The main rules governing transfer pricing are:
Transfer pricing rules were first introduced into Portuguese written legislation through Law 30-G/2000, 29 December, and Ministerial Order number 1446-C/2001, 21 December, and entered into force in the beginning of 2002. In 2008, the advanced transfer pricing agreements framework was introduced. In 2019, Law 119/2019 of 18 September and Ministerial Orders number 267/2021 of 26 November and 268/2021 of 26 November aligned the domestic transfer pricing regime with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017) and BEPS Actions 8, 9, 10 and 13.
Article 63 of the Portuguese CIT Code defines a controlled transaction as any transaction between related parties.
Controlled transactions comprise:
Related parties are entities where one of the parties has, directly or indirectly, a significant influence on the other party’s management. Such influence exists notably in regard to:
The Portuguese legislation lists five specific methods which can be used by taxpayers: (i) the comparable uncontrolled price method; (ii) the resale price method; (iii) the cost-plus method; (iv) the transactional profit split method; and (v) the transactional net margin method.
Unspecified methods are allowed every time the methods listed in 3.1 Transfer Pricing Methods cannot be used due to the unique or singular character of the transaction, or the lack of reliable comparable information or data on similar transactions between independent parties, in particular for transactions regarding real estate rights, share capital of non-listed companies, credit rights and intangibles.
Portugal has a flexible approach concerning transfer pricing methods. Taxpayers are allowed to select any method providing that the elected method is capable of providing the most reliable estimate of an arm’s length transaction, taking into consideration, notably, the nature of the transaction, the existence of reliable information and the degree of compatibility between identical transactions performed at arm’s length.
The selection of comparable transactions must be well grounded with selection and rejection criteria followed (including sensitivity), statistical and functional analysis to identify the proper comparable transactions and the adequate value or range of values obtained.
Following the selection of the comparable transaction and corresponding values or range of values, additional adjustments may be taken to correct the impact (of a residual nature) on transaction values caused by differences between the comparable transactions chosen and the independent transaction under analysis.
Transactions involving intangibles are subject to a specific regime which comprises of the following.
No special rules regarding hard-to-value intangibles apply. OECD guidelines on the matter are expected to be of particular relevance.
Cost sharing/cost contribution arrangements are recognised as arrangements in which two or more entities agree to allocate between each other the costs and risks of producing, developing or acquiring any assets, rights or services, according to the proportion of advantages or benefits that each party expects to obtain from its participation in the arrangement.
In such arrangements entered into between related parties, and according to the arm’s length principle, the value of the contribution to each of the parties should be in line with the value of the contribution that would be required by an independent party under comparable conditions.
The share of the contribution each party is liable for should correspond to the share of its contribution to the expected benefits to be received under the agreement. An appropriate allocation key may apply – considering the nature of the activity, the business turnover, personnel costs, added value or the invested capital – whenever a direct and individual assessment of such benefits is not possible.
There are no specific rules on affirmative transfer pricing adjustments after filing tax returns. Thus, subsequent material adjustments with impact on the tax return information should, in principle, require the submission of a corrective tax return.
From a functional perspective, exchange of information with other jurisdictions’ tax authorities may be automatic, spontaneous or upon request. Such exchange may occur under multiple international instruments, including:
APAs are recognised by Portuguese law. Such agreements can be either unilateral – if the agreement is entered into between the Portuguese Tax Authorities and one or more taxpayers – or bilateral/multilateral – if the agreement includes also one or more tax authorities of another jurisdiction with whom Portugal has signed a double tax treaty.
The APAs are directly negotiated with the Portuguese tax authorities. The programme is initiated with a request filed by the taxpayer directed to the general tax director.
Portuguese domestic law recognises bilateral or multilateral APAs if the other jurisdictions involved are parties in a treaty that establishes a mutual agreement procedure (MAP) in accordance with Article 25(3) of the OECD Model Convention or Article 16 of the Multilateral Instrument (MLI). Thus, in these procedures, APAs involve foreign tax authorities and proper co-ordination with the applicable MAP.
There are no objective limits on which taxpayers or transactions are eligible for an APA.
The preliminary request for an APA application must be filed up to nine months before the beginning of the tax year to be covered in the agreement.
A taxpayer is subject to a fee of between EUR2,618.96 and EUR34,915.85, depending on their turnover.
An APA can cover up to four years, renewable as per a taxpayer request made six months prior to its termination.
An APA can have retroactive effect concerning tax returns submitted in the preceding two years before the entry into force of the APA. This possibility depends on the similarity of the past facts and circumstances to the underlying facts and circumstances of the APA.
Penalties between EUR500 and EUR20,000 may be applied, plus 5% per day of delay, if the following conditions are not complied with:
Portuguese legislation requires a taxpayer to prepare and keep organised all tax documentation on transfer pricing policy contemplated by the OECD Transfer Pricing Guidelines, including a master file, a local file and a CbC report.
Taxpayers whose annual turnover is below EUR10 million, or, if above, when their controlled transactions income is less than EUR100,000 for each counterpart and EUR500,000 globally, are exempted.
Taxpayers must include in their transfer pricing documentation a master file containing detailed information on the following elements: (i) organisational, legal and operational group structure; (ii) group activity; (iii) intangibles; (iv) financing; (v) group policies adopted on transfer pricing matters; and (vi) other relevant group information, such as financial demonstrations and advance pricing agreements listing.
A local file must also be prepared, which shall include, with regard to each of the controlled transactions carried out, (i) a description of the taxpayer business activity; (ii) an identification and description of the related parties’ entities; (iii) characterisation of the controlled transactions; (iv) the description of the methodologies used for determining the (transfer) price for each relevant transaction; and (v) the financial information of the taxpayer.
Taxpayers that qualify as “small” (ie, those that employ fewer than 500 people) or “medium-sized” (ie, those that employ fewer than 3,000 people) are allowed to prepare only a simplified file.
A Portuguese resident entity parent company of a multinational group whose consolidated revenue is equal to or higher than EUR750,000 is required to file a CbC report including the financial and tax information regarding all entities of such group.
The Portuguese transfer pricing rules are closely aligned with the OECD Transfer Pricing Guidelines (2022).
The Portuguese transfer pricing rules do not depart from the arm’s length principle. Transactions involving real estate assets are subject to special rules concerning the relevant value for CIT purposes (in particular, when the tax value is higher than the transaction value).
Portugal follows closely the OECD’s BEPS project. BEPS Actions 8,9, 10 and 13 were the major source of and reason for the recent amendments to domestic legislation.
Portugal is part of the preliminary agreement regarding the OECD’s BEPS 2.0, which addresses the tax challenges arising from the digitalisation of the economy. If adopted, proposed changes are expected to imply structural changes in the worldwide tax system.
Portuguese legislation allows one entity to bear the risk of another entity’s operations by guaranteeing the other entity in return. No special limitations apply.
The United Nations Practical Manual on Transfer Pricing does not have any relevant impact on transfer pricing rules in Portuguese legislation, which mainly follows the OECD Guidelines. Notwithstanding this, the UN model is of practical relevance from a Portuguese practitioner’s standpoint due to the significant economic ties of Portugal to jurisdictions influenced by the UN model (in particular, Brazil and some Lusophone African countries).
In general, the material rules concerning compliance with the arm’s length principle apply. Domestic legislation on reporting obligations is relaxed for smaller enterprises. See 8.2 Taxpayer Obligations Under the OECD Transfer Pricing Guidelines.
Portugal does not have specific rules governing savings that arise from operating in the country.
Portuguese law does not include unique rules or practices applicable in the transfer pricing context that depart from the OECD Model.
Portugal does not require co-ordination between transfer pricing and customs valuation. However, the customs valuation may be of relevance to evaluate the arm’s length character of the controlled transaction.
There is no specific transfer pricing controversy process; therefore, general tax controversy rules apply.
A taxpayer can challenge a tax assessment resulting from a transfer pricing audit in an administrative claim, as a general rule, within 120 days from the term of the voluntary tax assessment payment. A negative decision may also be challenged through a hierarchical appeal before the Minister of Finance.
Taxpayers may also submit a claim before a state tax court or a tax arbitration tribunal. There is no need to have already filed a previous administrative claim or appeal.
In general, taxpayers may appeal from the state court decision to the second-tier courts (Tribunais Centrais Administrativos). In exceptional situations, an appeal to the Administrative Supreme Court may be admissible.
The decision of an arbitration tribunal may not, as a general rule, be challenged before the state tax courts.
Portuguese transfer pricing case law has mainly focused on the requirements for the application of the transfer pricing rules and the accuracy of the elected method for the adjustments made by the Tax Authorities, especially in regard to intra-group services and financial transactions. Although the Portuguese legal system is not precedent-based, there is a consistent body of jurisprudence on transfer pricing, which is of the utmost importance from a practitioner’s standpoint.
In case 02142/11.8BELRS (2022), the Supreme Administrative Court recently ruled that it is for the Portuguese Tax Authorities to prove that a controlled transaction was not carried out at arm’s length. In this case, where the taxpayer was exempt from organising a transfer pricing file, the Supreme Court decided that the Portuguese Tax Authorities should have proven why a bail provision and a bank guarantee hold sufficiently similar relevant economic and financial characteristics to be considered comparable. Having failed to demonstrate this, the Court decided that the transfer pricing comparability requirements were not met and deemed the assessment illegal.
In case 1882/14.4BESNT (2022), the South Administrative Court of Appeal stated that, in situations where the taxpayer had not complied with its ancillary obligations regarding the preparation of a transfer pricing file, it was fully responsible for providing the elements and information necessary to prove errors or inaccuracies in the adjustments made by Tax Authorities. In this case, the Portuguese Tax Authorities only had to prove (i) the existence of controlled transactions between related parties and (ii) that the arm’s length principle had not been observed. The Court of Appeal ruled that this requirement was sufficiently met when Tax Authorities proved that the taxpayer had purchased real estate from third parties at a considerably lower price than the one later established in the controlled transaction. Such price difference should have been covered in a transfer pricing file stating the reasons why, in such conditions, that price was indeed an arm’s length one.
The Supreme Administrative Court has decided (Process number 01240/08.0BEPRT (2021)), that the Tax Authorities are not permitted to restructure the nature of a controlled transaction in order to find a comparable; as such, a requalification of a given transaction may only be admissible under anti-avoidance provisions. The Court considered that transfer pricing rules are only to be used for the purpose of readjusting the terms and conditions of transactions entered into between related parties, and not to requalify such transactions. In particular, the Supreme Court concluded that a shareholder of with a capital nature cannot be compared, for transfer pricing adjustment purposes, with a common loan agreement and, therefore, should not be subject to transfer pricing rules.
Furthermore, the Supreme Administrative Court (Process number 01402/17 (2018)), together with other tax courts and arbitration tribunals, has reiterated a lex specialis relation between transfer pricing provisions and provisions on deductible expenses, with significant methodological consequences and practical implications for tax audits.
Portuguese law does not have any restrictions on outbound payments relating to uncontrolled transactions.
Portuguese law does not have any restrictions on outbound payments relating to controlled transactions.
Portugal does not have rules regarding the effects of other countries’ legal restrictions.
APAs and transfer pricing audit outcomes are not made public.
Portuguese Law does not allow the use of “secret comparables” by the Tax Authorities in setting an arm’s length price.
The transfer pricing landscape in Portugal does not seem to have been drastically changed by the COVID-19 pandemic. In specific sectors particularly impacted by the pandemic, controlled-transaction terms had to be adjusted to account for the abrupt changes in comparable uncontrolled transactions.
A considerable number of temporary legislative tax measures were implemented during the COVID-19 pandemic. The most relevant ones are:
These measures no longer apply.
Deadlines in tax audits were suspended for a period of almost three months at the beginning of 2021 due to the COVID-19 restrictive measures imposed by the Portuguese government. In addition, statutes of limitation deadlines were postponed globally for approximately six months. However, tax procedures resumed their proper functioning some time ago.
The Portuguese Tax Authorities may adjust prices set in related parties’ transactions whenever such transactions do not comply with the arm’s length principle.
Recent case law has been particularly perceptive in addressing the burden of proof regarding the transfer pricing framework; determining whether the burden of proof that (i) entities are related parties and (ii) a certain transaction between them was carried out at arm’s length falls on the taxpayer or on the Tax Authorities.
A key consideration for businesses in this area is understanding the importance of having a transfer pricing file prepared in advance.
General Requirements on Transfer Pricing Documentation
Taxpayers have been, since 2021, obliged to prepare transfer pricing documentation consisting of a master file and a local file.
Taxpayers must include in their transfer pricing documentation a master file containing detailed information on the following elements: (i) organisational, legals and operational group structure; (ii) group activity; (iii) intangibles; financing; (iv) group policies adopted on transfer pricing matters; and (v) other relevant group information, such as financial demonstrations and advance pricing agreements listing.
A local file must also be prepared, which shall include, with regard to each of the controlled transactions carried out, (i) a description of the taxpayer business activity; (ii) an identification and description of the related parties’ entities; (iii) characterisation of the controlled transactions; (iv) the description of the methodologies used for determining the price for each relevant transaction; and (v) the financial information of the taxpayer.
In addition, a Portuguese-resident parent company of a multinational group whose consolidated revenue is equal to or higher than EUR750,000 is required to file a country-by-country report including the financial and tax information of all the entities of that group.
Taxpayers that qualify as “small” (ie, those that employ fewer than 500 people) or “medium-sized” (ie, those that employ fewer than 3,000 people) are allowed to prepare only a simplified file.
Taxpayers that do not exceed a total annual income of EUR10 million are exempt from preparing a transfer pricing file. Taxpayers that have surpassed this level of annual income, but that in regard to related party transactions have not exceeded EUR500,000 in total (and EUR100,000 with a specific related party) are also exempt. These exemptions do not include related party transactions carried out with residents of tax havens.
Penalties and Consequences for Not Having Prepared a Transfer Pricing File
Notwithstanding other applicable penalties, in general, in cases of non-compliance with the submission requirements for the above-mentioned documents within the established deadline, the taxpayer is subject to penalties which can go from EUR500 up to EUR20,000, plus a 5% penalty for each day of delay.
In addition to these misdemeanours, the taxpayer’s failure to comply with obligations relating to the upkeep of transfer pricing files will have relevant consequences on the allocation of the burden of proof.
In fact, all the taxpayer’s declarations and records submitted under the law shall be presumed to be true and in good faith. However, this presumption does not apply when the taxpayer had not previously fulfilled its disclosure obligations or whenever its statements and accounting records contain omissions, errors or inaccuracies.
As a result, if a taxpayer has not previously prepared the necessary transfer pricing files, its declarations and statements regarding the elected methods and the fairness of a related party transaction will not benefit from a presumption of truth and good faith. Therefore, the Tax Authorities are entitled to choose the method they consider most suitable for that transaction. In such cases, the taxpayer will face increased difficulty in challenging assessments and bringing new reliable evidence to rule out the choice of method made by Tax Authorities proving, in the context of proceedings and tax disputes, errors in transfer pricing adjustments.
Indeed, in the case of a failure to comply with obligations relating to the upkeep of transfer pricing files, existing case law suggests that only in situations where the transfer pricing method chosen by the Tax Authorities was grossly unreasonable does the burden of proving the fairness of the adjustment fall on them. In situations other than these – ie, where there might be a range of suitable methods – it is up to the taxpayer to prove the inaccuracies of the adjustments made by the Tax Authorities.
The Importance of Having a Transfer Pricing File
On the other hand, if a proper transfer pricing file is maintained, one in which all relevant information on related parties’ transactions are disclosed, the taxpayer will benefit from a double presumption: (i) that the documentation prepared and kept is true and (ii) that the transfer pricing method elected is the most reliable one to determinate that the relevant transactions were at arm’s length. From the taxpayer’s perspective, it is extremely important to have transfer pricing documentation supported in studies, analyses and information which can demonstrate that the elected transfer pricing policies meet transfer pricing regulations.
If the taxpayer has complied with its ancillary obligations, it is up to the Tax Authorities to prove (i) that the parties are related for this purpose; (ii) that the taxpayer’s files are false or have errors or imprecisions; (iii) that the method adopted in the taxpayer’s file is not capable of proving a sufficient degree of comparability between identical transactions performed at arm’s length; and (iv) that the new method proposed by the tax revenue is more reliable.
Recent Case Law
Supreme Administrative Court – 15 December 2022
In a case from 15 December 2022 (02142/11.8BELRS), the Supreme Administrative Court was asked to decide on whether a bail provision and an autonomous bank guarantee can be considered comparable transactions for transfer pricing purposes and if the Tax Authorities may readjust the controlled transaction to an arm’s length value.
In this case, the taxpayer was, at the time, exempt from organising a transfer pricing file. The Supreme Court ruled that it is for the Portuguese Tax Authorities to demonstrate the fulfilment of transfer pricing requirements, particularly, to prove that bails and bank guarantees hold sufficiently similar relevant economic and financial characteristics.
Despite retaining a flexible approach concerning the choice of transfer pricing methods, the Tax Authorities are required to elect the method capable of providing the most reliable estimate of an arm’s length transaction, taking into consideration, in particular, the nature of the transactions, the existence of reliable information and the degree of comparability degree between identical transactions performed at arm’s length.
In this case, the Tax Authorities failed to demonstrate the comparability between bails and bank guarantees, the court therefore decided that transfer pricing comparability requirements were not met and deemed the assessment illegal.
South Administrative Court of Appeal – 16 December 2022
In a second case, from 16 December 2020 (1882/14.4BESNT), the South Administrative Court of Appeal decided that, in situations where the taxpayer has not complied with its ancillary obligations regarding the preparation of a transfer pricing file, although it does not imply a shifting of the burden of proof, it will make it difficult for the taxpayer to provide evidence and information to the process which might prove errors or inaccuracies in the adjustments made by the Tax Authorities.
In this case, the Portuguese Tax Authorities only had to prove (i) the existence of controlled transactions between related parties and (ii) that the arm’s length principle had not been observed – ie, that the controlled transactions were not carried out under the same conditions as those typically agreed upon for uncontrolled transactions. The Court of Appeal ruled that this requirement was sufficiently met when the Tax Authorities had proven that the taxpayer had purchased real estate from third parties at a considerably lower price than the one later established in the controlled transaction. This price difference should have been justified in a transfer pricing file stating the reasons why, in such conditions, that price was indeed at arm’s length.
South Administrative Court of Appeal – 30 June 2022
In a case from 30 June 2022 (1339/13.BELRA), the Southern Administrative Court of Appeal dealt with intercompany financing transactions, more specifically, with the application of transfer pricing rules to loan agreements between holding companies and their subsidiaries. The tax revenue suggested that the taxpayer had not prepared, as it should have done, a transfer pricing file; therefore, it should have provided evidence to demonstrate that the terms and conditions set out in the loan agreement were at arm’s length, a burden which the taxpayer had failed to discharge.
Notwithstanding this, the court decided that transfer pricing adjustments cannot rely exclusively on a generic principle under which every loan agreement concluded between related parties should bear interest; rather a clear demonstration is required that, in that framework, comparable transactions performed between independent parties under similar circumstances are subject to interest, selecting, for that purpose, an adequate transfer pricing method.
According to the Court of Appeal, this demonstration needs to be made by the Tax Authorities, which must prove not only that the parties are related for this purpose, but also the terms on which comparable transactions normally take place, stressing that this regime cannot be grounded on presumptions or indications of any type. In this case, the Tax Authorities had failed to determinate which independent transactions were used as comparables and which comparability requirements were adopted. This led the Court to decide that the transfer pricing requirements were not met.
It is of the utmost importance for taxpayers to prepare a transfer pricing file where all the relevant information and studies regarding transfer pricing policies on related party transactions are fully disclosed.
This is important to avoid penalties – which can go up to EUR20,000, plus a 5% penalty for each day of delay – but it is also very relevant in proceedings and tax disputes as it supports the policies and methods applied by the taxpayer.
The taxpayer will hence benefit from a double presumption: the documentation disclosed is presumed to be true and in good faith plus the transfer pricing methods there elected are presumed to be the most suitable. This will place the burden of proof – ie, the task of gathering and presenting evidence in order to contradict the taxpayers’ declarations and the accuracy of the methods chosen – fully on the Tax Authorities.