On 3 May 2019, Portugal introduced amendments to Portuguese Taw Law, in accordance with the European Union (EU) Anti-Tax Avoidance Directive (ATAD). ATAD provides a set of anti-tax avoidance provisions across EU Member States. Provisions include:
- Controlled Foreign Company (CFC) rules – to deter profit shifting to a low, or zero tax country
- Exit Taxation – to prevent companies avoiding tax when transferring assets
- General Anti-abuse rule – to counteract aggressive tax planning when other rules do not apply
- Hybrid Mismatch rule – to prevent double non-taxation of defined income between jurisdictions
- Interest Limitation – to discourage artificial debt arrangements, designed to minimise taxes
With the exception of the Hybrid Mismatch rule, Portugal has introduced new rules to implement the above measures into Portuguese Tax Law.
Controlled Foreign Company Rules (CFC Rules)
To be subject to the Portuguese CFC rules, the following criteria apply:
- The territory is included in the Portuguese tax haven list, OR
- The corporate tax rate, relevant to the subsidiary, is less than 50% of the tax rate due under Portuguese corporate tax rules (less than 10.5%, as the Portuguese corporate tax rate is 21%).
CFC rules do not apply if the “passive” income does not exceed 25% of the total income of the entity – i.e. royalties, dividends, income from financial leasing, sale of shares, operations exclusive of the banking system, interest, and defined commercial income obtained from related parties, that add little or no economic value.
The minimum participation threshold has been reduced from 25% to 10% of the share capital or voting rights, for taxpayers resident in Portugal. This applies when at least 50% of the shares and rights are held, directly or indirectly by taxpayers (corporate or individuals), resident in Portugal. Share capital and rights, held by related parties to the CFC, are also taken into account.
If certain conditions are met, it may be possible to deduct tax losses.
Depending on the specific circumstances, a number of additional rules may apply, relating to the taxation of CFCs.
Key changes relate to the transfer of assets from Portugal to another country.
The exit tax provision has been amended; the taxpayer of a Portuguese resident company, transferring tax residence abroad to an EU or EEA Member State, can no longer opt for the payment of tax when the gains are realised.
There are two options:
- Immediate payment of the full tax amount, OR
- Payment of the full tax amount in equal instalments over a five year period (under certain circumstances).
If the second option is chosen, a bank guarantee may be requested, late payment interest charged and annual tax returns will be required. Specific procedures and criteria must be met and Dixcart recommend that professional advice should be sought.
General Anti-Abuse Rule
The General Anti-Abuse rule is now applicable to ALL matters considered to be abusive (tax avoidance and evasion), that do not have a “genuine” reason taking into account “all facts and circumstances”.
Where the situation is considered to be abusive, any corresponding tax advantage will be assumed to have been enjoyed by the Ultimate Beneficial Owner (UBO).
Hybrid Mismatch Rule
Portugal will implement the Hybrid Mismatch rule at a future date.
Limit: Tax Loss Deductibility
The Portuguese Corporate Income Tax (CIT) Code already included an interest deduction limitation rule, under which the deduction of net financing expenses was capped by the higher of the following two amounts:
- 30% of the taxpayer’s earnings, before interest, tax, depreciation and repayment, adjusted for tax purposes, OR
- €1 million.
To comply with ATAD requirements, the definition of “net financing expenses” has been amended. Comprehensive details are available on request.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.