxed at the general CIT rate. Capital losses may be deducted if the general deductibility rules are fulfilled, but not to the extent such losses correspond to profits or reserves distributed in previous years or capital gains realised on the disposal of shares that benefited from the participation exemption or from the foreign (indirect) tax credit.
The participation exemption regime exempts capital gains and losses realised by Portuguese-resident companies with share transfers, provided that the following requirements are met.
Additionally, a rollover relief mechanism may be used to exclude 50% of the positive balance of capital gains and losses realised on the sale of tangible fixed assets, intangible assets and non-consumable biological assets, held for at least one year, from taxable income, to the extent the realisation value of such assets is wholly or partially reinvested in the acquisition, production or construction of similar assets during a four-year reinvestment period that corresponds to the two years before and the two years after the taxable period in which the realisation occurs. The law establishes specific rules to be observed, including regarding the type of assets qualifying for this regime.
When the reinvestment is not wholly or fully made until the end of the reinvestment period, the income that was not previously recognised for tax purposes must be subject to taxation in that period, increased by 15%.
Non-resident taxpayers who do not have a Portuguese-situs PE may be subject to Portuguese-source capital gain taxation on the disposal of the following assets:
There is an exemption that applies to non-resident entities or individuals deriving Portuguese-source capital gains from the disposal of shares and other securities issued by Portuguese entities, but this exemption does not apply in the following cases.
Other taxes may apply to specific transactions, namely:
Other than the taxes mentioned in 2.8 Other Taxes Payable by an Incorporated Business, a company owning real estate in Portugal is generally subject to property tax (IMI), levied at a rate ranging from 0.3% to 0.45% (urban properties) of the tax registration value. An addition to the property tax, called AIMI, may also apply.
Also, industry-specific levies may apply to companies operating in certain sectors.
Generally, most closely held local businesses operate in corporate form.
The CIT Code comprises a tax transparency regime that applies to the following entities in specific situations:
A "professional services firm" is defined as a company in which all the shareholders undertake the same type of professional activities listed in a ministerial order – doctors, dentists, lawyers, etc – and more than 75% of the income is derived from at least one qualifying professional activity, as long as its shares are held by not more than five shareholders for more than 183 days per tax year, with none of them being a public company, and at least 75% of the share capital is held by professionals who carry out such activities, totally or partially through the company.
The taxable profits are computed at a corporate level but are attributable to the shareholders and taxed as business (Schedule B) income. If the shareholder receives payments on account of future dividends during a given tax period, and such payments are in excess of the income attributed via the tax transparency regime, then the total amount of such payments should be taxed as self-employment/business income (Categoria B) for PIT purposes.
If a closely held corporation is domiciled in a blacklisted jurisdiction, it may be considered a controlled foreign company (CFC), in which case, anti-deferral rules could apply. In this case, the CFC profits or income may be attributable to the individuals holding an interest in the CFC, in the proportion of such interest. Income so attributed is characterised as business (Schedule B) income if the interest is used in a business activity, or as investment (Schedule E) income in all other cases.
If the tax transparency regime applies, the taxable profits of the tax transparent entity are directly attributable to the shareholder, and are taxed as business income for PIT purposes. If the shareholder receives payments on account of future dividends during a given tax period, and such payments are in excess of the income attributed via the tax transparency regime, then the total amount of such payments should be taxed as self-employment/business income (Categoria B) for PIT purposes.
Capital gains realised on the sale of shares by resident individuals are taxed at a special 28% rate (Schedule G income), unless the taxpayer chooses to include this income and submit it to the progressive rate structure and the solidarity surcharge, or unless it is shares from a non-listed micro or small-sized company that are taxed at the effective rate of 14%.
The rules that apply to the taxation of dividends and capital gains derived by individuals from publicly traded corporations do not differ from those applicable to income derived from privately traded corporations.
Dividends received by resident individuals are taxed at a 28% flat rate unless the taxpayer elects to include this income and apply the general progressive rate structure. In this case, when dividends are distributed by Portuguese-resident companies or EU/EEA companies (in the latter case, provided that the state of establishment of the distributing company is bound to administrative co-operation for tax purposes equivalent to the rules in force in the EU) and the same requirements established in the Parent-Subsidiary Directive are fulfilled, the taxpayer will be able to include an amount corresponding to 50% of such dividend.
Capital gains realised on the sale of shares by resident individuals are generally taxed at a special 28% rate (Schedule G), unless the taxpayer chooses to include this income and submit it to the progressive rate structure and the solidarity surcharge.
In general, interest, dividends and royalties paid by Portuguese resident companies to non-resident companies are subject to withholding tax at the rate of 25%.
Dividends, interest and royalties, among other forms of capital income, paid or made available to accounts held by one or more holders on behalf of unidentified third parties, or to entities deemed to be tax resident in blacklisted jurisdictions, should be subject to withholding tax at the rate of 35%.
Withholding tax on distributions of dividends may not take place if the Portuguese participation exemption regime is applied.
Dividends distributed by resident entities to non-resident entities should be exempt from CIT provided that:
In order to benefit from this tax exemption, the beneficiary of the income must fulfil some formal obligations.
This exemption regime also applies to dividends distributed by a resident company to a PE located in other EU or EEA countries of an entity that meets the mentioned requirements.
On the other hand, these tax exemptions are not applicable if there is an arrangement – or several arrangements that are not genuine – whose primary purpose, or one of those, is to obtain a tax advantage that defeats the object and purpose of eliminating the double taxation of dividends. This regime should also not apply if the Portuguese distributing company has not complied with the declarative obligations imposed by the Portuguese legal regime of the beneficial owner central registry.
Regarding interest and royalties income, the withholding tax may be eliminated by the tax framework established by the EU Interest and Royalties Directive (I&RD), provided that the following requirements are met:
The payment of interest and royalties to a company or a PE resident in Switzerland may also benefit from this exemption regime, provided that the aforementioned requirements are fulfilled.
The application of this tax exemption regime also depends on the fulfilment of some formal requirements.
The beneficiary may also apply for the later reimbursement of the withheld tax within the next two years following the respective payment.
This tax exemption regime on interest and royalties payments should not be applicable to the part of the income that does not comply with the arm’s-length principle.
Interest from debt securities issued by Portuguese companies and made available to non-residents may also be exempt from withholding tax under Decree-Law No 193/2005 of November 7th.
Portugal has so far executed 80 DTTs, 78 of which are in force. The last DTT to enter into force was with Angola. Finland has denounced its DTT with Portugal, so that a DTT has not been available since 1 January 2019.
Over the last few years, the Portuguese tax authorities (PTA) have increased their focus on cross-border tax matters, aiming to tackle treaty shopping practices, following the best international practices on the matter.
The last reports on activities developed for the combating of fraud and tax evasion that were released by the PTA highlighted the efforts to tackle cross-border abusive practices and an increase in the use of the international mechanisms available for the exchange of tax information.
In accordance with such reports, the PTA also intend to increase their control over cross-border transactions made between related parties, as well as over entities developing their business activities by means of new business models based on information technologies. One way to mitigate the risks arising from related-party transactions may be to execute an advance pricing agreement (APA).
The most common transfer pricing issues that foreign investors usually have to deal with regarding local corporations are related to the terms and conditions established between the related parties regarding interest on financing, as well as on the amount of management fees and royalties.
The Portuguese transfer pricing regime was amended in 2019 in order to expressly establish that the transfer pricing rules are applicable to corporate restructurings whenever they include the transfer of tangible or intangible assets, rights on intangible assets or compensation payments for losses.
In general, Portugal follows the OECD standards on transfer pricing issues; therefore, the PTA are legally entitled to challenge the agreements established by related parties with reference to limited risk distribution for the sale of goods or the rendering of services. The control of such arrangements is common for international corporate groups. These arrangements may also be covered by an APA.
Considering that Portugal tends to follow the OECD standards on transfer pricing matters, there are no particular differences to emphasise.
From a Portuguese tax standpoint, it is not common to settle transfer pricing disputes through DTTs and mutual agreement procedures (MAPs). Nevertheless, there are some cases duly documented in OECD statistics.
According to such statistics, at the end of 2019, Portugal had approximately 70 ongoing MAPs. Approximately nine of these cases started before 1 January 2016, while the remaining started after such date. Moreover, the number of ongoing MAPs related to transfer pricing cases increased to approximately 39.
The average time needed to close MAPs related to transfer pricing issues and started before 1 January 2016 was approximately 83.5 months. As regards the transfer pricing MAPs started after the previously mentioned date, the “start to end” timeframe was approximately 29.5 months.
On the other hand, the outcome of the MAPs was essentially the following:
Furthermore, in December 2017, the PTA published Guidelines for the use of the International MAP Procedures in accordance with the Double Tax Treaties entered into by Portugal, and with the Arbitration Convention – Convention 90/436/EEC, of 23 July 1990, on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.
As a rule, when the PTA execute a transfer pricing adjustment for one related party in a transaction, a correlative adjustment may be made by the other related party involved in such transaction.
Additionally, several DTTs entered into by Portugal provide a mechanism under which transfer pricing adjustments made by the tax authorities in one state may lead to a correlative adjustment in the other party's state of residence for the avoidance of potential double taxation.
Finally, where a transfer pricing adjustment leads to additional tax liability towards the PTA, the relevant company should be bound to pay compensatory interest to said authorities at a rate of 4% per year. Specific penalties may also apply.
As a rule, local branches and local subsidiaries of non-local corporations are taxed on the same basis. However, the following aspects in the tax regime applicable to a local branch of a foreign corporation should be considered:
As a rule, capital gains made by non-resident entities from the transfer of stock in local corporations are subject to tax at the rate of 25%, but may be exempt from taxation in Portugal provided that the following apply.
Some DTTs entered into by Portugal also establish a waiver of taxation regarding capital gains obtained from the sale of a local company, provided that such capital gains are not allocated to a PE located in the Portuguese territory.
Assuming that the beneficiary of the income is not a Portuguese tax resident, no taxation should be triggered in Portugal on capital gains arising from the transfer of non-local holding companies unless the assets of such non-local holding companies are essentially constituted by rights over real estate properties located in Portugal.
The most relevant tax issues that may be triggered by a change of control are the following:
The rules that apply to the determination and assessment of the respective taxable income are the same for local-owned and foreign-owned affiliates, including the transfer pricing rules that apply to transactions made between related parties.
As a rule, payments regarding management and administrative expenditures made to non-local affiliates are deductible for tax purposes, assuming that they are deemed necessary for the business of the local affiliate. Formal requirements regarding the documentary support of such expenses should be observed.
Finally, the terms and conditions related to the rendering of said services and the payment of the relevant fees are subject to the Portuguese transfer pricing rules and should be made according to the arm’s-length principles. Otherwise, the PTA may deny the tax deductibility of such expenses.
As a rule, there are no specific constraints, but such transactions should be made in accordance with the transfer pricing rules and the arm’s-length principle, or they risk being challenged by the PTA.
The CIT Code subjects resident companies to tax on all their income, regardless of the country of source. On the other hand, all deductible expenses are also taken into account to determine the taxable income of the local company, independently from the location where such expense is incurred.
Furthermore, the CIT Code expressly provides different methods to eliminate double taxation, namely tax credit and tax exemption methods.
Regarding tax credit methods, a credit deduction for international double taxation is available for situations in which income generated abroad is included in the taxable income.
The tax credit should correspond to the income tax paid in the foreign country, or to the amount of CIT assessed before the deduction, corresponding to the net income that may be taxed in the foreign country, whichever is lower.
Additionally, if a DTT applies, the tax credit should not exceed the tax that should have been borne abroad pursuant to the terms established by the DTT.
For the exemption method, the participation exemption regime should be highlighted, as well as a special regime applicable to foreign PEs that allows the tax exemption of the income generated by them in order to mitigate distinctions between foreign subsidiaries and foreign PEs.
This regime is optional and, if exercised, has to include all the PEs located in the same territory, and should remain in force for a minimum period of three years. Additionally, the following requirements should be met:
This last requirement may not apply if the following types of income obtained by the relevant entity do not exceed 25% of its global amount of income:
Moreover, the Portuguese company cannot choose to exclude the profits assessed by the foreign PE from its taxable income, up to the amount of tax losses assessed by such PE as have concurred to determine the Portuguese company’s taxable income in the previous five fiscal years, or the previous 12 fiscal years for small and medium companies.
The Portuguese company also cannot choose to include the losses assessed by the foreign PE in its taxable income, up to the amount of profits that such PE has assessed that have not concurred to determine the Portuguese company’s taxable income in the previous five fiscal years, or the previous 12 fiscal years for small and medium companies.
The optional regime mentioned above with reference to foreign PEs of Portuguese companies should be considered in light of local expenses. Provided that the same regime applies, the expenses made by the foreign PE are not deductible to determine the taxable income of the Portuguese company.
As a rule, dividends from foreign subsidiaries are considered taxable income for the resident shareholder and subject to taxation at the rates stated in the Portuguese CIT Code. However, tax relief or even a tax exemption may be obtained in accordance with the applicable DTT.
In order to avoid economic double taxation, the Portuguese CIT Code sets out a participation exemption regime, pursuant to which, inbound dividends may be exempt from CIT, provided that the following requirements are cumulatively met.
This tax exemption is subject to a specific anti-abuse clause, pursuant to which, it should not be applicable if there is an arrangement or several arrangements, not deemed as genuine, that have been executed with the main purpose of obtaining a tax advantage defeating the object and purpose of eliminating the double taxation of dividends, taking into consideration all the relevant facts and circumstances.
For this purpose, an arrangement, or a set of arrangements, should be considered as non-genuine when it is not executed for valid economic reasons and does not reflect economic substance.
Please see 2.2 Special Incentives for Technology Investments regarding the patent box regime.
The Portuguese CFC rules contained in the CIT Code closely follow the CFC regimes that have been adopted by several other EU countries.
According to the Portuguese CFC rules, the income generated by a CFC should be subject to taxation regardless of any dividends distribution, provided that some requirements regarding the percentage of shareholding, the location of the foreign entity in a tax haven territory and the evaluation of profit generated by the respective economic activity are met.
As regards the shareholding percentages, the resident shareholders – whether individuals or companies – should hold at least 25% of the shares, voting rights, profit rights or assets of the relevant non-resident entity, either directly, indirectly or by means of a fiduciary or an interposing agent.
With reference to the location criteria, a controlled company is an entity domiciled in a blacklisted jurisdiction, or an entity that is subject to an amount of tax on income that is lower than 50% of the amount of tax that would be due in taxation under the rules set forth by the CIT Code.
Finally, regarding the business activity requirement, CFC rules may not apply if the following types of income obtained by the relevant entity do not exceed 25% of its global amount of income:
These CFC rules do not apply when the foreign entity is resident in another member state of the EU/EEA (in the latter case, provided that the state of establishment is bound to administrative co-operation for tax purposes equivalent to the rules in force in the EU), and the resident company shows that the setting up and activity of such foreign entity is grounded in valid economic reasons and that the entity develops a business activity that involves employees, assets and business facilities.
With the exception of the mentioned CFC rules, as well as the substance rules provided by the participation exemption regime and the exemption regime applicable to capital gains made by foreign entities, there are no specific rules regarding the substance of non-local affiliates. Nevertheless, the Portuguese CIT Code sets forth that a company may be considered a tax resident if its effective management takes place in Portugal.
Please see 2.7 Capital Gains Taxation. The gains should benefit from the participation exemption regime, provided that the following requirements are cumulatively met.
The requirement of the non-local affiliate being subject to an income tax with a rate not lower than 60% of the Portuguese CIT may not apply if the following types of income obtained by the relevant entity do not exceed 25% of its global amount of income:
This exemption does not apply if the non-local affiliate has real estate in Portugal valuing more than 50% of its assets, unless such real estate is allocated to an agricultural, industrial or commercial activity (other than a real estate buy and sell activity) or was acquired before 1 January 2014.
There is a general anti-abuse rule (GAAR) under which the PTA can disqualify, for tax purposes, the typical effect of an arrangement or a series of arrangements that, having been put into place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are executed with an abuse of legal forms or are not genuine, having regard to all relevant facts and circumstances.
Where an arrangement or a series thereof is disqualified for tax purposes, the tax liability shall be calculated in accordance with the tax rules applicable to the arrangements corresponding to the underlying substance or economic reality.
For these purposes, an arrangement or a series of arrangements shall be regarded as non-genuine to the extent that it is not put into place for valid commercial reasons that reflect economic reality.
Whenever the GAAR applies, the compensatory interest rate levied by the tax authorities will be increased to 15%.
While there is no routine audit cycle that applies to all companies, the PTA prepare a National Tax and Customs Inspections Plan on a yearly basis. This plan establishes the programmes and criteria for tax inspections, directing the audit activities of the tax authorities.
Furthermore, the PTA created a Large Taxpayers Unit, which supports compliance and constantly monitors the tax activity of large taxpayers.
Portugal has already implemented several BEPS measures, such as the ones that follow:
Portugal is also a signatory of the Multilateral Instrument (MLI).
Some of the actions mentioned above are the result of the implementation of EU directives addressing some of the key factors identified by the BEPS Action Plan.
Also, CbC reporting was introduced in 2016, whereby multinational groups should submit country-specific statements disclosing detailed financial and tax information to the PTA, provided certain requirements are met.
As an EU and OECD member, Portugal is committed to the implementation of the BEPS Action Plan. Several BEPS measures have already been implemented, whether by unilateral decision or by implementation of EU directives dealing with the same tax challenges that are identified in several BEPS actions. Thus, for the next few years, the BEPS Action Plan should not give rise to any relevant tax reform in Portugal.
However, there are some specific tax issues that led to slight amendments during 2019. For instance, Law No 32/2019, of May 3rd, was approved, introducing amendments to the CFC rules, interest barrier rules, exit tax and the GAAR in order to conclude the transposition into the Portuguese tax system of the Anti-Tax Avoidance Directive (ATAD). Also, Law No 119/2019, of September 18th, introduced amendments to the transfer pricing rules.
Portugal enacted major corporate tax reform in 2014 aimed at increasing competitiveness, allowing stability and attracting investment in order to relaunch the Portuguese economy.
Such corporate tax reform, along with other changes in the economic environment, contributed to bringing international investment and, consequently, international taxation to a high level of attention in Portugal.
Moreover, in order to protect the legal framework arising from said tax reform and assure stability for investors, the solutions adopted have already taken into account the international trends in corporate taxation, namely regarding BEPS Action Plan discussion.
Considering the high level of implementation that the BEPS Action Plan already has in the Portuguese corporate tax framework as a result of the solutions established by said tax reform, no relevant developments on these matters are expected in the near future.
Please see the previous sections in relation to this matter.
Reference should be made to the relevant preceding sections.
As mentioned above, as an EU country, Portugal is subject to the two EU anti-tax avoidance directives, ATAD and ATAD 2, which establish anti-hybrid rules aimed to cover hybrid mismatches. Anti-hybrid rules established in ATAD 2 were implemented by Law 24/2020, of July 6th.
As a rule, Portuguese tax-resident entities and individuals are subject to income taxation based on their worldwide income. However, new territorial features were introduced by the CIT reform in 2014, including a participation exemption applicable to capital gains and losses, an exemption applicable to gains derived upon the liquidation of non-resident entities, and an elective regime under which profits attributable to foreign PEs may be exempt from CIT in Portugal.
Following the trend established in Germany and Spain, in 2012 Portugal introduced a BEPS-compliant restructuring of its interest deductibility limitations, including a so-called EBITDA rule, which is in line with BEPS Action 4.
Portugal does not have a territorial tax regime. A sweeper CFC rule would likely simplify the CFC rules in general (including the Portuguese), but would likely struggle with both constitutional and EU-level opposition to the extent it could no longer resemble an anti-avoidance mechanism targeted at countering unsubstantiated deferral practices. In addition, such a rule could also disproportionately affect legitimate business decisions, thus creating potential economic distortion/inefficiency.
Some of the Portuguese DTTs already have limitations of benefits, as well as principal purpose test (PPT)-type provisions. Notwithstanding, the PPT provision should be adopted with the MLI.
Following the examples in other EU countries, the PTA are expected to strengthen their scrutiny of the applicability of double taxation conventions (DTCs). As such, foreign groups with current investments in Portugal should re-evaluate the substance of their investment and financing structures, as well as how they are deploying intangibles in their Portuguese businesses. Portuguese groups using EU holding platforms may also consider restructuring in light of recent developments in Portugal.
Since 2000, Portugal has had a transfer pricing regime aligned with the OECD guidelines, and for the time being there are no proposed changes. The tax authorities and clients seek direction in the guidelines, and, as such, any further changes to it might have consequences. Generally, the taxation of profits related to intellectual property has not triggered increased controversy in recent years compared to pre-BEPS levels.
The transparency and CbC regimes being proposed and implemented, together with the instruments developed in recent years to exchange information automatically or upon request, contribute positively to a fairer international tax environment.
Ultimately, positive spillovers are to be expected as governments and the international organisations with tax policy roles are able to advance the tax system by enforcing taxation where value is created, in a world where digitalised models are also changing the rules of the game.
From a different perspective, the thresholds defined – namely regarding the application of CbC reporting – ensure that these rules will not disturb the functioning of the economy, particularly in companies that do not have a significant multinational footprint.
No substantial changes have yet been implemented to address concerns regarding the taxation of digital economy businesses for CIT purposes.
Recently, Law 74/2020, of November 19th, transposing Directive (EU) 2018/1808 of November 14th, introduced the payment of an advertising tax, applicable to audio-visual on-demand services or video-sharing platform services, as well as an annual levy of 1% payable by audio-visual on-demand service operators (the so-called Netflix Tax).
For VAT purposes, relevant changes have already entered into force to tackle the challenges of allocating indirect taxation rights in a fair manner in the digital economy.
Please see 9.12 Taxation of Digital Economy Businesses.
The income paid in relation to offshore IP is subject to withholding tax at the aggravated rate of 35%. Moreover, payments made in connection with offshore IP may not be deductible if the local paying company is not able to demonstrate that such payments correspond to existing operations and are not in an exaggerated amount.
The COVID-19 pandemic made the year of 2020 a turning point for the entire world and so all countries are now placing great expectations on 2021, which obviously impacts the legislative tax options of Portugal.
New Concept of Permanent Establishment
The Portuguese State Budget for 2021 has brought substantial amendments to the concept of permanent establishment, namely, widening the domestic concept in order to bring it closer to recent developments at OECD level. Although, in general, these amendments mostly aim to align the domestic concept of permanent establishment – as foreseen in the Corporate Income Tax Code (the "CIT Code") – with the concept currently embedded in the OECD Model Tax Convention and with Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), interestingly, the Portuguese legislator took the opportunity to go beyond the MLI and include a new form of permanent establishment (a “services permanent establishment”) that deviates from the OECD standard and follows the United Nations Model Tax Convention.
It is clear that all amendments serve the purpose of extending Portuguese tax jurisdiction to activities that, up until 2020, were either not covered in the concept of permanent establishment or would fall under the carve-out for “preparatory and auxiliary activities”. However, the material impact of such amendments is still to be ascertained, given that the effectiveness of the new provisions depends on their compatibility with the Portuguese double tax treaty network. In this regard, despite that some of these amendments result from the MLI, the fact is that Portugal ratified the MLI on 14 November 2019 (only deposited in February 2020) but made two important reservations regarding Articles 12 and 14 of the MLI.
All in all, the new provisions may be segmented into three categories.
Amendments in accordance with the MLI and not contending with the reservations made by Portugal
This category includes a new concept of a person closely related to an enterprise and the extension of the permanent establishment to activities that were formally deemed merely ancillary (the specific activity exemptions). Both amendments are now in force without the need for further action.
Amendments made in accordance with the MLI, which fall within the reservations made by Portugal
These amendments should not have a direct effect pursuant to the MLI (due to the reservation) and contend with the current wording of several double tax treaties entered into by Portugal. This category includes the new provisions addressing commissionnaire arrangements and similar strategies, and an anti-avoidance rule tackling the splitting up of contracts. This category is unlikely to enter into effect without bilateral renegotiation of the double tax treaties.
Amendments that are not related to the MLI
This is specifically the case for the new services permanent establishment concept. The CIT Code now encompasses within the concept of permanent establishment the provision of services (including consultancy services) by a non-resident company in Portuguese territory. To trigger the existence of a permanent establishment, the provision of services should last for more than 183 days within a 12-months period, irrespective of whether the services are provided by employees of the non-resident entity, or people hired for said purpose.
It is the authors' view that this new type of permanent establishment is inspired by the United Nations Model Tax Convention; however, it brings additional challenges from an interpretative standpoint due to the fact that there is no experience, guidance and virtually no case law on this matter, but also since most of the double tax treaties entered into by Portugal are based on the OECD Model Tax Convention and therefore the new domestic rule is most likely incompatible with most of the tax treaties signed by Portugal.
Additional Challenge of Identifying the Relevant Taxpayer
The concept of a person closely related to an enterprise raises one additional challenge, since the CIT Code does not clarify which should be the relevant taxpayer when several entities are considered closely related. One should bear in mind that neither the CIT Code nor the Portuguese tax authorities have yet implemented a clear methodology for the attribution of profits to permanent establishments. Therefore, provided a permanent establishment is created out of the activities of several “closely related enterprises”, it is not clear which entity (if not all) shall be deemed to have a permanent establishment and, ultimately, how the allocation of profits should be made in respect of the activities carried out by each entity.
The coming into force of these amendments represents a significant challenge for taxpayers, as well as for tax authorities and tax courts. In particular, the interplay between domestic provisions and double tax treaties, together with the effects of the MLI, will certainly lead to legal uncertainty and potentially an increase of tax litigation in this regard.
Portugal had a very long transposition process of Council Directive (EU) 2018/822 (DAC6).
Having information transparency and fairness in taxation as a political target, DAC6 sets forth new mandatory disclosure rules regarding cross-border tax mechanisms that meet at least one of the specified hallmarks. The transposition of DAC6 throughout the EU has been affected by several difficulties, not only from a technical standpoint – due to the complexity of the hallmarks and the impacts it has on all taxpayers and (tax) intermediaries in terms of compliance costs – but also due to the fact that the transposition occurred in the context of the COVID-19 pandemic. Following a significant delay in transposing DAC6 into domestic legislation, Portugal has also delayed substantially the approval of the official reporting forms (published in the official gazette on 29 December 2020) and the publishing of the official guidelines issued by Portuguese tax authorities on the matter (released only by the end of January 2021).
In addition, Portugal has decided to extend the territorial reach of this regime to purely domestic transactions, as well as the scope of the reporting obligations to virtually all main taxes, including Value Added Tax.
The fact that, apart from Poland, no other EU member state has followed this approach implies that there is very little guidance for the correct interpretation and application of the new rules, despite that the same are now fully in force, requiring a significant tax compliance effort for both taxpayers and intermediaries, and possibly implying material consequences in the event of incomplete or late filing of the reporting forms, given the tax penalties specifically set forth in this case.
Portugal is also in a peculiar position as regards professional privilege. Whilst DAC6 itself foresees specific rules to safeguard legal professional privilege, Portuguese legislation has taken a deviating path from all other EU member states, setting forth the exact same rules for intermediaries covered by legal or contractual privilege. This implies that intermediaries covered by a confidentiality clause in their service contracts may claim to be on the same footing as lawyers or other professions that are bound to professional privilege by law.
This option may itself prove to be in breach of DAC6, given that under the Directive's rules, intermediaries subject to a contractual privilege would still be primarily liable for any reporting obligations, contrary to the Portuguese rules. Moreover, the Portuguese regime does not dismiss intermediaries from an obligation to report the mechanisms to Portuguese tax authorities; rather, intermediaries subject to professional privilege are secondarily liable for the reporting obligation (if the taxpayer opts not to do so), leading to the disclosure of the identity of taxpayers in the reporting forms, in breach of the legal privilege and professional ethics rules. In light thereof, the Portuguese domestic legislation has been much criticised and it is as yet uncertain how Portuguese courts (ultimately the Constitutional Court) will address this matter.
In spite of the new pandemic wave, 2021 is expected to be a turning point with regard to the COVID-19 situation, where countries all over Europe start recovering from the impact on economic and social structures, and investors regain confidence to do business as usual.
Several tax measures were adopted in the course of 2020, mostly focused on postponing the impact of tax payments (deferring payment deadlines) and allowing an extended period for carrying forward tax losses. This will likely continue in 2021, and new tax measures are expected to foster the economic recovery in a – much expected – post-pandemic period.
From a VAT standpoint, 2021 was expected to bring two main developments.
On one hand, in August 2020, Portugal transposed Council Directive (EU) 2018/1910 of 4 December 2018, and has established a set of VAT simplifying measures applicable to intra-community transactions of goods – the quick fixes.
In fact, there are four types of in-force quick fixes:
The practical effects of these new rules should start to materialise in 2021.
On the other hand, Portugal was expected to add a new requisite for invoicing, so that invoices include a quick response (QR) code. The new rules were already set out in 2019, but their application was postponed initially for 2020 and, due to the COVID-19 pandemic, the measure was again postponed till 2022. That notwithstanding, electronic means of commerce are booming in the pandemic period and although companies benefit from this additional implementation period, it is likely that companies will start a smooth transition in the course of 2021, adapting their invoicing software to the new QR code requirement.
Outlook for 2021
There are no doubts that 2021 will be a challenging year on many levels, especially from a tax standpoint, not only because of the aspects referred to above but also due to the need for constant adaptation to the exceptional measures required by the pandemic. One may not disregard that alongside the legal frameworks in force, the tax function of companies is also affected by the fact that tax authorities are (also) working remotely and facing the struggle of quickly adapting to a new reality. During certain periods of 2020, and once again under the current lockdown in early 2021, judicial proceedings and tax enforcement procedures have been suspended, while tax inspections have been either suspended or primarily made by email or electronic communication. The tax authorities are improving their ability to interact with taxpayers in an efficient manner, but COVID-19 has naturally created additional difficulties regarding tax procedural matters. It is, however, expected that when things go back to a new normality, there will be a huge budgetary pressure to collect more taxes and it is likely that tax litigation may increase.
Together with temporary tax measures, it should be pointed out that starting from 2021, a new financial incentives plan is in force (Portugal 2030), focused on eight pillars:
The incentive packages will be complemented with the financial package negotiated by member states under the EU’s response to COVID-19, and new tax incentives will most likely be designed during the course of 2021 to help the economic recovery and lead stakeholders to focus on the economic sectors and priorities mentioned above.