Investor's Guide - Fiscal System - Main Taxes in Portugal

AICEP
Agência para o Investimento e Comércio Externo de Portugal

CABEÇALHO

Contact Us


Homepage » Invest in Portugal » Fiscal System

Portugal Investor's Guide

  

Fiscal System

 

1. Corporate Income Tax

 

1.1 Summary Table

 

Corporate Income Tax

Imposto sobre o Rendimento

das Pessoas Coletivas (IRC)

Entry into Force

1 January 1989 (1 January 2014 last extended CIT reform)

Tax Rates

·    Standard 21% rate

·    Municipal surtax (“derrama municipal”) up to 1.5% levied on taxable profits (depending on the municipality of the activities)

·    State surtax (“derrama estadual”) of 3% on taxable profits exceeding € 1.5 million up to € 7.5 million, 5% on taxable profits exceeding € 7.5 million up to € 35 million and 9% on taxable profits exceeding € 35 million

Exemptions

CIT exemptions available for the Portuguese State, Autonomous Regions, local municipalities, social security entities and capitalization funds, amongst others

CIT Returns

·    Annual CIT return, to be submitted until May 31 of the following year

·    Other reporting obligations (acquisition/disposal of securities, withholding tax on income paid, etc.)

  

1.2 Taxable Entities 

 

Corporate Income Tax (IRC)Corporate tax (CIT) is a tax levied on profits derived by both resident and non-resident entities. The mere holding of assets does not give rise to CIT taxation. 

Taxable resident entities are companies and other corporate bodies whose main activity is commercial, industrial or agricultural and with head office or effective place of management in Portuguese territory. Resident entities are generally subject to taxation on worldwide profits.

 

Non-resident entities with a permanent establishment in Portugal are also subject to corporate tax on the profit attributable to those permanent establishments.

 

In broad terms, a non-resident company is deemed to have a permanent establishment in Portugal if it holds a fixed place of business through which its activity is carried on. This may be the case when the non-residents have a local branch, office, building site or construction project or act through dependent agents.

 

Non-resident entities (i.e. companies and other body corporates with no permanent establishment in Portugal) are only taxed on Portuguese-sourced income. 

 

1.3 Rates  

 

Portuguese CIT is levied at a 21% rate, to which may be added a municipal surtax (“derrama municipal”) up to 1.5% levied on taxable profits (depending on the municipality of the activities), as well as a state surtax (“derrama estadual”) of 3% on taxable profits exceeding € 1,500,000 up to 7.5 million, 5% on taxable profits exceeding € 7,500,000 up to 35 million and 7% on taxable profits exceeding € 35,000,000. This means that the nominal tax rate may reach up to 31.5% for large companies.

 

A special reduced CIT rate is available for SME, i.e. companies with a turnover below € 50 million between other criteria as defined in the Decree-Law 372/2007 of 6 November. For these companies, taxable profits until € 15,000 are subject to a reduced rate of 17%. The remaining taxable profits above such an amount are subject to the standard CIT rate.

 

The state surtax is levied through an additional payment on account (an advance payment mechanism) equivalent to 2.5% and 4.5% of the share of previous fiscal year taxable profits exceeding € 1,500,000 and € 7,500,000. The Surtax is imposed before any loss carry forward, and computed and payable at individual level (also for companies taxed under group taxation).

 

Companies with head office or place of effective management in the Autonomous Region of Azores benefit from a reduced 16.8% CIT rate and 13.6% for the taxable profits until € 15.000.

 

For companies with licence to operate in the Madeira International Business Centre it is applicable a reduced CIT rate of 5% from 2013 to 2020, subject to requirements such as a thresholds on taxable income or job creation/maintenance (see further information below).

 

A new special regime applicable to entities with license to operate within the Madeira International Business Centre was approved, entering into force as from 1 January 2015.

 

1.4 Determination of taxable income

   
1.4.1 General Rule

 

Portuguese resident companies and local permanent establishments of foreign entities are taxable on their taxable income, determined in accordance with accounting standards and subject to the Portuguese CIT Code provisions. From 2010 onwards, the Portuguese accounting standards (generally accepted accounting principles – GAAP) follow closely the International Financial Reporting Standards (IFRS).  Accounting and tax periods coincide with the calendar year. 


1.4.2 Expenses & Non-decuctible items  

 

Expenses related to the business activity are generally deductible for CIT purposes, insofar such expenses are addressed to obtain or guarantee taxable income.

 

There are some exceptions to the general rule, namely (i) interest paid in shareholder loans in the amounts above the 12 month Euro Interbank Offered Rate accrued with a 1.2% spread rate (relevant for situations where transfer pricing rules are not applicable), (ii) expenses documented by invoices or other documents without a valid taxpayer number, (iii) penalties or fines paid, (iv) CIT and surtaxes or (v) depreciation of the acquisition cost of private vehicles between €25,000 and €50,000 (dependent of the date of acquisition and type of vehicle) and other luxury related expenses.


1.4.3 Depreciation and amortization 

  

The acquisition or production cost of certain assets is tax deductible in accordance with their expected useful life. Depreciation is generally computed through the application of the straight line method, although taxpayers may elect to apply the declining-balance method. Declining-balance method cannot be applied to building properties, passenger vehicles for private use or furniture, amongst others.

 

The depreciation rates are established by law and deductions above such rate are not recognized for tax purposes. Taxpayers may also opt to apply a depreciation rate representing 50% of the general rates. Below some examples of the maximum straight-line depreciation rates: 

 

Asset

Depreciation Rate

Commercial buildings

2

Industrial buildings

5

Office equipment

12.5 to 25

Electronic equipment

20

Computers and Software

33.33

  

Goodwill is generally not eligible as a tax deductible item.

 
1.4.4 Provisions

   

As a general rule, provisions constituted by a Portuguese company are not tax deductible, unless they are related to: 

i)    Pending judicial litigations, when concerning bad and doubtful debts; 

ii)   Warranties granted to clients foreseen in agreements for the supply of goods or services; 

iii)  Mandatory technical provisions, constituted in accordance with the Insurance Portuguese Institute and/or Bank of Portugal rules; 

iv)  Remedy of environmental damages.


1.4.5 Interest barrier rule 

 

The Portuguese CIT Code foresees an interest barrier rule which limits the deductibility of net financial expenses to the higher of the following: (i) € 1,000,000; or (ii) 30% of EBITDA (operating profits before interests, taxes, depreciations and amortizations).

 

This means that net financial expenses up to € 1,000,000 will be deductible in all cases. This is not an exempt amount, but a threshold which, once reached by net interest paid, will expose the entire net interest to the 30% deduction limitation. Under a transitional provision which establishes a phase-in system, according to which the EBITDA limit will be of 50% in 2015, 40% in 2016 and 30% in 2017.

 

The limits apply to all financing costs regardless of the existence of special relations between the debtor and creditor, and the residence of the creditor (i.e. financing from EU resident lenders is no longer excluded). The interest barrier rule is also applicable to tax groups.

 

Credit and financial institutions (including branches of foreign entities) under the supervision of Bank of Portugal and insurance companies under the supervision of the Insurance Institute of Portugal (ISP) are excluded from the interest barrier rule.


1.4.6 Bad Debts  

  

The costs with impairment losses derived from doubtful debts are tax deductible when an insolvency or recovery procedure has been submitted or when credits have been judicially claimed. Only impairment losses derived from debts outstanding for more than six months are qualified as tax deductible within the following limits on the amount in debt: 

(i)      From 6 to 12 months: 25%; 

(ii)     From 12 to 18 months: 50%; 

(iii)    From 18 to 24 months: 75%; and 

(iv)    More than 24 months: 100%.


1.4.7 Autonomous taxation

 

In addition to the general CIT rate, autonomous taxation is applied on certain expenses of CIT taxpayers. 

 

Expense Items

Rate

Non-documented expenses

50%

(70% if taxpayer

is CIT exempt)

Expenses with passenger vehicles (excluding electric vehicles) with an acquisition cost between an amount below € 25,000 and above € 35,000

10% up to 35%

Representation expenses

10%

Payments made to individuals or corporate entities resident in blacklisted jurisdictions

35% (individuals)

/ 55%

(corporate entities)

Per diem and travel allowances

5%

Dividends paid to partially or fully CIT exempt entities with shareholding less than one year

23%

Expenses incurred regarding compensation paid for the termination of manager or board members’ functions and not related to productivity goals established in the labour agreement.

Amounts exceeding the remuneration to be received by the manager or board member until the term of the labour agreement in case of termination prior to that term.

Bonuses paid to managers or board members corresponding to more than 25% of the yearly wage and exceeding € 27,500

35%

  

The rates are increased by 10% if the taxpayer assesses tax losses in the year when expenses are incurred. Autonomous taxation is paid even if no CIT is due.

  

1.5 Tax Incentives

 

The following outlines some of the major corporate tax benefits available to Portuguese entities:

 

Name

How it operates

Main Requirements

Tax Incentives System for Entrepreneurial Research & Development (“SIFIDE II”)

Under SIFIDE II a tax credit corresponding to the amount of expenses incurred with R&D activities is available limited to the following: 

(i)  32.5% of expenses borne during a tax year; 

(ii) 50% of the surplus of expenses borne in the tax year over the average of the two previous tax years, capped at €1,500,000.
In case the credit may not be fully offset in a taxable year, a carry-forward is available for the following eight years with certain limitations.

For SIFIDE II the following requirements apply: 

·     Expenses must have been incurred by Portuguese companies carrying out commercial, industrial or agricultural activities 

·     The expenses incurred cannot have been subject to non-refundable financial aid from the Portuguese State; 

·       A request must be submitted until July of the year following the year of investment; and 

·     The application of SIFIDE II is authorized by the Certifying SIFIDE Committee

Patent Box

Partial exemption (50%) from CIT of the profits derived from both the licensing and sale for companies exploiting patented inventions and other innovations such as models and industrial designs protected by intellectual property (IP) rights acquired after 1 January 2014.

Amongst the requirements to apply are: 

·    Qualifying IP must be self-developed.  

·    The licensee cannot be resident of a blacklisted jurisdiction. 

·    The IP must be effectively used for business activities.  

·    If the licensee is a related company, the IP cannot be used to create deductible expenses for the taxpayer.

Tax Regime for Investment Support (“RFAI”)

Under RFAI, investing companies may benefit from a tax credit against tax due (maximum 50% of tax assessed), corresponding to 25% of investments below EUR 5 million or 10% of investments above EUR 5  million. Exemptions of Real Estate Transfer Tax, Real Estate Tax (both depending on authorization of the corresponding municipality) and Stamp Tax on the acquisition of real estate may also be available. In the case of start-ups, a full of the CIT may apply in the year of beginning of activity and two following periods of taxations.

For RFAI the following requirements apply: 

·    Investment must be made in certain activity sectors, such as tourism or the mining industry; 

·    Investments must be maintained for a minimum period of 5 years; 

·    The investment must allow for the creation of jobs

Contractual Tax

Investment projects to be implemented until 2020 may benefit from contractual tax incentives. 

Under contracts signed with the Portuguese State, a tax credit from 10% to 25% of the amount of the investment made may be available. 

In addition, reduced rates or exemptions of Real Estate Transfer Tax, Real Estate Tax and Stamp Tax may also apply.

For contractual incentives, the following requirements apply: 

·    Minimum investment of EUR 3 million; 

·    Investment must have strategic economic interest; 

·    Investment must allow the creation of jobs.

Job creation

Job creation incentive allows companies to make under certain circumstances an additional deduction of 50% of labor related costs. The additional cost may be claimed for a period of five years, calculated from the date in which of the labor agreement was enacted.

For job creation incentive, the following requirements apply: 

·    increase number of employees by granting permanent employment contracts 

·    new employees are (i) aged between 16 and 35 years old; (i) below 23 years old which have not concluded secondary education and are not attending an educational program; or (iii) long term unemployed 

·    tax incentive limited to 14 times the minimum monthly wage 

·    limitation to cumulate this incentive with other benefits to support the job creation.

Portuguese investment funds

As from 1 July 2015, most of the income obtained by investment funds are CIT exempt in Portugal being the income subject to taxation at investors level.

Non-resident investors without a local permanent establishment (provided they do not have their residence in a blacklisted jurisdiction and no more than 25% of this share capital is held by Portuguese residents) will remain exempt from Portuguese taxation in respect of income derived from securities investment funds and, in respect of income derived from real estate funds, they are taxed in Portugal at a 10% rate.

  

There are also several relevant tax incentives for real estate rehabilitation that apply across the board to other taxes or entities.

 

The first is the special regime for real estate urban rehabilitation investment funds, whose assets are comprised of at least 75% by properties subject to urban rehabilitation. Those funds are fully exempt from corporate income tax on all types of income (including rental income and capital gains). These may also benefit from exemption from real estate taxes.

 

The Portuguese urban rehabilitation regime also provides qualifying rehabilitation of properties initiated on or after 1 January 2008 and concluded by 31 December 2020 the following tax incentives:

·       Possible IMI exemption for urban property subject to rehabilitation, applicable for a period of five years which may be renewed for a subsequent period of five years. 

·       Possible IMT exemption for the acquisition of urban property considered a permanent place of residence destined for urban rehabilitation. It must be the first transaction of the building after the rehabilitation and the building must be located in an urban rehabilitation area. 

·       Income obtained by both individuals and corporate investors and derived from the units held in funds is subject to a WHT rate of 10% for income tax purposes.

 

 

1.6 Social security contributions

 

The Portuguese social security system is financed by contributions of both employers and employees. Employers are required to contribute 23.75% for employment contracts. This contribution has no ceiling. Companies also must make contributions for the members of their corporate boards. The employer contribution is deductible for corporate tax purposes. The table identifies key situations (with potentially applicable exemptions or reductions in other situations).

 

Employee

Employer

Employee under contract

11,0%

23,75%

Board member

11,0%

23,75%

Self-employed

29,6%

5,0%

 

 

1.7 Tax losses

  

Tax losses may be carried forward for a period currently set in 12 years and limited to 70% of the taxable profits, as follow:

 

Tax years

Years carry-forward

Limit to the deduction

2008 and 2009

6

2012/2013 75% of taxable income

2010 and 2011

4

2012 and 2013

5

2014 to 2016

12

70% of taxable income

As from 2017

51

70% of taxable income

 

[1] This rule is scheduled to apply as from 2017 onwards. The 12 year period remain applicable to small and medium enterprises (“SME”) as per the qualification provided in Cedree-Law 373/2007, of 6 November.

 

 

1.8 Dividends and capital gains

  

Resident companies are subject to corporate income tax on their worldwide income and capital gains.

 

Domestic and foreign-source dividends derived by a resident company are exempt if the following conditions are met:

(i)      10% minimum shareholding on the company distributing the dividends;

(ii)     one year holding period (may be satisfied after the income is derived);

(iii)    source of dividends is not geographically limited (except for dividends received from blacklisted jurisdictions);

(iv)    the company distributing the dividends is subject and not exempt to a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate (if this last condition is not met other alternative requirements may apply).

 

A credit for the underlying tax will be available where one or more of the conditions for the participation exemption are not met.

 

As a general rule, capital gains derived by Portuguese resident corporate entities are included in the taxable profits and subject to the general CIT rate. Likewise, capital losses may be deduced to the taxable profits.

 

Under a reinvestment relief mechanism, 50% of the positive difference between capital gains and capital losses can be excluded from taxation provided the total amount of the sale’s proceeds is reinvested in the year prior to the disposal or before the end of the second following year (i.e. N-1, N, N+1 and N+2) in the acquisition, manufacture or construction of tangible fixed assets, non-consumable biological assets or investment properties and used for the activity of the acquiring company (i.e. only assets and not shares).

 

Capital gains derived by a resident company on the sale of shares in a non-resident company are exempt if the above-mentioned conditions for dividends are met throughout the whole shareholding period. There is however a real estate carve-out for cases where the assets of the company disposed consists of more than 50% of Portuguese real estate property. This exemption is also applicable to capital gains derived by permanent establishments of foreign entities operating in Portugal.

 

Mergers, demergers, transfers of assets, exchanges of shares and transfers of residence may benefit from a tax relief (tax neutrality).

 

1.9 Foreign business income

  

Portugal employs two methods to avoid double taxation of foreign-source income, i.e. the exemption and ordinary tax credit methods.

 

When a resident company derives business profits through a permanent establishment abroad a Portuguese company may opt for exemption method under certain circumstances and only to permanent establishment in a country with a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate (i.e. 13.8%).

 

1.10 Withholding taxes 

 

Income

Rate

Dividends

25% (1)

Interest

0% (2) / 25% (1)

Royalties

0% (2) / 25% (1)

Services and Commissions

25% (3)

Rental Income

25%

(1) Subject to reduced rates or exemptions under tax treaties.

(2) The payment of interest and royalties may benefit from an exemption of withholding tax under the Interest & Royalties Directive provided certain conditions are met.

(4) Most tax treaties exempt these payments from taxation in Portugal.

 

Domestic-source income derived by non-residents without a permanent establishment in Portugal is generally subject to a final withholding tax levied on the gross amount.

 

Dividends paid by a Portuguese company to its resident or non-resident shareholders are subject to a 25% flat withholding tax rate, unless an exemption for dividends paid by Portuguese resident entities is also applicable.

 

To qualify for the withholding tax exemption for dividend payments, the main criteria are the following: (i) 10% minimum shareholding on the Portuguese company distributing the dividends; (ii) one year holding period (may be satisfied after the income is paid); (iii) resident of shareholder is geographically limited to shareholders resident in a EU Member State, EEA (excluding those that do not exchange tax information with Portugal) or jurisdictions with which Portugal has signed a Double Taxation Agreement with exchange of information mechanism; and (iv) the company receiving the dividends should be subject and not exempt to a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate.

 

In case profits are distributed to a corporate entity resident in a blacklisted jurisdiction, a 35% flat withholding tax rate will apply.

 

No withholding tax on interest paid to Portuguese banks or local branches of foreign banks subject to CIT in Portugal.

 

Interest income and capital gains derived by qualifying non-residents from public or private debt securities and issued by Portuguese entities securitization notes are exempt from CIT.  An exemption is also available for dividend income derived by Portuguese or EU/EEA pension funds, provided some requirements are met.  

 

1.11 Capital gains derived by non-residents

  

Capital gains derived by non-resident corporate entities are subject to a 25% flat withholding tax rate.

 

Capital gains derived from the disposal of shares or other corporate rights and securities may benefit from a domestic tax exemption provided such gains are derived by a non-resident without a permanent establishment in Portugal, if the following requirements are met: 

(i)   The seller is not owned, directly or indirectly in more than 25% by a Portuguese resident company/individual or the seller is not a resident in a blacklisted jurisdiction; and 

(ii)  The gains derived do note relate to shares or corporate rights in resident companies whose assets consist in more than 50% of Portuguese-situs immovable property or holding companies, whenever such companies are in a control relationship with resident companies whose assets consist in more than 50% of Portuguese-situs immovable property. 

 

1.12 Group taxation

  

Resident companies may elect to be taxed within a tax group of companies. The Portuguese tax group does not work as a pure consolidation or fiscal unity system, but each entity must individually assess their taxable profits / losses.

 

In order for a group of companies to be qualified as a tax group for Portuguese taxation purposes, the following requirements should be met: (i) the head of the tax group must be the direct or indirect holder of at least 75% of the subsidiaries’ share capital, provided such shareholding represents more than 50% of the voting rights, (ii) the share capital of head of the group cannot be held in 75% or more by another Portuguese entity, (iii) all companies within the tax group must have their head office or place of effective management in Portugal and be taxed at the higher CIT rate and (iv) the participation in the subsidiaries must be held for a minimum period of one year from the moment the tax group is created. Under certain circumstances the Portuguese group taxation regime also allows integration where lower tier Portuguese entities are held by a foreign entity held by a Portuguese entity. Foreign permanent establishments do not qualify to head a tax group.

 

Under certain conditions, tax losses assessed by the individual companies prior to integration may be offset against the taxable profits of the tax group. The limitations referred above regarding the carry forward of tax losses are applicable to groups of companies.

 

As of 1 January 2015, it is possible to apply the group taxation regime if the dominant company has its registered head office or place of effective management in an EU or EEA country (in the latter case, provided there is administrative cooperation on tax matters similar to the one in place with the European Union). In addition, among others, the following requirements must be met:
  - The dominant company owns the dominated companies for more than one year with reference to the date at which the regime starts to apply.
  - The dominant company is not directly or indirectly 75% held by a Portuguese dominant company.
  - The dominant company is subject and not exempt from a tax as per Article 2 of Council Directive 2011/96.
  - The dominant company is incorporated as a limited liability company.

 

1.13 Transfer Pricing

  

The Portuguese transfer pricing regime has come into force in the Portuguese tax legislation in 2002 and follows closely the OECD guidelines. Under this regime, transactions entered into between related entities should reflect the arm’s length principle, i.e. for tax purposes, the controlled transactions’ prices should be established as if the parties were not related, by reference to the conditions which would have been obtained between independent enterprises, in comparable transactions and comparable circumstances. For these purposes, the threshold for the determination of a special relationship is currently in 20% of shareholding. In addition, an entity can be qualified as related party when it has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other.

 

The scope of the transfer pricing regime covers all taxpayers conducting cross-border as well as domestic controlled transactions, including transactions between permanent establishments and transactions entered into with unrelated entities resident in listed blacklisted jurisdictions.

 

Taxpayers that in the previous fiscal year obtained over € 3,000,000 of net sales and other operating profits are required to organize compile and keep contemporaneous transfer pricing documentation for a 10 year period. 

 

1.14 Liquidation and Exit Tax

  

Proceeds received by shareholders derived from the liquidation of a Portuguese resident company are qualified as capital gains. The capital gains exemption for both resident and non-resident entities is applicable to liquidation proceeds.

 

The transfer of the head office with corporate continuation or of the place of effective management (qualified as a cease of activity) of a company, without such company being liquidated, gives rise to a taxable gain or loss equal to the difference between the market value of the assets and their book value (at the general CIT rate).

 

The exit tax rules applicable to transfers of residence of Portuguese companies to other EU/EEA countries provides the following options for the payment of CIT: (i) immediate payment of CIT upon exit, (ii) option for payment in five instalments and (iii) option for deferral until the year of effective disposal of the asset or transfer of residence to another jurisdiction. 

 

1.15 International Business Centre of Madeira

 

A special regime applying for companies with licence to operate in the Madeira IBC as from 1 January 2017 up to 31 December 2014 is applicable until 31 December 2020. Under the current regime, a 5% CIT rate is applicable until the end of 2020 based on taxable income ceilings, which are connected with number of jobs. Those taxable income ceilings are backed by substance requirements involving either the creation of one to five jobs during the first six months of activity and a minimum investment of €75,000 on the acquisition of tangible or intangible fixed assets during the first two years of activity or creating of six or more jobs within the first six months of activity.

 

Taxable income ceilings

Number of jobs created

Tax base ceiling (€M)

1 - 2

2,73

2 - 5

3,55

6 - 30

21,87

31 - 50

35,54

51 - 100

54,68

> 100

205,5

   


A new tax regime was approved for companies licensed to operate in Madeira Business Center as from 1 January 2015. Entities licensed until 31 December 2020 can benefit from the new tax regime until 31 December 2027. Among other tax benefits, a reduced CIT rate of 5% applies on qualifying income, under the same taxable income ceilings as above. Dividends (except in very few circumstances) and interest paid out of shareholder loans derived by foreign shareholders are exempt from tax. In some cases, resident shareholders may also benefit from a tax exemption on these incomes.


The new regime was negotiated and duly authorized by the European Commission.

 

1.16 Anti-Avoidance Rules

 

Portugal has a general anti-abuse clause, special rules on tax-driven restructurings and rules on payments made to blacklisted jurisdictions. Portugal has implemented also a mandatory disclosure regime for abusive tax planning. Corporate profits of a foreign company resident in a low-tax jurisdiction may be attributed to the participators having a substantial interest therein and taxed in their hands in proportion to their holdings.

 

 

Content supplied by

 

Content supplied by Garrigues

 
Partilhar