Businesses can choose from several types of corporate forms when setting up their operations in Portugal, with the Private Limited Liability Company (Sociedade por Quotas or Lda.) and the Public Limited Liability Company (Sociedade Anónima or S.A.) standing out as the most common vehicles.
Private Limited Liability Company
There is no minimum share capital requirement, and the share capital is represented by “quotas” owned by at least two partners (“quotaholders”). The responsibility of the quotaholders is limited to the company’s capital, unless otherwise is provided in the company’s articles of association.
A Single Member Private Limited Liability Company (Sociedade Unipessoal por Quotas or Unipessoal, Lda.) may be incorporated by a single quotaholder or may result from the transformation of a standard Private Limited Liability Company into a Single Member Private Liability Company.
Public Limited Liability Company
It takes at least five individual or corporate founders to set up a Public Limited Liability Company, and a minimum share capital of EUR50,000. The liability of the shareholders is limited to the amount of capital they have invested in the company.
Both forms of company are taxed as separate entities from their shareholders. They must calculate the Corporate Income Tax (CIT) due under the self-assessment method, by filing a CIT return and a supporting accounting tax report on an annual basis.
The CIT Code establishes tax transparency rules applicable to the following:
Complementary Groups of Companies (Agrupamento Complementar de Empresas or ACE) and European Economic Interest Groups (Agrupamento Europeu de Interesse Económico or EEIG) are incorporated joint ventures for companies to pursue common economic interests, and to which the tax transparency rules apply (see 3.2 Individual Rates and Corporate Rates).
The residence of a business incorporated in Portugal is determined by the location of its legal seat or place of effective management.
The general CIT rate in Portugal is 21%, reduced to 14.7% in the Autonomous Region of Madeira and the Autonomous Region of the Azores.
On the Portuguese mainland, a reduced 17% CIT rate is applicable to the first EUR50,000 of taxable profits for SMEs and small-medium capitalisation companies (Small Mid-Cap), with the general CIT rate applying to the excess.
The CIT rate may be further reduced to 12.5% on the first EUR50,000 of the taxable amount for SMEs and Small Mid-Caps operating and having their effective management in inland territories of mainland Portugal, with the general CIT rate applying to the excess.
A Municipal Surtax (Derrama Municipal) may also be applicable. It varies between 0% and 1.5% on the annual taxable profit, depending on the municipality in question.
A State Surtax (Derrama Estadual) applies at the following rates:
Certain expenses incurred by entities subject to CIT are subject to a penalty tax (known as autonomous taxation or Tributação Autónoma), at varying rates.
Other reduced rates apply in the Autonomous Region of Madeira and the Autonomous Region of the Azores.
Finally, profits earned by tax transparent entities are attributed and taxed in the hands of their individual or corporate members, under the applicable Personal Income Tax (PIT) and CIT provisions.
Individuals will be subject to PIT at progressive rates up to 48%. A solidarity surtax may also apply, at the following rates:
The calculation of the taxable profit corresponds to the accounting net income for the period, plus the positive and negative variations to a company’s net worth during the same period not reflected in that result, adjusted in accordance with the provisions of the CIT Code. The adjustments include:
Indirect methods to determine the taxable profit may be applied if certain criteria are met.
The Patent Box grants a deduction corresponding to 85% of the income derived from contracts concerning the disposal or temporary use of certain industrial property rights (patents, drawings or industrial models and copyright on computer software). This includes income from the violation of such rights, upon the fulfilment of certain conditions established in the CIT Code.
For this purpose, income is defined as the net positive balance between the revenues and gains derived as consideration from the disposal or use of qualifying industrial property rights and the 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.
The Patent Box rules do not apply to any services supplied that are ancillary to a qualifying disposal or temporary use of industrial property.
The Portuguese SIFIDE II programme (the System of Tax Incentives for Business Research and Development) provides a tax credit for investments arising from R&D.
Portuguese tax resident companies carrying out commercial, industrial or agricultural activities, and non-resident companies with a permanent establishment in Portugal, are allowed to benefit from CIT deductions arising from the following eligible expenses:
If it is not possible to deduct the total amount of the calculated benefit, the excess will be converted into a tax credit, which may be carried forward for eight years.
Portuguese tax legislation provides for other special incentives that apply to particular industries or transactions.
Collective Investment Undertakings (CIUs) – Organismos de Investimento Coletivo
Collective investment undertakings in securities or in real estate take the form of investment funds or investment companies (incorporated in the form of public limited liability companies).
CIUs are subject to CIT at the general 21% rate, although they are exempt from the municipal and state surtax. They also benefit from a CIT exemption on their usual main sources of income (investment income, rental income and capital gains), unless the income is sourced in a blacklisted jurisdiction.
The taxation of income thus takes place at the level of the holders of units in the CIU, as follows:
Incentive for the Capitalisation of Companies (ICE) – Incentivo à Capitalização das Empresas
Introduced by the State Budget for 2023, this incentive provides for a tax deduction from the taxable income of 4.5% of the amount of an eligible company's net increases in equity (increased to 5% if the company qualifies as an SME or Small Mid-Cap).
The qualifying net equity increases result from:
Furthermore, in each tax period, the deduction cannot exceed EUR2 million or 30% of the taxable earnings before interest, taxes, depreciation and amortisation (EBITDA), whichever is higher. The portion that exceeds the limit may be carried forward for a period of five years.
Exemptions on Debt Instruments
Under Decree Law 193/2005, investment income and capital gains arising from qualifying debt instruments issued by Portuguese entities are exempt from Portuguese income tax as long as the beneficiaries are:
These rules cover debt instruments relating to public and non-public debt securities, including securities of a monetary nature (treasury bills and commercial paper), perpetual bonds, convertible bonds, other convertible securities, and qualifying tier 1 and tier 2 capital instruments, regardless of the currency in which this debt is issued. These instruments must be integrated in a centralised system managed by a Portuguese resident entity or by a management entity of an international clearing system established in the EU/EEA, provided that there is administrative co-operation in the field of taxation equivalent to that established within the EU.
Venture Capital Funds (VCFs) – Fundos de Capital de Risco
Income earned by VCFs set up and operating under Portuguese law is exempt from CIT.
Income paid or placed at the disposal of investors (unitholders) by the funds, by distribution or redemption, is generally subject to PIT or CIT at the rate of 10%, unless the unitholders are (i) entities that are exempt in respect of investment income, or (ii) non-resident entities without a permanent establishment in Portugal to which the income is attributable, unless they are resident in a blacklisted jurisdiction or are held, directly or indirectly, more than 25% by resident entities.
There is a possibility for individual unitholders to exempt 50% of the dividend income if they elect to aggregate the distributed income and subject it to progressive rates (see 1.4 Tax Rates).
Finally, a 10% rate applies on the positive balance between gains and losses deriving from the disposal of the units when the unitholders are non-resident entities to which the exemption further described in 2.7 Capital Gains Taxation does not apply, or are PIT taxpayers resident in Portugal who do not obtain the income from a commercial, industrial or agricultural activity and do not opt for aggregation.
Incentives for Non-resident Financial Companies
A CIT exemption applies to interest payments made by resident credit institutions to non-resident financial companies in respect of loans and swap transactions, provided that the non-resident entity:
In addition, gains obtained by non-resident financial institutions on securities repo operations with resident financial institutions are exempt from CIT, provided the gains are not attributable to the Portuguese permanent establishment of a non-resident entity.
The State Budget for 2023 introduced some important changes, including:
Carry-back is not allowed.
Under anti-loss trafficking rules, tax losses carried forward will be forfeited upon a change in direct ownership of at least 50% of shareholding or voting rights, unless the operation has not been carried out for tax avoidance purposes (which occurs when the operation has valid economic reasons).
Specific safe harbours are included for intra-group transfers of shares (eg, conversion of a direct shareholding into an indirect shareholding or vice versa, or when the change of ownership occurs between companies more than 50% of which are directly or indirectly held by the same entity).
These rules are not applicable to non-resident entities, except when they have a permanent establishment in Portugal to which the income and/or losses obtained in Portugal may be attributed. Therefore, in cases where non-resident entities do not have a permanent establishment in Portugal, they are taxed only on their Portuguese source income (ie, the balance between capital gains and losses from a Portuguese source).
There is a general limitation on the deductibility of net financing expenses up to the higher of the following limits:
The interest barrier rules also provide for a denied interest deduction and the carry-forward of unused EBITDA for a period of five years (on a first-in, first-out basis).
In addition, and in line with 2.6 Basic Rules on Consolidated Tax Grouping, where the tax group rules (Regime Especial de Tributação dos Grupos de Sociedades – RETGS) apply, there is the option to consider these rules at the level of the group, with some specificities regarding pre-group or post-group taxable years.
As regards shareholder loans, transfer pricing rules should apply and interest charged should be at arm’s length. Unless these rules apply, the maximum deductible interest will be equivalent to EURIBOR 12M + a 2% spread, except in the case of SMEs, where the spread is fixed at 6%.
RETGS is an optional regime for the aggregation (and not consolidation) of tax losses and profits of a group of companies. RETGS may be applicable whenever a “parent company” holds, directly or indirectly, at least 75% of another company, or when companies share capital and 50% of voting rights for more than one year, except when the subsidiary is newly incorporated.
Electing to apply RETGS is only possible if certain cumulative requirements are met regarding the parent company and the remaining group companies. These rules cease to apply when any of the parent company requirements are no longer fulfilled, or when the taxable profits of the subsidiary companies (member companies) are determined according to indirect methods.
Moreover, the fact that the parent company becomes controlled by another Portuguese company does not necessarily imply the loss of the possibility to apply these rules. The parent company can be resident in the EU (horizontal grouping). Specific rules apply if certain operations occur during the application of the RETGS, such as mergers, etc; specific rules also apply to the carry-forward of losses during the RETGS.
Capital gains or losses are assessed based on the difference between the sale price (after deducting inherent costs of the sale) and the adjusted acquisition value, which is calculated by applying a monetary devaluation indexation coefficient for the year of acquisition, when applicable.
However, under the participation exemption regime, capital gains or losses derived from the disposal of shares are exempt from taxation if the following requirements are met.
In addition, Portuguese tax law provides for a domestic exemption, which is available for non-resident entities without a permanent establishment in Portugal deriving capital gains from the sale of shares, provided that the following conditions are met.
Furthermore, the CIT Code establishes a reinvestment relief mechanism where up to 50% of the positive difference between capital gains and capital losses can be exempt from taxation, provided the sale proceeds are fully or partially reinvested in the year prior to the disposal or before the end of the second following year in the acquisition, manufacture or construction of the fixed, intangible and biological non-consumable assets.
In the case of non-compliance with the established rules, the defaulted CIT amount will be added to the taxable profit of that tax year, plus 15%.
Other taxes may be applicable to a transaction, as follows.
The mere holding of property in Portugal entails the annual payment of Municipal Property Tax (MPT), which is due over the VPT. The MPT rates for a property depend on the Municipality where it is located. For urban properties, the rates can range between 0.3% and 0.45%. In contrast, rural properties are subject to a fixed MPT rate of 0.8%.
The holding of property may also be subject to the MPT Surtax, which is due annually and levied at a 0.4% tax rate on the sum of the taxable values of the properties owned by the corporate taxpayers, as reported on 1 January of each year. No MPT Surtax applies whenever the real estate properties are registered for commercial or industrial purposes, or to render services.
There are also sector-specific contributions applicable to certain industries.
Most closely held local businesses usually operate in corporate form.
As discussed in 1.2 Transparent Entities, professional service firms may be subject to the tax transparency rules.
For these purposes, “professional service firms” are non-public companies engaged in listed professional activities in which all shareholders perform the same type of professional activities (doctors or lawyers, for example). Their shares should be held by five or fewer shareholders for more than 183 days per tax year, and more than 75% of the income must be derived from professional activity. In addition, at least 75% of share capital must be held by professionals who work wholly or partly through the company.
Taxable profits are calculated at the corporate level and, nevertheless, are subject to shareholder-level taxation as business income (subject to the progressive PIT rates outlined in 1.4 Tax Rates).
If a closely held corporation is located in a blacklisted jurisdiction, CFC) rules may apply.
CFC income is attributed to individuals in proportion to the interest held and is therefore taxed as business income if that interest is held as a business activity; it is taxed as investment income in all other cases. For more details on CFC rules, see 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules.
Capital gains obtained by resident individuals from the sale of shares are taxed at a flat rate of 28%. However, if the shares are issued by a micro or small-sized company, a 50% exemption applies and therefore the capital gains will be taxed at an effective rate of 14%. Alternatively, the taxpayer may opt to aggregate the gains with other taxable income and become subject to tax at progressive rates (as outlined in 1.4 Tax Rates).
Dividends received by resident individuals are subject to a flat rate of 28% (35% if paid by a company that is resident in a blacklisted jurisdiction). However, the taxpayer may opt to aggregate the dividends with other taxable income and become subject to tax at progressive rates (as outlined in 1.4 Tax Rates), in which case a 50% exemption applies to dividends distributed by Portuguese-resident companies or companies that are tax resident in an EU/EEA member state that are subject to and not exempt from a corporate income tax therein.
The tax rules applicable to sales of shares and dividends from publicly traded corporations do not differ from the rules applicable to closely held corporations (see 3.4 Sales of Shares by Individuals in Closely Held Corporations).
In general, dividends, interest and royalties paid by Portuguese resident companies to non-resident companies are subject to withholding tax at a rate of 25%. This is subject to an aggravated rate of 35% if the income is paid or placed at the disposal of accounts held by one or more holders on behalf of unidentified third parties, or to entities considered as tax residents in blacklisted jurisdictions.
Nevertheless, no tax is withheld on the distribution of dividends by Portuguese resident entities subject to and not exempt from CIT and not subject to the tax transparency rules when the Portuguese participation exemption regime is applicable. This occurs if the beneficiary of the income:
The withholding tax exemption also applies to dividends paid to a permanent establishment located in other EU or EEA countries of an entity that meets the mentioned requirements.
Regarding interest and royalties, a withholding tax is also available pursuant to the EU Interest and Royalties Directive (I&RD), provided the following requirements are met:
If the minimum holding period is not met, the beneficiary may apply for the reimbursement of the withheld tax within the two years following the respective payment.
The withholding tax exemption does not apply to the portion of interest and royalties that is not at arm’s length.
The withholding tax exemptions for dividends, and interest and royalties, are not applicable if there is an arrangement, or series of arrangements, that are not genuine, whose main purpose, or one of its main purposes, is to obtain a tax advantage that defeats the object and purpose of eliminating the double taxation, and which are carried out with an abuse of legal forms or are not considered genuine, considering all relevant facts and circumstances.
An arrangement or series of arrangements is considered non-genuine when it is not carried out for valid economic reasons that reflect economic substance.
In these circumstances, these arrangements or series of arrangements are disregarded for tax purposes and taxation is carried out in accordance with the rules applicable to business or acts that correspond to the substance or economic reality and do not produce the intended tax advantages.
To benefit from the above-mentioned withholding tax exemptions, the beneficiary of the income must fulfil some formal obligations.
Portugal has entered into 79 CDTs, 78 of which are in force and one has been signed and is awaiting entry into force. The last CDT to enter into force was with Timor-Leste.
Foreign direct investment is generally made primarily from Spain, the Netherlands and Luxembourg, as these are the primary tax treaty countries used (Bank of Portugal statistics, 2021).
The Portuguese Tax Authority (PTA) has an increased interest in international and cross-border tax issues, in order to bring down treaty shopping practices.
In fact, the PTA will challenge treaty shopping insofar as clauses limiting treaty benefits are included in the relevant tax treaties. This is the case for several tax treaties signed by Portugal.
For instance, the Protocol to the Portugal-Spain CDT, under certain conditions, limits the applicability of reduced rates or exemptions on dividends, royalties, interest and capital gains if the recipient of the income is held, directly or indirectly, more than 50% by a non-resident treaty investor.
With the approval of Council Directive 2021/0432 (the “Unshell Directive”), which will presumably enter into force on 1 January 2024, the PTA is expected to tackle the misuse of tax treaties signed with other EU states, regardless of the existence of specific CDT provisions. In particular, the applicability of those CDTs will be excluded in situations where entities are considered to lack economic substance (see 7.1 Overarching Anti-avoidance Provisions).
Management fees, royalties and interest charged over financing are the main issues dealt with by inbound investors under Portuguese transfer pricing rules.
Limited risk distribution arrangements concluded within multinational groups are frequently monitored by the PTA, and may also be covered by advance pricing agreements.
No significant issue arises from local transfer pricing rules and their enforcement, to the extent that Portugal follows the OECD standards. However, there are differences in the PTA approach in certain practical aspects.
The PTA generally does not resort to mutual agreement procedures (MAPs) to settle international tax disputes.
According to the latest OECD information available, as of 31 December 2021 the PTA was dealing with 127 ongoing MAPs, only 65 of which were transfer pricing cases.
Of the 17 transfer pricing cases closed that year:
The remaining cases were denied (one), resolved via domestic remedy (one) or had another outcome (one).
Whenever the PTA adjusts the taxable profit of an entity, a correlative adjustment must be made with regard to the taxable profit of its related party.
MAPs can be started to bring forward correlative adjustments to a taxpayer’s taxable income in situations where a related entity that is resident in a different jurisdiction was subject to transfer pricing adjustments.
Local branches (permanent establishments) and local subsidiaries of non-local corporations are generally liable to tax on an equal footing. However, there are some issues that must be considered in the tax rules applicable to a permanent establishment of a foreign corporation, such as:
Capital gains derived by non-resident entities from the sale of stock or other equity instruments in Portuguese companies are subject to a 25% CIT rate (no withholding tax applies) unless certain requirements are met (see 2.7 Capital Gains Taxation for details on the CIT exemption).
Most of the CDTs entered into by Portugal preclude taxation from the sale of stock of Portuguese entities, provided that the seller does not have a permanent establishment. However, capital gains from the sale of real estate-rich companies are generally taxable in Portugal.
Indirect transfers of stock of Portuguese companies are generally outside the territorial scope of the Portuguese CIT rules, unless more than 50% of the value of the stock is derived, directly or indirectly through one or more interposed entities, from immovable property that is located in Portugal and allocated to a property trading activity at any time during the 365 days preceding the sale.
The Portuguese CIT Code includes several change of control provisions that could give rise to a tax impact.
Except for capital gains taxation on indirect transfers of stock of Portuguese companies (see 5.3 Capital Gains of Non-residents), indirect changes of control do not generally trigger any tax impact.
Portuguese entities are subject to the same rules on the determination of taxable income, regardless of whether they are local or foreign owned. Portuguese transfer pricing provisions also apply to both domestic and cross-border transactions between related parties.
The attribution of profits to Portuguese permanent establishments of non-resident entities is preferably made by means of the direct method, and subject to the principle of the force of attraction. However, this principle is restricted by CDTs, in which Portugal follows the pre-2008 OECD separate entity approach.
Payments made to non-resident affiliates for management and administrative expenses are generally deductible if they relate to the local affiliate’s business activity, if certain documentary formalities are met, and if the terms and conditions are at arm’s length. The deductibility of payments to affiliates in blacklisted jurisdictions is subject to further requirements, such as providing proof that the transaction indeed took place and did not have an abnormal character.
Other than the application of transfer pricing provisions requiring that the terms and conditions are at arm’s length, there are no tax constraints on related-party borrowing. Interest payments to affiliates in blacklisted jurisdictions are subject to an aggravated 35% withholding tax rate, and restrictions apply on its deductibility.
Portuguese resident companies are taxed on their worldwide income and expenses. All income is taxed under the same class and is subject to the same tax rates. However, Portugal has specific schedules (eg, dividends, capital gains and royalties) for specific tax regimes.
As a rule, international double taxation is eliminated through the application of the credit method, under which an ordinary tax credit is granted for any foreign sourced income that is included in the company’s taxable basis.
The tax credit will correspond either to tax paid abroad or to Portuguese CIT due on the foreign income, net of direct and indirect costs related to such income, whichever is lower. The tax credit is calculated on a per country basis and may be carried forward for five years. Whenever a CDT is applicable, the tax credit is capped at the amount of tax payable pursuant to the CDT.
The Portuguese CIT Code also employs the exemption method for dividends (see 6.3 Taxation on Dividends From Foreign Subsidiaries), capital gains from the sale of stock of non-resident entities (see 2.7 Capital Gains Taxation) and profits made by foreign permanent establishments.
The exemption for profits of outbound permanent establishments is elective and covers all permanent establishments in one jurisdiction for at least three years. The relevant definition of “permanent establishment” is either the one found in the applicable CDT or, if no CDT is in place, the domestic definition. The CIT exemption is applicable if the following requirements are met:
The application of the exemption is subject to clawback rules, as follows:
The clawback provisions also apply for the conversion of a foreign permanent establishment into a subsidiary.
The tax treatment applicable to expenses borne by or attributable to the foreign permanent establishment follows a principle of symmetry. Accordingly, if a taxpayer has elected to apply the exemption method to a foreign permanent establishment’s profits, expenses borne by the foreign permanent establishment are not tax deductible at the level of the Portuguese head office, regardless of whether they are incurred in Portugal or abroad.
Dividends distributed by foreign subsidiaries qualify as taxable income for the Portuguese shareholder and are therefore subject to the standard CIT rates (see 1.4 Tax Rates).
Pursuant to the participation exemption regime, economic double taxation is eliminated through a CIT exemption if the following requirements are met:
The participation exemption regime is subject to a sector-specific anti-abuse provision, according to which the CIT exemption will not apply whenever there is an arrangement or series of arrangements which is not considered genuine, having been carried out for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object and purpose of eliminating double taxation on foreign dividends. An arrangement or series of arrangements are regarded as not genuine if they are not carried out for valid economic reasons and do not reflect economic substance.
If the participation exemption regime does not apply, juridical double taxation is eliminated through an ordinary foreign tax credit, which is capped at the rate provided for under the CDT, if applicable. An underlying tax credit is also available to eliminate economic double taxation if the Portuguese company holds, directly or indirectly, at least 10% of the distributing subsidiary’s share capital or voting rights for an uninterrupted period of one year prior to distribution (or this period is completed afterwards) and if the distributing subsidiary is not resident or domiciled in a blacklisted jurisdiction.
The use by foreign subsidiaries of intangibles developed by Portuguese entities must be remunerated at arm’s length. For the taxation of this income, please see 2.2 Special Incentives for Technology Investments regarding the patent box rules.
All the CDTs entered into by Portugal provide for source taxation on royalty income (in line with the UN Model Convention). Accordingly, taxation may arise in the jurisdiction of the foreign subsidiaries, with a tax credit generally being available to eliminate double taxation.
Portuguese CFC rules closely follow the CFC provision included in the EU Anti-Tax Avoidance EU Directive.
Under the Portuguese CFC rules, the undistributed profit or income obtained by non-resident entities that are subject to a “considerably more favourable” tax regime is attributed and taxed at the level of the shareholders, either individuals or companies.
A foreign company is considered to be a CFC if all of the following requirements are met:
Nevertheless, the CIT Code provides for several safe harbours, according to which a company is not considered a CFC if:
Distributions of profits that have already been attributed and taxed at the level of the shareholder due to the application of CFC rules will be excluded from taxation in Portugal, without prejudice to any tax credits that may apply for taxes paid abroad.
Other than the requirements set out under the CFC rules (see 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules), there are no specific provisions dealing with the substance of foreign entities. Foreign companies may also be considered tax resident by virtue of having their place of effective management in Portugal.
Nevertheless, the introduction of substance-based tests is expected if the proposal for the Unshell Directive is approved and enters into force.
Please see 2.7 Capital Gains Taxation.
Under the General Anti Abuse Rule (GAAR), the PTA may disregard an arrangement or a series of arrangements that have been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, and are therefore not genuine or have been carried out with abuse of legal forms, having regard to all relevant facts and circumstances. An arrangement or series of arrangements is considered not to be genuine when it is not carried out for valid economic reasons that reflect the economic substance.
As a result of the application of the GAAR, such arrangements or series of arrangements would be taxed in accordance with the rules applicable to transactions or acts that correspond to the substance or economic reality, without producing the tax advantages sought by the taxpayer with the structure implemented.
The Portuguese GAAR includes the uncommon feature of allowing the PTA to collect the tax due at the level of the entities obliged to levy withholding tax (paying entity) whenever that entity is or should be aware of the arrangement or series of arrangements that triggered the application of the GAAR.
In addition to the GAAR, there are several specific anti-abuse rules throughout the CIT Code dealing with tax-neutral reorganisations, tax losses trafficking or transactions involving blacklisted jurisdictions. These include aggravated tax rates, non-deductibility of expenses, denial of certain benefits, etc.
There is no routine audit cycle, although audits need to be started within the statute of limitations (four years for CIT). The PTA adopts a yearly National Tax Inspections Plan, which sets out the criteria for tax inspections.
The PTA has also created the Large Taxpayers Unit, which monitors and supports large taxpayers with their compliance obligations. Entities qualifying as large taxpayers are generally subject to tax audits regularly. In 2022, the list of large taxpayers was broadened to include entities subject to the supervision of the Portuguese Securities Market Commission and non-resident entities without a Portuguese permanent establishment subject to the supervision of the Bank of Portugal.
Portugal has implemented several provisions reflecting the BEPS recommendations and EU “BEPS-inspired” Directives, such as:
In the context of its EU and OECD membership, Portugal has publicly supported and actively pursued the implementation of BEPS-related measures (see 9.1 Recommended Changes).
Together with other EU member states, Portugal has been engaged in negotiations to approve Directives implementing the OECD’s proposals under Pillar One and Pillar Two within the context of the EU.
Although no agreement has been reached regarding the implementation of Pillar One, on 12 December 2022 the Council of the EU reached consensus and approved the so-called Minimum Taxation Directive, on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (Pillar Two). Portugal shall now incorporate the Directive into domestic law by 31 December 2023 for financial years starting on or after 31 December 2023, except for the undertaxed profits rules, which only apply for financial years starting on or after 31 December 2024.
Portugal carried out a reform of its corporate taxation system in 2014, aimed at increasing the country's tax competitiveness and ensuring the inflow of foreign capital into the country.
Subsequently, in 2015, the taxation of collective investment undertakings was revamped to ensure taxation only at investor level, thus preventing double taxation and improving the competitiveness of the financial sector.
Since then, the changes introduced have related mostly to the implementation of BEPS recommendations, but these did not result in major change to Portugal’s approach to international taxation.
Furthermore, the envisaged changes to the Portuguese international tax landscape refer to the transposition of the Minimum Taxation Directive and potentially the Unshell Directive.
Despite the introduction of a broad set of anti-abuse provisions (both BEPS and non-BEPS-related), as a capital importing country Portugal continues to seek to maintain a competitive tax policy that attracts international investment.
In addition to the fairly recent amendments to the Portuguese corporate tax system outlined in the preceding sections, Portugal has several tax incentives, such as the Patent Box, SIFIDE and the Madeira Free Trade Zone.
Since Portugal is a member of the EU, it is subject to state aid restrictions. The application of the rules of the Madeira Free Trade Zone were recently held to be in breach of state aid provisions by the European Commission. Portugal challenged the EC’s decision but the General Court of the EU rejected Portugal’s claim in a ruling of 21 September 2022 (case T-95/21).
Portugal has appealed against the General Court’s decision to the Court of Justice (case C-736/22 P), and a decision is expected within the next few months.
More than 30 companies have also filed claims against the EC’s decision.
Portugal introduced anti-hybrid mismatch arrangements rules into Portuguese law through Law 24/2020 of 6 July 2020, which incorporated Council Directive (EU) 2016/1164 of 12 July 2016 (Anti-Tax Avoidance Directive – ATAD I) and Council Directive (EU) 2017/952 of 29 May 2017 (ATAD II) into Portuguese law. These rules closely follow the EU’s approach to the issue.
Portugal does not have a territorial tax system, as Portuguese tax resident entities are subject to CIT on their worldwide income.
Nevertheless, certain exceptions apply to such rule, such as the participation exemption regime applicable to foreign dividends and capital gains or the exemption for profits of foreign permanent establishments.
Despite not having a territorial tax regime, Portugal has adopted CFC rules (see 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules).
Portugal adopted the GAAR in 1999, and the PTA has since applied it to recharacterise transactions in domestic (non-CDT) settings.
Despite being a public supporter of the BEPS recommendations, in the context of the MLI Portugal has merely opted for the application of minimum standard provisions, such as the inclusion of a Principal Purpose Test (PPT) in its CDTs.
According to publicly disclosed information, Portugal has elected for the inclusion of the PPT in its tax treaties because of the PTA’s prior experience with the application of the GAAR. Despite the absence of case law on the matter, it is reasonable to expect that a similar standard will be applied by the PTA when applying the GAAR or the PPT.
In November 2021, Portugal updated its transfer pricing rules to reflect the amendments to the 2017 OECD Transfer Pricing Guidelines.
Since the PTA and Portuguese courts applied Portuguese rules in line with the OECD Transfer Pricing Guidelines, the amendments had limited practical impact.
Despite increasing litigation dealing with transfer pricing issues, the taxation of income arising from intellectual property has not given rise to additional controversy.
Portugal has been at the forefront of transparency in international tax matters, first by promoting co-operation with foreign tax administrations (namely, through tax information exchange agreements), then by adopting mandatory disclosure rules on aggressive tax planning (initially in 2008 and then in 2021 to implement DAC 6) and finally by adopting CbCR rules.
The incorporation of Public CbCR rules pursuant to Council Directive 2021/2101, of 24 November 2021, into Portuguese law is currently pending.
There is no denying that transparency measures are an essential part of a healthy and thriving international tax system, where ensuring a fair share of taxation became one of the end goals.
The thresholds applied to CbCR rules ensure that smaller groups will not be excessively burdened with compliance obligations and that the information to be made publicly available is adequately selected, providing the necessary data for scrutiny without creating the risk of leaks of classified information or know-how that could disrupt the business models of multinationals.
No rules dealing specifically with the taxation of digital economy businesses have been enacted or discussed at a Parliamentary level in Portugal.
Without prejudice, Portugal has adopted the following relevant measures:
Portugal is also expected to soon implement Council Directive 2021/514, of 22 March 2021 (DAC 7), which provides new due diligence and reporting requirements for digital platforms.
Please see 9.12 Taxation of Digital Economy Businesses and comments regarding Pillar One in 9.2 Government Attitudes.
Other than withholding tax being levied on outbound royalty payments at an aggravated 35% rate, there are no specific provisions dealing with the taxation of offshore intellectual property.
The deductibility of payments to entities resident or domiciled in blacklisted jurisdictions is subject to proof that the transaction indeed took place and was not abnormal in character.
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Corporate Tax in Portugal: an Introduction
2022 brought meaningful tax-related changes at both national and international levels, such as:
In the context of the global economic recovery following the scaling down of the COVID-19 pandemic, a new socio-economic crisis with global effects has arisen, stemming from the armed conflict in Ukraine. Tax policies are once again being subjected to significant changes, and are regarded as a tool to mitigate the negative social and economic effects of the current international context. The Portuguese State Budget Law for 2023 has recently been approved, including relevant changes that will be analysed in this article, along with national and international case law that has future impacts for companies liable to tax in Portugal.
New tax loss regime
The Portuguese State Budget Law for 2023, approved by Law No 24-D/2022 of 30 December 2022, has established a new regime for the utilisation of tax losses reported by corporate taxpayers in previous tax periods, which can be offset against the taxable income obtained by the same company in future periods.
Under the previous legal regime, tax losses reported by a company liable to Corporate Income Tax (CIT) in Portugal in a given tax period could be offset against the taxable income that the same company obtained in future periods. This option was available for five years for most companies, and for 12 years for companies that qualified as a micro, small or medium enterprise under Portuguese Decree-Law No 237/2007. The amounts offset against the taxable income of each year could not exceed 70% of said taxable income, and losses in excess of this limit could still be carried forward to future tax periods.
The most relevant change introduced by the Portuguese State Budget Law for 2023 in this regard is that tax losses obtained by a company that is liable to CIT can be offset against the taxable income of future periods without any temporal limit. In addition, under the new regime, tax losses that are offset against the taxable income of a given tax period cannot exceed 65% of said taxable income, while losses in excess may still be offset in future tax periods.
Regardless of the 5% decrease in the threshold that limits the deduction of tax losses to the taxable income in each period, the new regime will allow companies to retain the right to offset tax losses indefinitely, averting the possibility of significant tax losses incurred by companies that are liable to CIT, for not being possibly fully offset during the five or 12-year limit that was previously applicable.
The new regime will be applicable to tax losses obtained by companies in tax periods starting after 1 January 2023, as well as tax losses obtained in previous tax periods, which could still be offset in 2023 under the previous tax loss deduction regime.
The time period and the deduction threshold changes were not the only relevant changes introduced by the Portuguese State Law for 2023 in regards to the tax loss regime. The previous regime contained a clause through which tax losses obtained in previous tax periods ceased to be deductible to the taxable income of a given period if, in the period in which the loss originated, there was a change of more than 50% of the shareholder structure or the voting rights of the entity in question (with certain exceptions, such as changes from direct to indirect shareholding or changes resulting from operations covered by the tax neutrality regime).
While the new regime still foresees a limit to the possibility of tax losses being offset if there is a change in the shareholding structure or voting rights in the company that is greater than 50%, this limitation will not be applicable in any scenario where the operation through which said change took place has economic substance and was not carried out for tax purposes, or mainly for tax purposes.
With this change, the Portuguese CIT Code will depart from the previous formalistic approach to the limitations on the deductions of tax losses obtained in previous tax periods, establishing new material criteria rooted in the substance and economic reasoning of the operations through which the shareholding structure of the taxpayers undergoes major changes. However, this change also implies that the taxpayer will be burdened with having to prove that the operations in question were carried out with sound economic reasons and that obtaining a tax advantage was not one of the main motives for said operations. If the taxpayer is not able to prove the economic substance of operations that led to a major change in its shareholding structure, the right to offset tax losses to future taxable income may be lost.
The aforementioned anti-abuse provision is also applicable to corporate groups that are subject to the special tax consolidation regime established in the Portuguese CIT Code, when offsetting tax losses of a company against the consolidated taxable income of the group that will be liable to CIT in Portugal, if there was a change of the dominant company of the group or if said company acquired the dominant company of a different group during the tax period in which the loss originated. In that scenario, the dominant company of the group will also have to demonstrate that the operation that originated the changes in question was concluded for valid economic reasons.
Withholding tax of foreign funds (Allianz GI Fonds case law)
Under the current national law, foreign Collective Investment Vehicles (CIVs) that invest in Portuguese companies are subject to CIT through withholding tax levied on dividends that are distributed by the companies in which the investment was concluded. CIV that are domiciled in Portuguese territory benefit from a CIT exemption on dividends; therefore, no withholding tax is levied on dividends received, which poses a clear disadvantage for foreign CIVs and has generated controversy between such entities and the Portuguese tax authorities.
Due to this legal framework, foreign CIVs have regularly challenged the legality of the withholding tax mechanism that is being enforced in regards to Portuguese sourced dividends, which has also been known to happen in different EU member states with similar tax regimes on this matter.
After various tax disputes arose due to the different treatment of domestic and foreign CIVs in this regard, the European Court of Justice (ECJ) has been requested to rule on a question presented by the national tax courts, in order to decide if this difference in treatment should be qualified as a discriminatory treatment that is inadmissible under European law, namely by being an unjustified restriction of the freedom of movement of capitals between EU member states, which is one of the four fundamental freedoms established under European law, having a broad application spectrum that also covers capital flows between third countries and EU member states.
The ECJ decided on the matter in case C-545/19 (also known as the Allianz GI Fonds case), issued on 17 March 2022, stating that the current regime established under Portuguese law is not compatible with European law since the difference in the tax treatment of the dividends received by foreign and domestic CIVs is not applicable to “objectively comparable situations”, and therefore has no legal justification. For the purposes of EU law, such difference in treatment would only be acceptable if it was justified by the need to preserve the coherence of the Portuguese tax law or to ensure the appropriate allocation of taxing rights between EU member states, which is not the case.
At the immediate level, the Allianz GI Fonds decision will have a direct impact on a multitude of tax disputes that are currently being settled by the national tax courts, where withholding tax levied on dividends received by a foreign CIV has been challenged, many of which were suspended pending an ECJ ruling on the matter. Previous tax disputes that had already been settled – in which Portuguese tax courts had decided the withholding tax in question was contradictory to the EU law, based on previous decisions of the ECJ – are also impacted by the settlement of the question that remained controversial after the issuance of such decisions.
The effects of the Allianz GI Fonds decision will also have impacts beyond the Portuguese boundaries, as it clarifies the ECJ's decisive understanding on the matter, which will pave the way for a change in similar regimes enforced in other EU member states, affecting CIVs that have invested in the countries in question.
In the aftermath of the ECJ’s ruling, the Portuguese law was expected to be updated in order to remove the discriminatory regime. However, in similar instances where Portuguese law had to be amended due to incompatibilities with European law, changes were not immediate, which appears to also be the case with the withholding tax regime applicable to foreign CIVs.
Foreign CIVs that have been subject to withholding tax on Portuguese sourced dividends received in the past can request the refund of the amounts withheld in the previous two years, through a formal appeal submitted to the Portuguese tax authorities. Alternatively, Portuguese law also foresees a mechanism through which foreign CIVs in this situation may request the Portuguese tax authorities to review the collection of the amounts withheld, which has the advantage of allowing the return of the amounts withheld in the previous four years.
GloBE – Pillar Two
In 2021, OECD countries reached a consensus on the implementation of significant changes to the global international tax policy, mainly through the approval of Pillars One and Two of the GloBE Model Rules.
The main premise of Pillar One is the proper allocation of taxing rights between jurisdictions where multinational enterprises (MNEs) with significant turnover and profitability are present, in order to ensure taxing rights for the jurisdictions where economic value for the MNE is created. Pillar Two focuses on establishing and ensuring that a minimum tax of 15% is levied on the income of MNEs that have global income surpassing EUR750 million.
While both initiatives have been widely discussed in the international tax community, Pillar Two and the establishment of a minimum CIT applicable to MNEs that achieve a certain level of profitability have recently, faced some reluctancy from OECD member countries. This has motivated additional discussions and prevented the implementation of an EU Directive that already aimed to establish such minimum tax, since the Directive needed to be approved by a unanimous decision of the member states, which was not achieved.
Regardless of the proposal for the Directive not being approved, a political consensus has recently been reached in the EU regarding how the minimum corporate tax for MNEs should be implemented, in order to ensure the elimination of CIT competition within the EU and mitigate the risks of erosion of the tax base of EU member states and ensure that large MNEs are subject to a minimum level of taxation. In light of said consensus, the formal legislative process of the EU institutions may resume its course.
As such, the Directive that establishes the minimum corporate tax for MNEs is expected to be approved in the near future. EU member states may face some difficulties with the adaptation of internal legislation for the domestic implementation of said Directive, especially considering the short timeframe assumed by the OECD countries: the relevant legislation must be approved in 2023 for implementation in 2024.
The Directive will include specific rules in order to ensure that covered MNEs are subject to a minimum CIT of 15% in each jurisdiction where they have a significant economic presence, with the possibility of entities of an MNE that are not located in said jurisdictions also being subject to tax if the minimum tax level is deemed not to be achieved, according to the rules that will determine the effective tax rate to which the MNE was subjected in each jurisdiction.
In light of the recent developments, 2023 will be a crucial year for MNEs, which will need to adapt to the new complex legislation and regulations, and to the minimum CIT, although it is expected that the first tax returns and compliance obligations associated with the implementation of Pillar Two will only need to be filed and submitted from 2026 onwards.
Temporary solidarity contributions (windfall profits tax)
After widespread discussion on whether a tax on extraordinary profits derived from entities that operate commercially in the energy sector should be implemented, due to the inflation wave that has recently been felt in Europe and its impact on energy prices, Portuguese Law No 24-B/2022 was approved on 30 December 2022 and introduced a temporary solidarity contribution for such entities. The law in question also approved a contribution to be levied on the extraordinary profits of entities that operate in the food distribution sector, which is an unexpected novelty in the Portuguese tax landscape.
The justification provided for the implementation of such contributions for entities in the energy sector stems from EU Regulation 2022/1854, which addressed the necessity for the member states to implement policies to mitigate the rampant rise in energy prices, suggesting the implementation of a windfall profits tax.
Since the inflation phenomenon that originated this concern has also impacted prices of essential commodities such as food, a similar contribution was also implemented for food distribution entities, which is not rooted in European legislation. According to the law that approved both contributions, revenues generated through the application of both contributions will be used to finance anti-inflation measures, which will be implemented by the Portuguese government to assist those who are most impacted by the increase in the price of essential goods.
The solidarity contribution for the energy sector will be levied on entities that operate in the following subsectors:
Entities will be deemed to operate in these sectors if 37.5% of their turnover is derived from the extracting, mining or refining of oil or the fabrication of related products.
Law No 24-B/2022 was not clear in regards to the entities that would be covered by the solidarity contribution in the food distribution sector, but the approval of Ministerial Decree No 312-E/2022 established the specific activities to which this contribution is applicable, which essentially consist of food and beverage retail.
The solidarity contributions will only be levied in regards to the extraordinary profits obtained by the covered entities in 2022 and 2023, which will consist of the taxable income that exceeds, in at least 20%, the average taxable income obtained by said entities in the period between 2018 and 2021. In both cases, the contribution rate will be 33%.
Due to the fact that the contributions in question will already be applicable to tax periods starting in 2022, and that the law through which they were implemented was approved on 30 December 2022, doubts are arising as to whether this constitutes an unconstitutional retroactive effect of the law, which violates the legitimate expectations of Portuguese taxpayers.
This matter is expected to be brought to the Portuguese Constitutional Court in the near future.
Simplification of tax benefits applicable to companies liable to CIT in Portugal
The Portuguese Tax Benefits Code previously contained two tax benefits that were applicable to companies: the Deduction for Retained and Reinvested Profits regime and the Conventional Equity Remuneration regime. Both have been revoked by the State Budget Law for 2023 and will be condensed into a new regime: the Incentive to the Capitalisation of Companies (ICE) regime.
The new regime will be applicable to tax periods starting after 1 January 2023 and will consist of a possible deduction in the taxable base of companies that are domiciled in Portugal, in the amount of 4.5% of registered net capital increases.
The capital increases that are eligible for this purpose are as follows:
The net capital increases will consist of the eligible capital increases after offsetting cash or in-kind outputs in favour of shareholders, as remuneration of equity or capital decrease, or as a distribution of the company’s assets, and distributions of reserves or retained earnings. The calculation of the deduction will be based on the net capital increases obtained in the tax period in question and the nine previous tax periods.
For the purposes of the application of this regime, only net capital increases of tax periods starting after 1 January 2023 will be eligible.
The deduction resulting from this regime cannot exceed EUR2 million or 30% of the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA).
The ICE cannot be applied in regards to a certain tax period if, in the same tax period or one of the previous five periods, the same benefit has been applied to companies that have a shareholding position in the company in question or to companies in which the applying company has a shareholder position.
Environment, social and governance (ESG)
In light of the ever-growing ESG concerns on a global scale, and in an effort to ensure a more sustainable future, countries are regarding tax policies as tools that may contribute to companies' adoption of ESG-compliant behaviours and policies.
ESG base values have been the main motivator of policies such as the taxation of environmentally irresponsible behaviours (also known as green taxes) and the implementation of tax benefits or breaks to encourage a reduction in harmful emissions, and incentives for the upskilling of employees and the development of a circular economy.
As such, companies are expected to start looking into alternative ways of conducting business and investments, and alternative employment practices, as a form of strategy with tax impacts on their overall profitability.
Due to the dissemination of ESG-related concerns, the pressure for the adoption of behaviours and policies that defend the inherent values of this movement is also expected to be reflected in consumer preference or investor options, which will ultimately be an additional motivation for companies to adapt their business.
In the near future, it is expected that ESG-driven policies will be reflected in international and national legislation that will affect not only tax, but also several other core business level such as financing, governance, employment and supply chains.
Outlook for 2023
The implementation of the Recovery and Resilience Plan (RRP) for Portugal will continue in 2023, and the European Commission is expected to approve an extension of the deadline for the implementation of the investments and reforms contained within the RRP, beyond the original deadline of 2026. As such, the national economy is expected to be impacted by the EUR13.9 billion in grants and EUR2.7 billion in loans that will be granted in future years.
The Portuguese political landscape has recently been controverted and impacted by media events, but the trend of Portugal having an investor-friendly environment is expected to continue, aided by the recent approval of the Digital Nomad Visa programme. The Digital Nomad Visa will be applicable to individuals who remotely work for entities that are domiciled abroad, either as an employee or as service providers.
The Portuguese State Budget Law for 2023 has also approved the tax regime applicable to income derived from crypto-assets by individuals, which was previously not subject to taxation in the majority of cases. In the wake of the establishment of crypto-assets as a growing component of the global economy, the application of this regime will also have significant implications for the development of the Portuguese digital economy.
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