What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
Answer ... The Madeira International Business Centre (MIBC) regime was established for entities licensed to operate until 31 December 2014 and extended to entities licensed to operate as from 1 January 2015 until 31 December 2027.
Under certain conditions, such entities benefit from a reduced 5% corporate income tax (CIT) rate for certain activities and from a 50% deduction to their assessed tax. Non-resident shareholders of such entities may also benefit from a tax exemption on dividends and interest.
Exemptions from stamp duty, property tax, property transfer tax and regional and municipal surcharges also apply, subject to an 80% limitation per tax and transaction or period.
Tax benefits for MIBC licensed entities cannot exceed annually the highest of the following limits:
- 20.1% of annual gross added value;
- 30.1% of annual labour costs; or
- 15.1% of annual turnover.
Entities resident in the Autonomous Region of Azores may also benefit from a contractual regime of incentives for investments with strategic relevance made in that territory.
At a national level, there is also a contractual regime for granting tax benefits for relevant investment projects, together with non-contractual (automatic) tax incentives for investments.
In 2016 Portugal adopted the international recommendations on intellectual property and patent box regimes deriving from Base Erosion and Profit Shifting Action 5, and thus amended the special tax rules applicable to corporate income deriving from patents and other industrial property rights. The regime provides for a 50% reduction of the qualifying taxable IP income. A limit was established that is a function of the total costs incurred in developing the asset protected by the IP right.
There are also special regimes for:
- investment funds (focused on taxing at the distribution level);
- securitisations (income tax, stamp duty and value added tax (VAT));
- casinos; and
- shipping (an optional special regime for the taxable profits of the shipping company, to be assessed as a function of ship tonnage, and a special regime for ship crew).
Answer ... Following the transposition of the EU Merger Directive, the Portuguese tax law foresees a special tax neutrality regime for certain operations performed as part of group reorganisations, including mergers, demergers, contributions in kind and exchanges of shares. Among other conditions, this regime applies only to operations performed for economic reasons. Under certain conditions, restructuring operations are automatically exempt from municipal tax on property transfer, stamp duty and emoluments and legal fees. However, such exemptions may not be automatic in case of:
- an operation which is subject to the prior approval of the Portuguese Competition Authority; or
- a demerger operation for which the prior approval of the minister of finance is required (unless it is intended that the demerged part will merge with existing companies or with parts of other companies).
There is also a participation exemption regime, under which dividends and capital gains are exempt if the Portuguese company is not tax transparent and holds, directly or indirectly, a minimum of 10% of the capital or voting rights of its subsidiary for a minimum period of one year. The participated company cannot be resident in a blacklisted jurisdiction and must be subject to and not exempt from CIT or, if EU resident, from a tax mentioned under Article 2 of Directive 2011/96/EU; or, if resident outside the European Union, from a tax similar to CIT, provided additionally that the rate applicable under such tax is not less than 60% of the Portuguese CIT rate.
Answer ... Resident taxpayers may opt for a simplified regime, provided that they are not exempt and not subject to special taxation rules, and that they undertake commercial, industrial or agricultural activities as their main activity. In addition, the following conditions must be met in respect to such taxpayers:
- The annual gross income obtained in the immediately preceding taxation period may not exceed €200,000;
- The total balance sheet for the immediately preceding tax period may not exceed €500,000;
- Their accounts must not be subject to statutory audits under the applicable law;
- More than 20% of their share capital must not be held, directly or indirectly, by companies that do not satisfy any of the preceding conditions, except where such entities are venture capital companies or venture capital investors;
- They must have adopted the accounting standards for micro-companies; and
- They must not have renounced the application of these rules in the previous three years, with reference to the date on which the application of the regime begins.
The taxable base covered by the simplified rules is calculated by applying coefficients to revenue/turnover which may vary from between 0.04 and 1, depending on the nature of the revenue. Some coefficients are reduced by 50% for the taxation period at the beginning of the taxpayer’s activity and by 25% for the following taxation period.
The Portuguese State Budget Law for 2019 foresees that a discussion on the implementation of a new simplified regime will occur during the first semester of 2019.
There is also an (optional) regime for shipping, where taxation is a function of the ship tonnage.
Answer ... The differences between the functional accounting currency and the currency in which some operations may be carried out are dealt with by National Accounting Standard 23, which basically follows International Accounting Standard 21. The corporate tax regime accepts in principle the treatment provided for therein.
With regard to the articulation between the functional accounting currency and the tax reporting currency (‘tax currency’), there are no specific rules foreseen in Portugal for CIT purposes (although some particular tax rules on capital gains have relevance in this regard).
It has been argued that since the CIT regime accepts, as a starting point, the accounting rules and their outcomes, and since the accounting rules allow for a functional currency which is different from the national currency, it is permissible to compute accounting profits, and thereafter taxable profits, in a different currency from the national currency.
However, as CIT must be paid in the national currency, a currency conversion must be made at some point and at some specific rate. It has been argued that the relevant exchange rate should be that of the last day of the taxable period. However, this issue has yet to be clarified through either legislation or a tax ruling.
For capital gains purposes, the Portuguese CIT Code foresees specifically that the sale or acquisition value in operations performed in a different currency shall be determined by the exchange rate on the date of the sale or acquisition, or otherwise by the exchange rate of the previous quotation.
For VAT purposes, there are specific rules which - irrespective of the functional accounting currency - require that invoicing/operations in a different currency be converted to the national currency for VAT reporting purposes, on at least a monthly basis, by applying the exchange rate on the first working day of the month in which the VAT becomes due (“mês em que se verificou a exigibilidade do imposto”).
Answer ... The cost basis of some intangible assets without a determined economic lifecycle is deductible, pursuant to the straight-line method, for 20 tax years (5% per year), counting from the initial record of the asset in the company’s accounting books. This regime applies to the following intangible assets:
- industrial property such as trademarks, licences, production processes, models and other similar rights acquired for consideration and without a determined lifecycle; and
- goodwill arising from business restructuring operations.
However, the following intangible assets are excluded from this regime:
- intangible assets transferred by virtue of mergers, divisions and transfers of assets made pursuant to the special tax neutrality regime;
- goodwill related to shares;
- intangible assets acquired from entities which are resident in a tax haven; and
- intangible assets acquired to entities with which there are special relations as defined under the transfer pricing regime (this exclusion is in force as from January 1, 2019 onwards).
If the intangible asset has a determined economic lifecycle, its cost base is deductible throughout.
A patent box regime applies to corporate income derived from patents and other industrial property rights, which provides for a 50% reduction of the qualifying taxable IP income. A limit was established that is a function of the total costs incurred in developing the asset protected by the IP right.
Answer ... The Portuguese CIT Code foresees corporate deductions at the employer level for contributions to pension funds and equivalents, which may be deducted up to a maximum of 15% of the total amount of the expenses incurred, provided that some conditions are met (eg, equal treatment of employees).
Answer ... Corporate taxpayers in certain sectors may be subject to additional taxes, such as:
- the contribution for the banking sector, whose tax revenue is intended to benefit a Resolution Fund created in order to address the systemic risks of Portuguese banks;
- the extraordinary contribution for the energy sector, established for the purpose of financing mechanisms to promote the systemic sustainability of the sector, with revenue allocated to a fund which aims to reduce the tariff debt and fund social and environmental energy policies; and
- the extraordinary contribution for the pharmaceutical industry, whose tax revenue is intended to benefit the public health service.
None of these additional taxes can be deducted for CIT purposes.
Answer ... Portuguese law foresees a municipal surcharge of up to 1.5% of taxable income, as well as a state surcharge which varies as follows:
- 3% for taxable profits of €1.5 million to €7.5 million;
- 5% for taxable profits of €7.5 million to €35 million; and
- 9% for taxable profits exceeding €35 million.
Companies that own real estate are also subject to municipal property tax on the tax value of the property. The tax rate varies as follows:
- between 0.3% and 0.45% for urban properties (fixed annually by the municipality and tripled if the property is left vacant for more than one year);
- 0.8% for rural properties; and
- 7.5% for properties owned by entities with their head office in a blacklisted territory.
An additional municipal property tax applies to the sum of the tax registered value of all urban properties (excluding those classified as serving “trade, industry, or services” purposes and “others”) held by each corporate (or individual) taxpayer on 1 January each year. Corporate taxpayers are subject to a 0.4% rate, or a 7.5% rate if the corporate taxpayer’s head office or effective management is located in a blacklisted territory. Urban properties owned for the personal use of company shareholders, board members or members of any administrative, supervisory or management bodies are subject to a rate of 0.7% (and 1% for that part of the taxable amount which exceeds €1 million).
Answer ... A notional interest deduction to taxable profits applies upon the incorporation of an entity or a capital increase, either in cash or through the conversion of credits deriving from shareholder loans or third-party loans, or through reinvesting the profits for that same tax period. The deduction corresponds to 7% of the capital contribution, up to a limit of €2 million. Such deduction applies for the tax period in which the capital contribution is made and the following five tax periods, as long as:
- the company’s taxable profits are not determined through indirect methods; and
- the beneficiary company does not reduce its equity by returning it to shareholders in the first relevant tax period and the following five tax periods.
This regime does not apply if it has been applied, for the same tax period or the previous five tax periods, to entities that hold, directly or indirectly, a shareholding in the beneficiary entity, or which are held, directly or indirectly, by the same entity, up to the amount of the capital contributions of the entities that have previously benefited from this regime.