Highlights on the 2014 State Budget proposal State Budget proposal

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1 Highlights on the 2014 State Budget proposal proposal

2 firms help organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with close to 184,235 people who are committed to delivering quality in assurance, tax and advisory services. 2

3 Contents What to expect from this Budget Comments by Jaime Carvalho Esteves Amendment to the 2013 State Budget Personal income tax Social Security Corporate income tax VAT and other indirect taxes Property taxes Compliance and reporting obligations Tax litigation 41 3

4 Jaime Carvalho Esteves Tax Lead Partner, in charge of the department Government and Public Sector What to expect from this Budget This budget key figures are: 0.2% Primary balance equal to 0.2% of the GDP. 4% Public debt equal to 4% of the GDP. The proposal implies a significant adjustment to public services and the State, following on from the considerable efforts required from the private sector in the previous years Budget. For corporations, the major impact was the presentation of the corporate income tax reform proposal and respective measures the day before the presentation of the State Budget proposal. Taxation will increase with immediate effects through the increase of autonomous taxation, the increase of the limitation on the deductibility of net financial expenses, the limited range of the tax benefit for the reinvestment of retained earnings and the increase of the taxable basis of Social Security contributions of board members. For Portugal as a holding location, the effectiveness of the reform will depend on the options yet to be taken at the level of taxation of financing. In particular, there will be amendments to stamp duty (these should be aligned with the participation exemption regime) and corporate income tax has alterations concerning interest paid to non-residents. The reform is important as it should provide an important contribution towards the promotion of investment and consequently the creation of new jobs. 4

5 What to expect from this Budget On the other hand, the execution of the Budget will depend on how the macroeconomic scenario will evolve in view of the forecasts, which are optimistic. It will also depend on the decisions of whether the options taken are in line with the constitution. Within this framework, there is uncertainty about the effective execution of the Budget, due to the (temporary) adjustment of public wages and pensions, the viability of the State and the exceptional circumstances, different efforts required from private and public sectors, fair distribution of sacrifices, protection of rights and expectations, discrimination between public and private, temporary nature of the measures and assuring a minimum income. The reform is an important contribution towards the promotion of investment and consequently the creation of new jobs. These matters shall be discussed within the wider context of State reform, including what State functions can and should be paid and the need for a structural reduction of public expense, in order that public debt becomes sustainable without the need of external financial assistance. However, it is crucial that budgetary execution assures two main goals: a positive primary balance of 2% of the GDP and 4% of public debt to GDP. These are critical for the success of the financial assistance programme ending on June

6 What to expect from this Budget INE INE SB SB 1. Tax revenue (2+3+4) 61, , , , Taxes on production and imports 23, , , , Taxes on income and wealth 16, , , , Social contributions 20, , , , Other current revenue 7, , , , Total Current Revenue (1+5) 69, , , , Intermediate consumptions 8, , , , Compensation of employees 19, , , , Social transfers 37, , , , Interest (EDP) 6, , , , Subsidies 1, , , , Other current expenditure 4, , , , Total Current Expenditure ( ) 77, , , , Gross Saving (6-13) -8, , , , Capital Revenue 7, , , , Total Revenue (6+15) 76, , , , Gross Fixed Capital Formation 4, , , , Other Capital Expenditure 2, , , Total Capital Expenditure (17+18) 6, , , , Total Expenditure (13+19) 84, , , , Net lending (+)/ Borrowing (-) (EDP) (16-20) -7, , , , Sources: Ministry of Finance and State Budget Reports 2013 and

7 What to expect from this Budget Forecast Forecast Growth rate % Real Gross domestic product (GDP) SB (1 st version) Real SB (1 st version) Real SB (1 st version) IMF EC OECD Bank of Portugal SB (1 st version) IMF EC OECD Bank of Portugal Gross Public Debt (% GDP) / Private Consumption Government consumption Gross Fixed Capital Formation (GFCF) Exports Imports Unemployment rate (%) Inflation rate Current Balance (%GDP) Sources: INE, Ministry of Finance and State Budget Reports 2013 and 2014 (proposal) 7

8 What to expect from this Budget SB (1 st version) Real SB (1 st version) Real SB (1 st version) Real SB (1 st version) Forecast SB Euribor (%) Brent (USD) Euro Area Growth Rate (%) USD/Euro Sources: Eurostat State Budget Reports 2010, 2011, 2012 Bloomberg 8

9 Fiscal Evolution Total Taxes OE State Budget Receita Tax revenue Fiscal Sources: State Budget , 2008, 2009, 2010, 2011, 2012, 2013, 2014 State General Accounts , 2009, 2011, 2012 Pordata 9

10 Fiscal Evolution Direct Taxes OE State Budget Receita Tax revenue Fiscal Corporate Income Tax Personal Income Tax OE State Budget Receita Tax revenue Fiscal State OE Budget Receita Tax revenue Fiscal Sources: State Budget , 2008, 2009, 2010, 2011, 2012, 2013, 2014 State General Accounts- 2007, 2009, 2011, 2012 Pordata 10

11 Fiscal Evolution Indirect Taxes OE State Budget Receita Tax revenue Fiscal VAT OE State Budget Receita Tax revenue Fiscal Sources: State Budget- 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014 State General Accounts- 2007, 2009, 2011, 2012 Pordata 11

12 Fiscal Evolution Other Indirect Taxes Tax on Energy Products and Electricity Car Tax OE State Budget Receita Tax revenue Fiscal OE State Budget Receita Tax revenue Fiscal Excise Duty on Alcohol and Alcoholic Beverages Excise Duty and Tobacco OE State Budget Receita Tax revenue Fiscal OE State Budget Receita Tax revenue Fiscal Stamp Tax OE State Budget Receita Tax revenue Fiscal Sources: State Budget- 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014 State General Accounts- 2007, 2009, 2011, 2012 Pordata 12

13 01. Amendment to the 2013 State Budget The increase of the taxable income caps and the reform of the corporate income tax, if combined with an increase of the internationalisation of investments and a stable legislative framework, may place the Madeira International Business Centre on the map for foreign investors. Leendert Verschoor, Tax Partner 13

14 01. Amendment to the 2013 State Budget Corporate income tax State Surtax The amendment to the 2013 State Budget proposes the revocation of the provision of the 2012 State Budget that established the temporary nature of the State Surtax. Until its abolishment, foreseen to occur in 2018 under the corporate income tax reform, State Surtax shall continue to apply at 3% on the taxable income between 1.5 and 7.5 million, and at 5% above 7.5 million, in both cases prior to use of tax losses carried forward. Special regime of taxation of income from debt securities The regime now applies to income from hybrid financial instruments, commercial paper and other financial instruments. Proof of exemption shall be made by means of a standard form yet to be published. Personal income tax Additional solidarity surcharge The additional solidarity surcharge is maintained, following the proposal to revoke the provision of the 2012 State Budget that established its temporary nature. The applicable rates are respectively 2.5% or 5% on taxable income above 80,000 or 250,000. Madeira International Business Centre (MIBC) New maximum taxable income caps have been established, according to the number of jobs created, to which reduced CIT rate in case of entities licensed to operate in the MIBC apply as from 1 January Taxable income (in million euros) Current cap Proposed cap Number of jobs created Between 1 and Between 3 and Between 6 and Between 31 and Between 51 and More than

15 02. Personal Income Tax The increase of the autonomous taxation of expenses with company cars encourages the PIT taxation of the benefit for the employee of the private use of the car. Ana Duarte, Tax Director 15

16 02. Personal Income Tax Tax rates and tax deductions The general tax rates and income brackets remain unchanged for There are also no changes to the tax deductions and tax benefits. Health insurance The provision of health insurance by an employer for the benefit of its employees and family members is no longer considered as taxable employment income for the employees, provided that the attribution of the benefit is made for the generality of the employees. Currently, the costs of health insurance premiums borne by companies for the benefit of the employees family members were regarded as employment income for the employees, provided that the benefit could be individualised. If the benefit could not be individualised, the related costs were not allowable as a deduction for CIT purposes. Liquidation proceeds of a company As from 2014, liquidation proceeds of a company will be considered as capital gains (Category G). Currently, this kind of income may be considered as capital gains or as investment income (Category E), depending on the circumstances. Capital gains The definition of capital gains will expressly include the income from the extinction of shares or other forms of capital arising in operations of merger, demerger or exchange of shares of a company. Dependents household, for tax purposes, in case of parents divorce The Proposal provides for a clarification of the household to which dependent children should belong, for tax purposes, whenever the parents are divorced and the parental responsibilities are held jointly. Dependents should be considered as part of the household corresponding to the residency officially determined in the regulation of the parent responsibilities or, in the absence of this, to the household where he/she has his/her tax address as of 31 December of each year. However, the rule under which the tax deductions, including the personal deduction, are available in 50% for each parent, remains unchanged. Optional regime for residents in other European Union (EU) or European Economic Area (EEA) countries This optional regime allows Portuguese non-tax residents who are resident in other EU or EEA countries (in the latter case, provided that there are mechanisms for exchange of tax information between Portugal and that country), and who obtain income from a Portuguese source, to be taxed under the Portuguese rules applicable to Portuguese tax residents, provided that more than 90% of the individual s income is obtained in Portugal. The optional regime is now applicable to all kinds of income, whereas it was previously available only in respect of employment income (category A), self-employment income (category B) and pensions (category H). 16

17 02. Personal Income Tax Simplified regime for self-employees and entrepreneurs As from 2014, a self-employee or entrepreneur may qualify for the simplified regime provided that the gross income obtained is lower than 200,000 (currently, 150,000). The computation of the taxable income under the simplified regime is as follows: i) 4% of the sales of goods and services in the hospitality and leisure sector; ii) 75% of listed service-rendering activities; iii) 95% of royalties, know-how and other income (investment income, capital gains, rental income) obtained in connection with the self-employee /entrepreneurial activity; iv) 10% of the remaining income arising from services and business-related subsidies. Autonomous taxation Expenses with passenger vehicles, such as depreciations, rents, fuel, parking, insurance, maintenance, taxes and interest, incurred by individuals who have organised accounts in the course of their self-employed/ entrepreneurial activity are subject to autonomous taxation ( tributação autónoma ). The rate of autonomous taxation is increased to 20% for vehicles with an acquisition cost higher than 20,000, remaining at 10% for vehicles with an acquisition cost lower than or equal to 20,000. Surtax The extraordinary surtax of 3.5% remains applicable to income subject to PIT in 2014, under the same conditions that in Suspension of the update of the IAS (Social Security Index Indexante dos Apoios Sociais) The update of the Social Security Index (IAS) remains suspended for 2014, its value been remaining at Transitional provisions Taxable income of disabled taxpayers In 2014, only 90% of the gross income from categories A (employment income), B (self-employment income) and H (pensions) of taxpayers with disabilities will be computed for PIT assessment purposes. However, the exclusion from taxation shall not exceed 2,500 per category of income. Tax withholdings Individuals who receive employment/ pension income may opt for a monthly withholding tax rate higher than the one established on the tax withholdings table, with a limit of 45% (currently 40%). The Decree-Law on tax withholdings is amended to reflect the changes on the PIT tax rates introduced in Tax residence certificates In order to stop the tax withholdings on income obtained in Portugal by non-tax residents or claim a tax reimbursement of tax unduly withheld, the Portuguese tax authorities are requesting the presentation of specific Portuguese forms (Forms 21-RFI and 24-RFI), certified by the tax authorities of the country of residence of the individual. The Proposal creates an alternative to the procedures currently in force by allowing that taxpayers may present the above 21-RFI/24-RFI certificates without being certified by the foreign tax authorities, provided that a certificate of residence in that country, issued by the relevant authorities, is presented together with those forms. In addition, the possibility to stop tax withholdings at source or request the reimbursement of taxes unduly withheld will also be available whenever there is no Double Tax Treaty in force between Portugal and the country in question, provided that this possibility results from other international treaties or the applicable internal legislation. 17

18 02. Tax Credits 2014 Amounts in Euros Married Not married Tax credits in respect of taxpayers and their relatives i) Taxpayer 427,50 213,75 ii) Single-parent taxpayers 332,50 iii) Dependants 213,75 213,75 Dependants <= 3 years old on December 31 of the year to which the tax relates 427,50 427,50 Households with three or more dependants in their care / for each dependant 237,50 237,50 iv) Ancestors actually living in the same household with the taxpayer who do not receive income greater than the minimum pension payable under the general regime 261,25 261,25 v) Only one ancestor actually living in the same household with the taxpayer who does not receive income greater than the minimum pension payable under the general regime 403,75 403,75 People with disabilities i) For each taxpayer (1) 3,800,00 1,900,00 ii) For each dependant with disability 712,50 712,50 iii) For each ancestor with disability 712,50 712,50 iv) 30% of education and rehabilitation expenditures Sem limite Sem limite v) 25% of life assurance premiums or contributions paid to credit unions 15% coleta 15% coleta - Age-related retirement contributions Health Expenses 10% of the following expenses are creditable: a) Acquisition of goods and services which are exempt from VAT or that are liable to the reduced VAT rate of 6%; b) Acquisition of other goods and services duly justified with a medical prescription (2) 838,44 (2) 838, ou 2.5% de a) se superior ou 2.5% de a) se superior c) The health expenses limit shall be increased for households with three or more dependants in their care, for each dependant, in: 125,77 125,77 Education and training expenses i) 30% of amounts spent up to a limit of: 760,00 760,00 ii) In households with three or more dependants in their care the limit referred to in i) shall be increased, for each dependant, in: 142,50 142,50 Nursing home fees 25% of charges for homes and institutions to support the taxpayer, ancestors and relatives until the third degree who do not have income equal to or above the minimum monthly wage 403,75 403,75 Life insurance and personal accident premiums 25% of the amount spent with personal accident insurance and life assurance covering only risks of death, disability and retirement due to age, in the latter case where benefits may be received only after 55 years of age and 5 years of contract Alimony Repealed - Only in place for professions involving rapid wear and tear and people with disability 20% of the amount spent 419,22 per month, for beneficiary 18

19 02. Tax Credits 2014 Amounts in Euros Married Not married Real estate costs A tax credit of 15% of the following expenditures: a) Debt interest, for contracts concluded until 31 December 2011, incurred on the acquisition, construction or improvement of permanent private residential property used as the taxpayer s permanent private 296,00 296,00 residence, or rent (paid) in respect of a tenant's duly substantiated permanent residence b) Instalments payable as a result of contracts concluded until 31 December 2011 with housing cooperatives or under the group purchasing regime, for the purchase of residential property for use as the (taxpayer s) personal and permanent residence or rental paid in respect of a tenant's duly substantiated 296,00 296,00 permanent residence, to the extent in which they refer to interest of related debt c) Amounts paid by way of rent under a leasing contract concluded until 31 December 2011 in respect of a personal and permanent residence under their regime, to the extent that it does not constitute 296,00 296,00 repayment of capital d) Amounts, spent by way of rent, net of subsidies or official contributions, concerning an urban real estate or fraction for permanent housing under the Urban Rental Regime or the New Urban Rental 414,00 414,00 Regime The limits set out in paragraphs a), b) and c) are increased as follows: - Taxable income up to 1nd bracket - 50%, 444,00 444,00 - Taxable income up to 2nd bracket - 20%. 355,20 355,20 The limits set out in paragraph d) are increased as follows: - Taxable income up to 1nd bracket - 50%, 621,00 621,00 - Taxable income up to 2nd bracket - 20%. 496,80 496,80 Retirement Savings Funds and Retirement Savings Plans (3) Tax credit of 20% of the amount invested i) People under 35 years old 800,00 400,00 ii) People between 35 and 50 years old 700,00 350,00 iii) People above 50 years old 600,00 300,00 Health insurance premiums Tax credit of 10% on health insurance premiums expenses 100,00 50,00 For each dependant accrue 25,00 25,00 Donations Tax credit of 25%: i) Central, regional or local administration; Foundations (with conditions) No limit No limit ii) Donations to other entities Capitalisation Public Regime Tax credit of 20% of the amount invested in individual accounts managed under the capitalisation public regime Value Added Tax (VAT) borne (4) Deduction of 15% of the VAT incurred by any household member included on invoices communicated to the tax authorities regarding certain provision of services 15% of computed tax 15% of computed tax 700,00 350,00 500,00 250,00 19

20 02. Limitation to computed tax deductions and tax benefits 2014 Limits to aggregate computed tax deductions (5) The limits to aggregate computed tax deductions are: - taxable income within the 1st bracket No limit - taxable income within the 2nd bracket (6) 1,250,00 - taxable income within the 3rd bracket (6) 1,000,00 - taxable income within the 4th bracket (6) 500,00 - taxable income within the 5th bracket 0,00 Limits to tax benefits deductible to computed tax The limits to benefits deductible to computed tax are: - taxable income within the 1st bracket No limit - taxable income within the 2nd bracket 100,00 - taxable income within the 3rd bracket 80,00 - taxable income within the 4th bracket 60,00 - taxable income within the 5th bracket 0,00 (1) Assuming that both taxpayers are people with disabilities (2) This limit applies to paragraphs a) and b) (3) Amounts invested after the retirement date are not deductible (4) Deductible expenses incurred with services acquired in the following sectors of activity: - Maintenance and repair of motor vehicles; - Maintenance and repair of motorcycles and related parts and accessories; - Accommodation and food service activities; - Hairdressers and beauty saloons. (5) Health expenses, education and training expenditures, nursing home fees, costs with immovable property and alimony are included (6) These limits are increased by 10% for each dependant or civil godson, which is not a taxpayer 20

21 02. PIT Estimates Taxation in 2014 Private sector employee / Single/ No dependents 2014 Gross employment income 750 /month 1,500 /month 3,000 /month Gross income 10, , , PIT without deductions (1) , , Solidarity tax rate (2) Personal deductions (3) Surtax(4) , Total tax liability (1)+(2)-(3)+(4) , , Net employment income 9, , , Effective tax rate 6.80% 18.93% 28.59% Public sector/ Single / No dependents 38,780 Euros / 3,000 Euros per month Gross income Diference Gross employment income 38, , (1, ) PIT without deductions (1) 10, , ( ) Solidarity tax (2) Tax deductions (3) Personal tax deductions ( ) ( ) Surtax (4) ( ) Total tax liability(1)+(2)+(3)+(4) 10, , ( ) Net income 27, , (1, ) Effective tax rate 27.97% 27.53% -0.44% 21

22 02. PIT Estimates PIT taxation of use of company car vs. Autonomous CIT taxation Vehicle acquistion cost(*) Without agreement With agreement 60, , Depreciation cost (25%) 15, , , , Other related expenses (oil, insurance ) 2, , , , Total of vehicle expenses 17, , , , Autonomous taxation (AT) 20% 35% 20% 35% AT due/year 3, , Increase of AT in , If company has tax losses AT tax rates (+) 30% 45% 30% 45% AT due 5, , (*) vehicle purchased in January 2013 (+) increase of 10 p.p. Personal income taxation Single / No dependents Gross employment income / month Without agreement With agreement Gross employment income 84, , Private use - Taxable income (*) , PIT without deductions (1) 27, , Personal deductions (2) Surtax (3) 2, , Total tax liability (1)+(2)+(3) 29, , Increase of taxation related with private use of car 2, (*) 0.75% of the vehicle s acquisition cost multiplied by the number of months of use 22

23 03. Social Security Social Security contributions due by board members cease to have an upper cap. Ana Duarte, Tax Director 23

24 03. Social Security Board members Board members will start to pay contributions on the effective gross remuneration received in each of the entities where they exercise such role, without any maximum limit. Currently, the monthly Social Security contribution basis applicable to members of the board was limited to a maximum of 5, (12 times the IAS). Regular nature of payments In general, to be subject to Social Security contributions, premiums, bonuses and other payments should be considered as regular. In order to assess the regular nature of those payments obtained by employees, an additional element is now introduced. In addition to the entitlement of the employee to receive such payment, it should be granted with a periodicity of 5 years or less. Self-employees Self-employees make contributions to the Social Security based on a conventional basis, which is linked to the amount of the services rendered. As from 2014, self- -employees will be able to opt to pay contributions to the Social Security based on their conventional income level or, alternatively, based on two levels above or below this level. The referred option should be communicated in February or June of each year and will apply to the contributions due as from the following month. Only insurance and other saving products exclusively financed by individuals are excluded from the CES. Adrião Silva, Tax Director 24

25 03. Social Security Extraordinary Solidarity Contribution (CES) The Extraordinary Solidarity Contribution remains in force for 2014, in accordance with the table below. The application of this contribution may not result in a monthly pension lower than 1,350. CES is applicable to all pensions paid by the Caixa Geral de Aposentações, pension funds and insurance companies, Centro Nacional de Pensões and Caixa de Previdência dos Advogados e Solicitadores. Sickness allowance and unemployment allowance The 5% contribution on the payments of sickness allowances for periods longer than 30 days remains in force. The 6% contribution on unemployment allowances is also maintained, except if those allowances are entitled to a 10% gross-up, under the terms of the applicable legislation (e.g., if both members of a couple receive unemployment allowance). An exclusion from the CES applies to the reimbursement of capital from lifetime annuities, in respect of contributions made by the beneficiaries. Table Extraordinary Solidarity Contribution Gross Monthly Pension ( Euros): Rate(%) 2014 Deductible amount (Euros) From 1,350 to 1, % 0.00 From 1,800 to 3,750 16% Greater than 3,750 10% 0.00 In addition: if greater than 5, until 7, % if greater than 7, % 2,

26 04. Corporate income tax The benefit for the reinvestment of retained earnings will allow the increase of small and medium-sized company s equity, if they opt to retain and reinvest earnings in eligible assets, up to 5 million. However, the tax benefit is capped at 500,000, which may reduce the effectiveness of the measure. Rosa Areias, Tax Partner 26

27 04. Corporate income tax Tax benefit for the reinvestment of retained earnings It is proposed to amend the Tax Benefits Code to include a new tax benefit on the reinvestment of retained earnings ( DLRR Dedução por Lucros Retidos e Reinvestidos ). Targeted to small and medium-sized companies, it allows a corporate income tax (CIT) deduction of 10% of the retained and reinvested earnings used for the acquisition of eligible assets. Reinvestment should be made within two years, computed as from the end of the tax year in which the earnings are realised. The annual deduction is capped at 25% of the CIT due. Estimated impact of the tax benefit for the reinvestment of retained earnings Taxable profit 1,000,000 1,000,000 Carry forward tax losses - - Taxable income 1,000,000 1,000,000 CIT rate 25% 23% CIT due 250, ,000 Tax benefit - 500,000 Cao (25% of the CIT due) - 57,500 Deduction - 57,500 CIT due 250, ,500 Effective tax rate 25% 17% Corporate income tax reform: The tax benefit corresponds to 10% of the reinvested retained earnings ( 5 million as an example, being the maximum amount allowed). Holding companies (SGPS), Venture Capital companies (SCR) and investors (ICR) and dividends from PALOPs (Portuguese Speaking African Countries) and East Timor It proposed to revoke the tax regime applicable to holding companies (SGPS), venture capital companies (SCR) and investors (ICR), that foresees the exemption from taxation of capital gains realised on the sale of participations. The revocation shall also apply the exemption on dividends distributed by subsidiaries in PALOPs (Portuguese Speaking African Countries) and East Timor. A replacement is foreseen of both regimes by the proposed participation exemption, with a broader and more beneficial scope. Incentive regime for R&D (SIFIDE II) extended to 2020 It is proposed to extend the tax benefits under SIFIDE II until It is also proposed to extend the carry forward period in case the amount of the CIT due does not allow using the total amount of the tax credit to 8 years (currently 6 years). Several amendments are introduced regarding payroll costs (namely, costs with PhD s) eligible for SIFIDE II, allowing an additional deduction of 20% (currently, the deduction is linked to the incremental rate, with certain limitations). Additionally, the Certifying Commission of SIFIDE will make mandatory technical audits to the beneficiaries of SIFIDE II once the project ends. Contractual tax benefits for internationalisation It is proposed to revoke the regime of contractual tax benefits for the internationalization of Portuguese companies, currently foreseen in the Investment Tax Code. Tax regime applicable to external loans It is proposed to extend the CIT and PIT exemption to 2014, applicable on interest derived from Schuldscheindarlehen loan agreements signed by the Public Treasury Institute (IGCP) on behalf of the Portuguese Republic. It is required that the creditor is not resident in Portugal and has no permanent establishment herein to which the loan can be allocated to. The tax exemption is subject to IGCP s confirmation that the requirements are met. 27

28 04. Corporate income tax Special tax regime applicable to debt securities issued by non-resident entities It is proposed to maintain the PIT and CIT exemptions on income from debt securities representing public and nonpublic debt issued by non-residents in The exemption applies provided that the income is considered to be obtained in Portugal, under Portuguese tax rules, and paid by the Portuguese State as a guarantor of the obligations undertaken by the entities in which it owns a participation, together with other EU Member States. This exemption applies to effective beneficiaries that fulfil the requirements stated in the legal diploma of the debt securities regime. Repo Operations It is proposed to maintain the CIT exemption on gains obtained by non-resident financial institutions on securities report operations, undertaken with resident credit institutions in The exemption applies provided that such gains are not attributable to Portuguese permanent establishments of non-resident financial institutions. Tax regime of collective investment entities Legislative authorisation A legal authorisation is granted to the Government to change the tax regime of collective investment entities, foreseen in the Tax Benefits Code, regarding income earned by investment entities and by participation units owners and/or shareholders of such entities. At the level of investment entities, the regime aims at modernizing and increasing the respective competitiveness at international level, by means of establishing: a tax neutral regime, transferring the taxation to investors at a single rate; that a fixed percentage, between 0.01% and 0.2%, of the net value of assets, shall be subject to stamp duty. At the level of both resident and non-resident investors, the current taxable events foreseen at the level of PIT and CIT may be subject to review. Additionally, a transitional period shall be implemented allowing the change of investment funds into investment companies. The Government is also granted an authorisation to adjust the tax regime of other collective investment entities which apply the tax regime foreseen in article 22 and following articles of the Tax Benefits Code. There will also be a definition of anti-abuse rules and control mechanisms by the tax authorities. 28

29 04. Corporate income tax Regulation of online gambling and betting Legislative authorisation The Government is granted an authorisation to legislate on the regime applicable to games of chance and betting, when carried out remotely through electronic, computer, telematics or interactive devices installed in Portugal, among others, as follows: Determine the terms and conditions under which the State will grant concessions for online gambling; Establish the grounds of the concession, namely rights and obligations of dealers and the situations of violation of duties to which they are bound; Apply an adequate tax regime to online gambling and betting, as well as remainder financial terms of the concession, including compensations due; Limit access by under-aged and disabled, as well as the use of images, objects, or anything contrary to any right or fundamental freedom; Establish the criminal liability of individuals and corporations, as well as the respective responsibility, derived from offences committed by their corporate bodies or representatives; Establish a subordinated liability of board members and managers for the payment of fines and penalties; Criminalize illicit online gambling and betting, the practice of coercion towards online gambling and betting, and fraudulent online gambling and betting; Set the penalty framework for illicit behaviours; Review of the legislation applicable to entities that supervise games of chance and betting. Taxation of the income arising from debt securities Legislative authorisation The Government is granted authorisation to review the special regime of taxation of the income arising from debt securities (public or private), as follows: Broaden the scope of the regime to include income from short-term monetary debt securities (e.g., commercial paper) duly and exclusively registered at the competent management entities responsible for international compensation and liquidation; Establishing the entities that are responsible for complying with the tax obligations (e.g., withholding taxes, reporting and payment of the tax due); Review the regime aiming at simplifying reporting obligations, identifying beneficial owners and refund procedures; Establish liability for taxes not withheld or improperly refunded; Establish the implications, namely penalties, applicable to the non-compliance of any obligation foreseen in this regime. 29

30 04. Corporate income tax External debt financing Legislative authorisation The Government is granted authorisation to introduce rules regarding the CIT regime applicable to interest payments made or due by Portuguese resident companies, arising from external debt financing, namely: That the regime shall be applicable to loans granted by (i) financial institutions resident in another EU or European Economic Area (EEA) Member State, and that are not allocated to the activity of a Portuguese permanent establishment or to a foreign permanent establishment (outside the referred Member States); (ii) branches of Portuguese, EU or EEA financial institutions that are not allocated to the respective activity in Portugal; Establish that the regime applicable to the interest the payment of which is attributed to a permanent establishment of a EU or EEA tax resident company, or a company resident in a country with whom Portugal has concluded a Double Taxation Agreement (DTA); Establish the means of proof regarding the beneficiary of the income; Establish the concept of EU or EEA financial institutions and loans. M&A transactions and structuring of investments in Portugal shall be encouraged by eliminating the tax concept of pure holding companies (SGPS). Maria Torres, Tax Partner 30

31 05. VAT and other indirect taxes The current challenges of the real estate sector justify the decrease from 5 to 3 years of the deadline to request a partial refund of VAT deducted, under the VAT exemption waiving regime, in case of real estate which is not effectively allocated to VATable transactions. Susana Claro, Tax Partner 31

32 05. VAT and other indirect taxes VAT Regime of goods in circulation ( RBC Regime de Bens em Circulação ) The transport of the following goods is excluded from the scope of this regime: Goods from aquaculture producers; Goods intended for agricultural production, beekeeping, forestry and aquaculture or animal production when transported by the producer or on his behalf; Waste similar to urban solid waste when collected by the competent authorities; Hospital waste accompanied by the relevant identification form; Goods to be delivered by private institution of social solidarity to beneficiaries; Goods collected by non-profit organizations for social solidarity campaigns purposes. When a global transport document is issued, the issuance of the following documents is mandatory: On an effective supply of goods, a delivery note, invoice or simplified invoice; In the case of goods to be incorporated in a supply of services, an internal document (e. g. worksheet) issued under the conditions established for the issuance of delivery notes. Transport documents can now be issued by a third party in the name and on behalf of the sender, subject to prior agreement. Transport documents can now be issued by the service provider in case of transport of goods that were/will be subject to works. The seizure of goods in circulation is now limited to cases where there is suspicion of criminal offence. Recovery of VAT on bad debts and irrecoverable debts VAT related to the below mentioned debts will only be recovered within a 2 year period (counted from the first day of the following civil year): Credits outstanding for more than 6 months, which amount is not higher than 750, VAT included, when the debtor is a private person or a taxpayer that performs exclusively exempt operations without the right to deduct; Irrecoverable debts. This rule is only applicable to the debts overdue after 1 January The deduction of VAT related to irrecoverable debts must now be communicated to the debtor. Waiving of the VAT exemption on real estate transactions It is now possible to waive the VAT exemption if, after refurbishment works, there is an increase of 30% (previously 50%) of the taxable value of the property, for Property Tax purposes, previously used for on VAT exempt supplies. VAT Cash Scheme It is established that the deduction of VAT related with goods and services acquired from taxpayers that are under the VAT Cash Scheme is allowed in the period in which the invoice is received or in the following period. This rule has an interpretative nature. Invoicing Financial services, insurance and reinsurance supplied to EU taxpayers that are exempt from VAT, require the issuance of an invoice. The use of sets for numbering of invoices, amendment documents and simplified invoices is now regulated. 32

33 05. VAT and other indirect taxes VAT reduced rate For supplies to agricultural producers, the mention to forestry services is replaced by supply of services related to agriculture production activities. It is clarified that services provided by agricultural producers benefit from the VAT reduced rate when related to their agriculture production activities.. Agriculture activities not connected with land use, or when ancillary, benefit from the VAT reduced rate. Supply of goods to exporters The VAT exemption applicable to the supply of goods to national exporters is now applicable to all exporters, regardless of their place of establishment. Social Security Public Institutions and Lisbon Charity The special VAT refunds scheme shall apply in Legislative authorisations The Government is authorised to transpose into national legislation the new rule regarding the place of supply of telecommunications, broadcasting, television and electronic services to non-taxable persons. According to the new rule, these services will be taxed at the place where the customer, a non-taxable person, is established, has his permanent address or usually resides. The Government is also authorised to create a lottery for the attribution of a prize to individuals whose tax number was mentioned on an invoice that was communicated to the PTA. Tax on vehicles Charitable Organisations Exemptions Exemption in case of vehicles used for public transport of passengers, with a capacity of 9 seats, acquired by Charitable Organisations. Excise Duties Excise duty on beer, intermediate products and spirituous drinks Increase of 1% of the excise duties on beer and 5% on intermediate products and spirituous drinks. Excise Duty on Tobacco Decrease of 3% of the ad valorem rate on tobacco and increase of 10% of its specific component. 25% increase of the ad valorem rates for cigars and cigarillos. Excise Duty on oil and energetic products additional rate 1% increase and new additional rate on gasoline ( 0.005/l) and colored and marked diesel ( /l) Road service contribution The contribution of 0.053/l now applies to Auto GPL. Circulation Tax Additional rates for Class A and B An additional rate is created regarding Class A and B vehicles, according with the date of the registration plate and the engine capacity (capped at 68.85). Energetic Sector Contribution A contribution to the energetic sector is created. Entities operating in the national energetic sector are now subject to a new contribution aimed at putting in place a fund with the purpose of reducing the tariff debt and financing social and environmental politics of the energy sector. The contribution rate is due on the value of tangible and intangible fixed assets (except those related with intellectual property taxes) and shall not be reflected in the current tariffs. Financial institutions Bank levy The Bank levy will be maintained for It is computed by applying a rate that can range between 0,01% and 0,07% over institutions' liabilities, reduced by their core capital (Tier 1) and complementary capital (Tier 2) and by clients deposits covered by the deposits' warranty fund (currently the rate may vary between 0,01% and 0,05%, and is set at 0,05%) and a rate between 0,0001% e 0,0003% on derivatives instruments notional value not included on the balance sheet (currently the rate can vary between 0,0001% and 0,0002%, and is set at 0,00015%). 33

34 06. Property taxes Investment through real estate investment funds will become less efficient when compared with a company subject to corporation income tax, since the exemption from real estate taxes will be partially revoked. It is advisable to make a general review of the applicable tax regime. Jorge Figueiredo, Tax Partner 34

35 06. Property taxes Real Estate Tax (RET) Exemption for hospitals and health units Hospitals and health units incorporated as public corporate entities are now exempt from RET in relation to properties where healthcare is provided. RET Rates applicable to urban buildings The RET Code foresees a single rate, varying between 0.3% and 0.5%, applicable both to urban buildings appraised under RET rules and urban buildings appraised under the previous rules. RET Term to challenge outdated tax registration value The term of three years for claiming the review of outdated tax registration value of buildings is now counted from the date of the registration request or from the registration made by the tax authorities, or from the update of the registration of the building (formerly, the closing date of the tax registration of the building, i.e. 31 December). The tax registration value assessed under the general valuation of buildings can be challenged, based on an outdated value, on the third year following its entry into force for RET purposes. Real Estate Transfer Tax (RETT) Place to request the tax assessment in case of term of the exemption In case of termination of exemption or rate reduction, the request for RETT assessment should be filed with the local tax office where form RETT Model 1 was previously filed or, in its absence, in the local tax office where the building is located. Tax Benefits Partial abolishment of RET and RETT exemptions for real estate investment funds Buildings owned by open-ended real estate investment funds, publicly placed closed-ended real estate investment funds, pension funds and retirement savings funds, are no longer exempt from RET and RETT, and the applicable rates are reduced to half. Tax benefits to corporate restructurings The granting of tax benefits to corporate restructurings is no longer dependent on the fact that the companies involved in the reorganisation have the same activity or an activity within the same value chain. It is also proposed that tax benefits can be granted even if there is no share capital increase, in case of acquisition of a business, in line with the CIT reform proposal regarding tax neutrality regimes. The request for the reimbursement of Property Transfer Tax, Stamp Duty and administrative fees paid upfront as result of a corporate restructuring, should be submitted within three months counting from acceptance of the exemption (currently, the request should be submitted within one year computed as from the operation). Real Estate Investment Funds for Residential Letting (FIIAH) The extension, until 31 December 2015, of the tax regime for applicable to FIIAH is proposed. Tax Benefits RET exemption for habitual residence Where the RET exemption request is filed within the deadline, or in case the allocation of the building as the taxpayer s habitual residence occurs after the deadline, the RET exemption applies as from the year of the communication to the tax authorities and not from the year in which the conditions become fulfilled. 35

36 06. Property taxes Stamp Tax Short term financing The exemption for treasury operations with a maturity not exceeding one year, currently applicable between holding companies and its subsidiaries, will be applied to financing granted by any company to companies dominated by them or with a shareholding with voting rights of at least 10%, or with a purchase price of at least 5,000,000. The exemption also applies to financing between companies in a dominant or group relationship. Stamp Tax Real Estate with a tax registration value equal to or higher than 1,000,000 The 1% Stamp Tax levied on the ownership, usufruct or surface right of urban housing buildings, with a tax registration value equal to or higher than 1,000,000, will also cover building land whose construction is authorised or intended for house building. Stamp Duty - Reporting obligations In addition to the annual reporting of the tax assessed, the law now foresees that this report also includes the tax basis of exempt transactions. Stamp Tax Guarantees A Stamp Tax exemption is applicable in 2014 on guarantees provided in favour of the State or Social Security institutions in relation to the payments of debt Installments, which may be collected under administrative procedures, or relating to the recovery of tax and Social Security credits. Stamp Tax Repo operations It is not renewed the exemption of Stamp Tax for 2013 on securities repos or similar rights exchanged in stock markets, as well as the repo and fiduciary sales in guarantee, performed by financial institutions intermediated by central counterparties. Stamp Tax Financial Transaction Tax The legislative authorisation provided for in the State Budget for 2013 to legislate on the taxation of most financial transactions taking place in the secondary market, is maintained for 2014 under the same conditions. 36

37 07. Compliance and reporting obligations Significant reduction of compliance time and costs as well as context costs have been introduced through the reform of the corporate income tax and the introduction of the simplified tax regime applicable to individual entrepreneurs (above 200,000). Paulo Ribeiro, TMAS Partner 37

38 07. Social Security Communication of admission An exception is created regarding the communication of admission of domestic service employees, which now can be made by any written mean as an alternative to the electronic communication through the Social Security s website. Salaries monthly report ( DMR Declaração mensal de remunerações ) The possibility of filing the salaries monthly report on physical support in case of individuals who had one employee at their service is eliminated. Personal Income Tax Surcharge Reporting obligations Entities paying employment income and pensions are required to withhold the surcharge on a monthly basis and report those amounts in the DMR, in the Modelo 10 return to be submitted to the Portuguese Tax Authorities, as well as to include those amounts in the document to be provided to the beneficiary of the income. Income earned by non-residents Exemption from withholding tax and tax refund In order to apply double taxation treaties, it is accepted as proof to exempt from withholding, or to claim a partial or full refund of withholding tax refund, a standard form to be approved by the competent member of the Government, certified by the competent authorities of the relevant State of residence, or alternatively the presentation of the same form accompanied by a document issued by the competent authorities of the respective country of residence. These aim at certifying the tax residence in the relevant period and the liability to income tax in that State. 38

39 07. VAT Stamp Duty Temporary regime for communication of invoices through electronic transmission The temporary regime allowing partial communication of the elements regarding the first and last invoice and the invoices that contain the purchaser VAT number, for taxpayers who are not required to have the Standard Audit File for Tax Purposes Portuguese version (SAF-T PT) regarding invoices, and that are not using, nor are obliged to use it, invoicing software is extended to Companies simplified information/annual Statement Stamp duty taxpayers shall report in the companies simplified information/annual statement (IES) not only the detailed statement of the stamp duty paid, also the amount and type of operations exempt from stamp tax (not yet reported). Excise Duties Registered recipient The registered recipients must maintain updated accounting records regarding goods received under suspension regime and introduced on consumption, indicating their origin, destination and any other elements relevant to the tax calculation. Tax warehouses It is clarified that the physical and accounting conditions necessary for the establishment and approval of tax warehouses for the storage of manufactured tobacco are regulated by Ministerial Order. Termination of exemption Request for assessment It is clarified that in case the tax exemption or reduction ceases to apply, the request for tax assessment, to be made within 30 days, must be requested at the tax office where the initial assessment was made. In the absence of this statement, the request shall be filed at the tax office of the area in which the property is located. 39

40 07. Contribution to the Energetic Sector Assessment and payment Taxpayers liable for the contribution to the energetic sector should assess the respective amount up to 31 October 2014 using a standard form to be filed by electronic means (to be approved by the Government). Payment should occur up to the same date. 40

41 08. Tax litigation In view of the increasing pressure to generate revenue, the State Budget proposes a reinforcement of the taxpayers rights, by allowing courts to supervise the tax authorities, at the same reinforcing the measures aiming at preventing and fighting fraud. Jaime Esteves, Tax Partner 41

42 08. Tax litigation Binding ruling request Within the measures presented in the CIT reform, it becomes possible to appeal to the court regarding the refusal to issue a binding ruling request. Taxpayers may also appeal to court when they do not agree with the content of the binding information. General administrative rulings The Portuguese tax authorities must amend their general administrative rulings to comply with the case law of the superior courts. Sham transactions The disregard of sham transactions carried out through official documents no longer needs to be declared by a court of law. Special regime of group taxation The absence or delay in filing a return concerning an exclusion from or of changes on the composition of a group of companies taxed under the special regime is punished with a penalty ranging from 500 to 22,500. Guarantees in favour of the Portuguese state The stamp duty exemption on guarantees in favour of the Portuguese State remains in force in Tax havens Preferential tax regimes are defined using a substantive set of criteria. Countries and territories that are listed as tax havens can appeal when such criteria are not met, for the purposes of being excluded from the list. Fraud against the Social Security The illegal gain required in cases of criminal fraud against the Social Security rises to 7,500 (currently, 3,500) reducing therefore the cases that may qualify as a crime. 42

43 Contacts Lisbon Palácio Sottomayor Rua Sousa Martins, Lisboa Tel: Fax: pwc.tax@pt.pwc.com Porto o Porto Bessa Leite Complex Rua António Bessa Leite, Porto Tel Fax pwc.tax@pt.pwc.com Cape Verde Av. Andrade Corvo, 25 1º Dto Praia Tel. (238) Fax. (238) Jaime Esteves, Tax Lead Partner jaime.esteves@pt.pwc.com Jorge Figueiredo, Tax Partner jorge.figueiredo@pt.pwc.com Leendert Verschoor, Tax Partner leendert.verschoor@pt.pwc.com Maria Torres, Tax Partner maria.torres@pt.pwc.com Rosa Areias, Tax Partner rosa.areias@pt.pwc.com Susana Claro, Tax Partner susana.claro@pt.pwc.com Paulo Ribeiro, TMAS Partner paulo.fernando.ribeiro@pt.pwc.com Adrião Silva, Tax Director adriao.silva@pt.pwc.com Ana Duarte, Tax Director ana.duarte@pt.pwc.com 43

44 This communication is of an informative nature and intended for general purposes only. It does not address any particular person or entity nor does it relate to any specific situation or circumstance. PricewaterhouseCoopers & Associados Sociedade de Revisores Oficiais de Contas, Lda. We will not accept any responsibility arising from reliance on information hereby transmitted, which is not intended to be a substitute for specific professional business advice PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. All rights reserved. refers to the Portugal member firm, and may sometimes refer to the network. Each member is a separate legal entity. Please see for further details.