DOING BUSINESS IN PORTUGAL 2017

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1 DOING BUSINESS IN PORTUGAL 2017

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Mei-June Soo Asia-Pacific: Mei-June Soo, Nina Umar, Ying Zhang Caribbean: Priscilla Lachman, Sandy van Thol Europe: Khadija Baggerman, Larisa Gerzova, Adrián Grant Hap, Marjolein Kinds, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui, Mei-June Soo Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderon Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA PORTUGAL JANUARY

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5 DOING BUSINESS IN PORTUGAL 2017 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO Member Firms and their clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The fee income of the member firms in the BDO network, including the members of their exclusive alliances, was US$7.6 billion in These firms have representation in 158 countries and territories, with over 67,700 people working out of 1,401 offices worldwide. BDO s brand promise is built upon our vision, to be the leader for exceptional client service always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global network that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN PORTUGAL 2017 TABLE OF CONTENTS CORPORATE TAXATION... 9 ABBREVIATIONS... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Deductible expenses Non-deductible expenses Depreciation and amortization Reserves and provisions Revaluation reserves Provisions for doubtful debts Provisions for devaluation of inventory Provisions for depletion for oil companies Other CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments Dividends Interest Royalties Other INCENTIVES Incentives under national legislation Free-trade zones of the Azores and Madeira Contractual tax incentives Tax credit for R&D-related investments Reorganizations Job creation incentive Urban property rehabilitation regime Notional deduction for SMEs Extraordinary tax credit for investments Tax regime to support investment Incentives under regional tax legislation Autonomous region of the Azores Autonomous region of Madeira Reinvestment of retained earnings Patent box Simplified regime ADMINISTRATION Taxable period Tax returns and assessment

8 DOING BUSINESS IN PORTUGAL 2017 TABLE OF CONTENTS Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME LOCAL INCOME TAX TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WORTH TAX REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING General Best method rule Applicable methods Corresponding adjustments THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY OTHER ANTI-AVOIDANCE RULES Tax havens Limitation on net financial expenses VALUE ADDED TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS MISCELLANEOUS TAXES CAPITAL DUTY

9 TABLE OF CONTENTS DOING BUSINESS IN PORTUGAL TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY OTHER TAXES Levy on the banking sector INDIVIDUAL TAXATION ABBREVIATIONS INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME Simplified method Direct method Indirect method INVESTMENT INCOME Dividends Interest Royalties Income from immovable property CAPITAL GAINS Immovable property Shares Other PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits Family expenses Personal and family tax credit Credit for specific sector invoices (e.g. restaurants) Health expenses Education and training expenses Dwelling expenses Nursing home expenses Alimony payments Tax credits under the tax incentives statute Credit for the extraordinary surtax LOSSES RATES Income and capital gains Withholding taxes ADMINISTRATION Taxable period

10 DOING BUSINESS IN PORTUGAL 2017 TABLE OF CONTENTS Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS TAXABLE BASE PERSONAL ALLOWANCES RATES DOUBLE TAXATION RELIEF INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS Inward expatriates Outward expatriates NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Employment income Business and professional income Investment income Capital gains Other Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

11 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL 2017 PORTUGAL This chapter is based on information available up to 1 January Abbreviations Abbreviation English definition Portuguese definition CC Social Security Contributions Code Código dos Regimes Contributivos do Sistema Previdencial de Segurança Social CFI Tax Investment Code Código Fiscal do Investimento CIMI Municipal Property Tax Code Código do Imposto Municipal sobre Imóveis CIMT Real Estate Transfer Tax Code Código do Imposto Municipal sobre as Transmissões Onerosas de Imóveis CIRC Corporate Income Tax Code Código do Imposto sobre o Rendimento das Pessoas Colectivas CIRS Individual Income Tax Code Código do Imposto sobre o Rendimento das Pessoas Singulares CIS Stamp Duty Code Código do Imposto do Selo CIVA Value Added Tax Code Código do Imposto sobre o Valor Acrescentado EBF Tax Benefits Statute Estatuto dos Benefícios Fiscais LFR Law of the Regional Finances Lei das Finanças Locais LGT General Tax Law Lei Geral Tributária ORAA Budget Law for the Autonomous Region of the Azores Orçamento da Região Autónoma dos Açores RDA Amortization and Depreciation Regime Regime das Depreciações e Amortizações RETRVMRD Special Regime of Taxation of Income from Debt Securities Regime Especial de Tributação dos Rendimentos de Valores Mobiliários Representativos de Dívida Introduction Corporate taxpayers are, as a general rule, subject to corporate income tax, which is the only national tax on the profits of corporate entities and is levied throughout the Portuguese territory. Municipalities may levy a surtax on the profits of companies established within their territory. Corporate taxpayers must also pay social security contributions for their employees. Immovable property is subject to a municipal real estate tax, but no general net worth tax is applicable. A VAT system applies. The Portuguese Republic comprises mainland Portugal and the archipelagos of the Azores and Madeira. The two archipelagos are autonomous regions with political and administrative statutes. They are granted the power to establish regional taxes and to adapt the national taxes to their specific regional interests. They have adapted the national corporate income tax to their specific regional interests, but have not established regional taxes. The currency is the euro (EUR). 9

12 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION 1. Corporate Income Tax 1.1. Type of tax system Companies are subject to a corporate income tax and a state surcharge on their worldwide profits (articles 4 and 87-A of the CIRC). In addition, municipalities may levy a municipal surtax on the annual taxable income of companies established within their municipal area (see section 3.1.). Non-qualifying dividends derived by companies are fully taxed in the hands of the recipient resident company. Therefore, presently the classical system is only modified by the participation exemption (see section 2.2.). Domestic dividends are subject to a withholding tax (see section ). For foreign dividends, see section Taxable persons Corporate income tax (IRC) is generally levied on all corporate bodies that are resident in Portugal or have a permanent establishment in Portugal (article 1 and 3 of the CIRC) (see also section 6.2.). Resident corporate taxpayers are all types of commercial companies, including corporations (SAs) and limited liability companies (Ldas). Other entities subject to IRC include partnerships, i.e. partnerships limited by shares, limited partnerships and general partnerships (article 2 of the CIRC). The following entities are treated as transparent for tax purposes (article 6 of the CIRC): civil partnerships which are not incorporated in a commercial form; incorporated firms engaged in listed professional activities in which all partners are individuals qualified in the same profession; joint ventures incorporated as domestic complementary groupings of enterprises and European economic interest groupings (EEIGs) resident in Portugal; and companies merely holding assets which are either controlled by a family group or fully owned by five (individual or corporate) members or less. The income of partnerships that are treated as transparent is taxed in the hands of its partners. In all other cases, partnerships are treated as companies. Certain entities may be exempt from corporate income tax if a number of conditions are fulfilled. Such entities include private institutions of social solidarity and entities that pursue, exclusively or predominantly, objectives of, inter alia, a scientific, cultural or charitable nature. This survey is limited to the taxation of resident corporations (SAs) and limited liability companies (Ldas), as well as to non-resident entities of a similar description. These entities are hereafter referred to as companies Residence A company is deemed to be resident in Portugal if it has its legal seat or place of effective management in Portugal (article 4(1) of the CIRC). 10

13 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL Taxable income General Resident companies are taxable on their worldwide income (article 4(1) of the CIRC). Income and expenses should, as a general rule, be allocated to a financial period on a consistently applied accruals basis. The taxable income of a resident company is based on its profit and loss accounts made under the applicable accounting framework, of which the result is adjusted according to the rules set forth in the CIRC. Afterwards, eligible tax losses from prior years and tax incentives may be deducted from the taxable income (direct method) (articles 15 and 16 of the CIRC). If the application of the direct method is not possible, the tax base is determined on the basis of circumstantial evidence (indirect methods). The determination of taxable profits under the indirect methods is based on all the information available to the tax authorities (e.g. average gross or net profit margins, average rates of return from investments and taxable income in the preceding year(s)). Capital gains are included in the ordinary income of companies and are subject to tax at the normal rates, if not exempt (see section 1.4.) Exempt income The only important items of exempt income are domestic and foreign dividends qualifying for the participation exemption regime (see section 2.2.) Deductions Expenses are deductible for IRC purposes if they are documented and incurred by a company in order to generate or guarantee taxable income (article 23 of the CIRC) Deductible expenses Royalties and service fees are generally deductible if actually paid (article 23 of the CIRC). Where related parties are involved, the arm s length principle must be followed; otherwise, the tax authorities can disregard such payments. Interest is generally deductible, but may be subject to a limitation (see section ). Dividends are not deductible. Certain categories of expenses of a social nature incurred for the well-being of personnel or their family (e.g. kindergarten, library and canteen) or voluntary social security schemes are deductible, subject to conditions. The mandatory social security contributions (see section 4.2.) are deductible. In addition, IRC taxpayers may deduct donations in cash or in kind to qualifying nongovernmental organizations (NGOs) engaged in the pursuit of scientific, cultural or charitable goals, provided that the donor is not entitled to any monetary or commercial benefit in respect of such donation Non-deductible expenses Items that are disallowed as deductible expenses include (articles 23-A of the CIRC): (1) the IRC itself, including the autonomous taxation, and the municipal surtax (see section 3.1.) and any taxes or charges that must be passed on to third parties; (2) fines and penalty charges for tax infringements; (3) expenses related to documents (e.g. invoices) issued by taxpayers with a nonexistent or invalid tax identification number or issued by taxpayers whose activities are declared to have ceased ex officio; 11

14 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION (4) booked undocumented allowances and expenses relating to the employees travel using their own vehicles for the employer s account and not invoiced to clients; (5) interest on loans granted by a shareholder to his company in the amount that exceeds the prevailing EURIBOR rate for 12-month loans. This limitation does not apply, however, (and conversely, the full interest is deductible) to loans in line with the transfer pricing rules (see section 7.2.); (6) payments by employers, not constituting employment income for their employees, relating to accident insurance or life insurance schemes, as well as contributions to supplementary social security schemes, except when qualifying as social benefits; (7) expenses relating to acts prohibited by Portuguese penal law; (8) expenses paid to residents in low-tax jurisdictions (see section 7.1.) or to bank accounts held in financial institutions resident or domiciled in those jurisdictions, unless the taxpayer proves that the payment concerns a genuine transaction and has no abnormal character or is not in an excessive amount; (9) financial expenses exceeding certain limits (see section ); (10) the extraordinary levy on the energy sector; and (11) the levy on the banking sector (see section ). Furthermore, an autonomous taxation is imposed separately on certain (listed) expenses (e.g. undocumented expenses, specific payments made to a resident of a tax haven and expenses related to vehicles) that are deducted by ordinary IRC taxpayers. The autonomous taxation rates range from 5% to 70%, depending on the type of expense, as follows: 50% for undocumented expenses (70% in the case of companies exempt or partially exempt from IRC which carry out an activity other than commercial, industrial or agricultural); 10% for entertainment expenses, and expenses relating to depreciation, hiring, insurance, maintenance and preservation, fuel and taxes on the ownership or use of passenger vehicles or motorcycles. The autonomous tax does not apply, however, in respect of expenses relating to light passenger vehicles operating either in public transportation or in car rental businesses, or used as a company car by employees; 35% for expenses paid to any resident in a low-tax jurisdiction, or to bank accounts held in financial institutions resident or domiciled in those jurisdictions, for which deduction is disallowed (70% in the case of companies exempt or partially exempt from IRC which carry out an activity other than commercial, industrial or agricultural) (see (8) above); 5% for deductible amounts relating to booked allowances; and expenses mentioned in (4) above if the taxpayer sustained a loss in the relevant year; 10% for expenses deducted in respect of passenger and mixed vehicles with an acquisition value not exceeding EUR 25,000 (excluding vehicles that are solely powered by electrical energy); 27.5% for expenses deducted in respect of passenger and mixed vehicles with an acquisition value equal or higher than EUR 25,000 and below EUR 35,000; and 35% for expenses deducted in respect of passenger and mixed vehicles with an acquisition value of EUR 35,000 or higher. 12

15 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL 2017 An autonomous taxation of 35% is due on bonuses and other variable payments to managers and directors, provided that such payments represent more than 25% of their annual remuneration and exceed EUR 27,500, except if 50% of the payments are deferred for at least 3 years and the payments are linked with the managers and directors performance. If any of these conditions cease to apply, the amount of autonomous taxation that was due, becomes due in the tax year in which the conditions ceased. The autonomous taxation rates are increased by extra 10 percentage points if the taxpayer incurs tax losses in the same tax year Depreciation and amortization All fixed assets, except land, can be depreciated or amortized for tax purposes (articles 29 and 34(1)(b) of the CIRC). As a general rule, fixed assets are depreciated under the straight-line method (article 30 of the CIRC). The declining-balance method may be elected for new tangible assets other than buildings, private passenger cars not used for public transport or rental and office furniture. As a rule, depreciation is compulsory. However, a depreciation amount of the current year can be claimed in a later year insofar as it was not deductible previously because it exceeded the maximum depreciation amount allowed for tax purposes. For the treatment of depreciation in loss years, see section Depreciation is usually taken on pools of items of a similar level of use. This rule does not apply to buildings or cars. The unit cost below which assets may be written off in the year of acquisition or production is currently EUR 1,000. Where tangible fixed assets are subject to extraordinary wear and tear, the depreciation rates are increased by a maximum of 25% for use in two shifts and by 50% for more intensive use. Accelerated depreciation may be allowed by the tax authorities. Under the straight-line method, the maximum depreciation is calculated by applying to the adjusted purchase cost or production cost either the specific depreciation rates (for assets used in farming, forestry or fisheries; mining or quarrying; manufacturing; construction or public works; energy or water; transportation or communications; and health, recreation, etc., services) or the general rates (for other assets). The general maximum straight-line depreciation rates include (tables 1 and 2 of the RDA): Type of asset Rate (%) Office buildings 2 Industrial buildings 5 Electronic equipment 20 Computers and compressors or 25 Ordinary tools and fittings 25 Engines and heavy machine tools 12.5 Portable machine tools 20 Motor vehicles 14.28, 20 or 25 Office equipment 12.5 Software The applicable depreciation rates may exceptionally be based on the expected useful life for second-hand assets, revalued assets for accounting purposes, major repairs and improvements and work in buildings by third parties. 13

16 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION Under the declining-balance method, annual depreciation is calculated by applying the rates applicable under the straight-line method, increased by (article 31(4) of the CIRC): 50% if the useful life is less than 5 years (coefficient 1.5); 100% if the useful life is 5 to 6 years (coefficient 2); and 150% if the useful life is more than 6 years (coefficient 2.5). Start-up expenses and research and development expenses may be depreciated at the rate of 33%. Patents, trademarks, manufacturing licences, models and similar rights acquired for consideration for exclusive use during a limited period of time may be depreciated according to a rate that is determined with respect to the time frame of such exclusive use. Goodwill is not depreciable unless it suffers an effective depreciation recognized by the General Directorate of Taxes. For the following intangible assets, acquired after 1 January 2014, without a determined life cycle, the depreciation deduction is 5% per year (for 20 years): industrial property such as trademarks, licenses, production processes, models and other similar rights acquired for consideration and without a determined life cycle; and goodwill arising from business restructuring transactions. The regime will not be applicable: to intangible assets transferred by virtue of mergers, divisions and transfer of assets made pursuant to the special tax neutrality regime; to goodwill related with shares; and to intangible assets acquired by entities resident in a tax haven. The regime applies to intangible assets acquired on or after 1 January In situations where an asset is disposed of, and disposal proceeds exceed the writtendown value of the asset (i.e. a capital gain is derived), roll-over relief is available (see section 1.4.). For capital losses, see section Reserves and provisions Revaluation reserves The surplus resulting from authorized revaluations of the net book value of tangible fixed assets must be recorded in a special reserve account. This reserve may only be used to self-finance a capital increase or to offset losses. Only 60% of the amount of additional depreciation arising from such revaluations qualifies as a deductible expense for tax purposes (article 15(2)(a) of the RDA). Allocations to other reserves which are chargeable as an appropriation of profit (e.g. legal, statutory, contractual and free reserves) are not deductible Provisions for doubtful debts A tax-deductible provision is allowed for duly substantiated and recorded debts which are more than 6 months overdue (article 28-B(1)(c) of the CIRC). The maximum amounts, based on percentages of outstanding balances, which may be set aside in the provision are: 25% (overdue more than 6 to 12 months); 14

17 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL % (overdue more than 12 to 18 months); 75% (overdue more than 18 to 24 months); and 100% (overdue more than 24 months) Provisions for devaluation of inventory A deductible provision for written-down inventory may be set up when, at the end of a financial period the market value is less than the historic cost (article 28(1)(c) of the CIRC). The provision is deductible only in the financial period in which the loss is incurred Provisions for depletion for oil companies Companies engaged in exploration for and exploitation of petroleum sources are entitled to a depletion provision for the replacement of petroleum deposits (article 42 of the CIRC). The annual deduction is limited to the lower of 30% of the gross income from sales of the oil source s output or 45% of the net profit from such sales before taking the deduction. This provision must be reinvested in domestic oil exploration or exploitation within 3 years Other A deductible provision may be set up for liabilities and charges arising on court procedures (article 39(1)(a) of the CIRC). Also, deductible provisions must be set up by financial and insurance companies Capital gains Worldwide capital gains derived by resident companies are regarded as ordinary income (article 20(1)(h) of the CIRC). Capital gains include (a) voluntary capital gains, i.e. gains realized from the sale or exchange of fixed assets or the appropriation of a company s fixed assets for any purpose unrelated to the operation of the corporate business and (b) involuntary capital gains, i.e. gains realized on compensation from expropriation and on indemnities for a loss of assets. The gain is generally the amount by which the proceeds from the disposal exceed the cost of acquisition. The gain on property acquired gratuitously is equal to its current market value. In order to avoid imposing tax on inflationary gains, the acquisition cost of fixed assets, immovable property, and shares and comparable interests in companies (excluding other financial assets) alienated after an ownership period of 2 years may be adjusted in accordance with the indexation coefficient for the year of acquisition. Under a partial rollover relief scheme, 50% of capital gains on the disposal of tangible fixed assets owned for at least 1 year or resulting from indemnities covering losses of such assets is taxable in the year of disposal (article 48(1) of the CIRC). The remaining 50% is not subject to tax, provided that the total consideration received is reinvested, within a 2-year period beginning in the year preceding the disposal, in the acquisition of similar assets (excluding second-hand assets acquired from related parties; see section ). If only part of the consideration is reinvested, only the corresponding part of the gain qualifies for the relief. If the reinvestment is not made by the end of the second year, the corresponding gain that was not taxed, as increased by 15%, is taxable in that year. The reinvestment regime does not apply to investment properties, even if accounted for as tangible fixed assets. 15

18 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION Capital gains and losses obtained from the sale of shares and other equity instruments are also exempt from corporate income tax provided that the same requirements that apply to the participation exemption for (received) dividends are met (see also sections 2.2. and ). As an exception, the capital gains exemption regime will not be granted if more than 50% of the assets of the subsidiary are composed, directly or indirectly, of real estate located in Portugal, unless these assets are allocated to an agricultural, industrial or commercial activity. This exception only applies to real estate located in Portugal purchased on or after 1 January Losses Losses are deductible in computing the tax base of IRC taxpayers (see section ) Ordinary losses Tax losses generated as of tax year 2017 will only be carried forward for 5 years. Operating tax losses incurred by corporate taxpayers between 1 January 2014 and 31 December 2016 may be carried forward to be set off against taxable profits for the next 12 years (article 52(1) of the CIRC). The carry-forward period for losses generated in 2012 and 2013 was 5 years, and 4 years for losses generated in 2010 and Such losses may only be offset up to a maximum of 70% of the taxable income. The right to carry losses forward is forfeited if, prior to the tax year in which the loss would be deductible, at least 50% of the capital or the majority of the voting rights has been transferred, subject to exceptions. The Minister of Finance may, however, authorize the carry-forward for valid economic reasons if so requested by the taxpayer prior to the above-mentioned change. Special rules apply to loss deductions under the group regime discussed in section 2.1. and in the case of business reorganizations. For foreign losses, see section In addition, depreciation must be accounted for, even in loss years. Tax losses carry-back is not allowed Capital losses Capital losses and other losses related to equity instruments are not deductible up to the amount that corresponds to the profits or distributed reserves or capital gains realized from the sale of shares of the same entity that have benefited in the same tax period or in the previous four periods, from the participation exemption (article 51 of the CIRC), from the credit for international double taxation (article 91 the CIRC), or from the deduction provided for in article 51-C of the CIRC (capital gains losses related to the sale of shareholdings) (article 23-A of the CIRC). No deduction is allowed if the capital losses refer to equity instruments in entities resident in a listed tax haven (see section 7.5.) Rates Income and capital gains With effect from 1 January 2015, the general IRC rate in mainland Portugal is 21% (23% before that date) (article 87(1) of the CIRC). A reduced rate of 17% applies to taxable income up to EUR 15,000 earned by small and medium-sized enterprises (article 87(2) of the CIRC). 16

19 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL 2017 A national surtax (derrama estadual) at the rate of 3% is levied on income subject to corporate income tax that is derived by resident entities and exceeds EUR 1.5 million. Taxable profits exceeding EUR 7.5 million are subject to tax at the rate of 5%. Taxable profits exceeding EUR 35 million are subject to the surtax at the rate of 7% (article 87- A of the CIRC). In the case of a group of companies, the thresholds apply to the taxable income of each entity of the group. The tax due cannot be less than 90% of the IRC that a company would pay in the absence of (1) certain listed tax incentives (excluding e.g. the contractual tax incentives, the tax credit for R&D-related investments (SIFIDE II), and lower rates in freetrade zones), (2) deductions in respect of supplementary contributions to pension funds, and (3) deductions in respect of tax losses transferred in the context of a restructuring. An autonomous taxation (tributação autónoma) at the rate of 35% (50% in the case of financial institutions) is levied on expenses incurred by companies on bonuses and other variable payments made to managers and directors (article 88(13) of the CIRC), provided that the amount (a) represents more than 25% of their annual remuneration and (b) exceeds EUR 27,500. The autonomous taxation is not levied if at least 50% of the payment is deferred for a minimum period of 3 years, and the payment is conditional upon the positive performance of the company during that period. This payment is not deductible for corporate income tax purposes. The autonomous taxation rates are increased by 10 percentage points if the deduction of expenses leads to tax losses in the relevant tax year. For reduced rates under incentive legislation, see section 1.7. For the municipal surtax, see section 3.1. For the taxation of permanent establishments of non-resident companies, see section Withholding taxes on domestic payments Payments between resident companies are generally subject to withholding of IRC. For a resident corporate recipient, this payment is an advance levy of IRC Dividends For dividends, the general withholding tax rate is 25% (article 94(4) of the CIRC). An exemption from the withholding tax applies in respect of (article 97 of the CIRC): dividends qualifying for the participation exemption (see section 2.2.); dividends paid within a group of companies taxed under the regime discussed in section 2.1., provided that the dividends relate to profits derived in a tax period in which the regime applies; and stock dividends representing capitalized profits or reserves. Resident companies that benefit from a full corporate income tax exemption on dividends received (see section 2.2.) are subject to the 25% withholding tax if the shareholding has not been held for at least 1 year at the time the dividends are received Interest For interest, the general withholding tax rate is 25% (article 94(4) of the CIRC). 17

20 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION Exempt types of interest include: interest paid within a group of companies taxed under the special regime discussed in section 2.1., provided that the payment relates to a tax period in which such regime applies (article 97(1)(e) of the CIRC); interest on loans and credit facilities paid to resident credit institutions (the European Commission has requested Portugal to end discriminatory taxation of foreign banks regarding interest income) (article 97(1)(a) if the CIRC); interest and related charges arising on deferral or late payment of debt claims relating to supplies of goods or services by resident companies (article 97(1)(b) of the CIRC); interest on shareholders loans, commercial paper or bonds, paid by an entity of which the share capital is held, directly or indirectly, of more than 10% for at least 1 year by the taxpayer; and interest on government bonds issued prior to 4 May Royalties For all royalties (including payments in respect of know-how, leasing of equipment and technical assistance), the withholding tax rate is 25% (article 94(4) of the CIRC). The withholding tax is imposed on the gross amount of royalties excluding VAT. Royalties are exempt from withholding tax if paid within a group of companies taxed under the regime discussed in section 2.1., provided that the payment relates to a tax period in which the regime applies Other Corporate directors fees, agency commissions and fees for services (other than transport, communications and finance-related services) supplied in Portugal are subject to withholding tax at a rate of 21.5% (article 94(4) of the CIRC). In addition, the income from immovable property is subject to a 25% withholding tax (article 94(4) of the CIRC). These rates are applied on the gross amount of fees, commissions or rents, excluding VAT Incentives Tax incentives for corporate income tax purposes are set forth in national tax legislation laid down in the Corporate Income Tax Code, the Tax Incentives Statute and specific decree-laws, as well as in legislation enacted by the autonomous regions of the Azores and Madeira. The tax incentive statute establishes, with certain exceptions, a general 5-year period to benefit from the tax incentives. The most important incentive regimes are discussed below Incentives under national legislation Free-trade zones of the Azores and Madeira 2007 Madeira free-trade zone regime: For qualifying companies that, in the years 2007 through 30 June 2014, obtain(ed) a licence to operate in the zone, a reduced IRC rate applies (4% in 2010 through 2012 and 5% in 2013 through 2020) (article 36 of the EBF). 18

21 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL 2017 Access to this scheme is restricted to companies that meet specific eligibility criteria, based on the number of new permanent jobs created. The tax benefits are limited by ceilings placed on the tax base per company, which ranges from EUR 2.73 million (where less than three jobs are created) to EUR million (where more than 100 jobs are created). Companies licensed to operate under the 2007 Madeira free-trade zone regime may only carry out the following activities: agriculture and animal production; fishing, aquiculture and related services; processing industries; production and distribution of electricity, gas and water; wholesale trade; transport and communication; real estate business; leasing of tangible assets and rendering of advisory, architectural, publicity and related services to companies; educational activities; and other activities related to public services, such as artistic, sportive and cultural services. The regime is also applicable to companies already licensed to operate in the Madeira free-trade zone. The 2007 Madeira free-trade zone regime does not apply to financial intermediation and auxiliary financial activities, insurance and insurance auxiliary activities, nor to intra-group services (coordination, treasury and distribution centres) Madeira free-trade zone regime: The 2015 Madeira free-trade zone regime was approved in July It applies to entities licensed between 1 January 2015 and 31 December 2020, and it will be in force until 31 December 2027 (article 36-A of the EBF). These are the main general characteristics of the new regime: maintenance of the 5% reduced CIT rate and of the existing thresholds; withholding tax exemption on dividends and interest paid to shareholders, except if these are tax resident in Portugal or in a black listed jurisdiction; exemption from stamp duty, property tax, property transfer tax, regional and municipal surcharges subject to a limitation of 80%, per tax, transaction or period; and special payment on account and autonomous taxation (except if related to undocumented expenses or payments to residents in a black listed jurisdiction) only due in proportion of the applicable corporate income tax rate. Companies licensed to operate within the Madeira free-trade zone from 1 January 2015 to 31 December 2020 may only carry out the following activities: manufacturing industries; production and distribution of electricity, gas and water; wholesale trade; 19

22 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION transport and communication; real estate activities, renting and business services; higher education, adult education and other educational activities; and other collective service activities. The following entities are excluded from the 2015 Madeira free-trade zone regime: entities carrying out intra-group activities and activities of head offices, or consulting activities for business and other advice to management as well as financial and insurance activities; entities carrying out activity in the steel and synthetic fibres sector, as well as in the coal and shipbuilding sector; entities carrying out activity in the sectors of agriculture, forestry, fisheries, aquaculture and mining and quarrying; entities considered firms in economic difficulties; and entities subject to a recovery order pending following a decision by the European Commission to declare an illegal and incompatible aid with the internal market. As regards the annual amount of the benefits, the following limits cannot be exceeded: 20.1% of the annual gross added value amount; 30.1% of the annual labour costs incurred; and 15.1% of the annual turnover. Entities licensed under the regime that was in force up until 2014 may benefit from this new regime, provided they fulfil the requirements Contractual tax incentives Contractual tax incentives are granted for industrial investment projects carried out by 31 December 2020 if they involve at least EUR 3 million, and are deemed to be of strategic interest to the domestic economy and encourage job creation, technological innovation and domestic scientific research (article 2 of the CFI) (for specific rules applicable to projects in the autonomous regions of Madeira and the Azores, see sections and ). The incentives, granted by the central government on a case-by-case basis for a maximum period of 10 years, include a 10% to 25% investment tax credit and an exemption from, or reduction of, municipal real estate tax (see section 5.2.), real estate transfer tax (see section ) and stamp duty (see section 9.3.) Tax credit for R&D-related investments A tax credit for R&D-related investments (SIFIDE II), applicable from 1 January 2013 until 31 December 2020 (originally 31 December 2015), is available for qualifying R&D expenses (article 38 of the CFI). The creditable amount is the sum of: a basic credit, equal to 32.5% of the qualifying expenses for the relevant year; and an additional credit, equal to 50% of the amount by which the qualifying expenses for the relevant year exceed the average R&D expenses incurred over the 2 preceding years, with a ceiling of EUR 1.5 million. Any unused credit may be carried forward for 8 years (6 years before 2014). 20

23 CORPORATE TAXATION DOING BUSINESS IN PORTUGAL 2017 In order to make use of the credit, the qualifying investor (not taxed under the indirect methods; see section ) must include in the documentation file: a compliance statement, issued by a verification body to be appointed by the Minister of Economy and Employment, concerning the qualifying R&D expenditure effectively incurred; and an annual statement confirming the appropriate payment of taxes and social security contributions. This R&D investment tax credit may not be used concurrently with any other similar tax incentive. The SIFIDE II also provides for some specific rules for small and medium-sized companies Reorganizations Corporate reorganizations (e.g. mergers, divisions or cooperation agreements), involving companies resident in Portugal or in any other EU Member State or in a country with which Portugal has concluded a tax treaty, may benefit from the following tax benefits (article 60 of the EBF): exemption from the real estate transfer tax (see section ) and stamp duty on the transfer of immovable property (see section 9.3.) for the purposes of the merger or cooperation agreement; exemption from stamp duty on the incorporation, increase of capital or assets of capital companies necessary for the corporate reorganization; and exemption from legal fees and charges on the deeds relating to the reorganization process, including notary fees and commercial registry fees. Companies resident in listed tax havens (see section 7.5.) are, however, excluded. An application for these exemptions must be filed with the Minister of Finance; the exemptions are granted on a case-by-case basis Job creation incentive An amount equal to 150% of the eligible expenses related to the net increase in permanent jobs for individuals between the ages of 16 and 35 years and for long-term unemployed individuals (i.e. registered unemployed for more than 9 months) is deductible (article 19 of the EBF) Urban property rehabilitation regime An urban property rehabilitation regime is in force from 1 January 2008 for rehabilitation works carried out in certified projects. The regime provides for: a temporary exemption from municipal real estate tax (see section 5.2.) in respect of rehabilitated urban property; a corporate income tax exemption until 31 December 2013 in respect of income derived by real estate investment funds whose assets consist mainly of rehabilitated urban property; a special 10% rate of individual income tax (IRS) or corporate income tax (IRC) withholding, respectively, on income derived by resident individuals or entities from a participation in above-mentioned real estate investment funds. The 10% withholding tax is considered as a payment on account for IRC and for IRS of individual entrepreneurs, and as a final tax for other individuals; 21

24 DOING BUSINESS IN PORTUGAL 2017 CORPORATE TAXATION a general tax exemption for income derived by non-resident entities (except residents of low-tax jurisdictions (see section 7.5.) and for income derived by non-resident entities that are held for more than 25% by Portuguese residents); and a reduced VAT rate of 6% on rehabilitation projects Notional deduction for SMEs Companies may qualify for a notional IRC deduction, computed by multiplying a rate of 7% on the capital contributed by the shareholders in cash upon incorporation or in a subsequent capital increase, up to EUR 2 million, provided that the companies taxable income is not assessed through indirect methods and no share capital reduction is performed for a period of 5 years. If there is a share capital reduction within the aforementioned term, the full amount of the notional deduction plus 15% should be added back to the company s taxable income Extraordinary tax credit for investments The extraordinary tax credit for investments (CFEI) is a tax credit available for companies making qualifying investments (articles 3 and 4 of the Law No. 49/2013 of 16 July 2013). It consists of a deduction of IRC due equal to 20% of the eligible investment made, with a limit of 70% of the tax due. The credit may be applied if the following conditions are met: the investment does not exceed EUR 5 million; and the investment is made between 1 June 2013 and 31 December 2013, and is taken into use before the end of the tax period starting on or after 1 January The credit may be carried forward for a period of 5 years if there is an insufficient amount of tax due. Only investments in new (i) tangible fixed assets and (ii) depreciable intangible assets are eligible for the CFEI Tax regime to support investment The tax regime to support investment (RFAI) provides specific corporate income tax credits related to investments made in qualified fixed tangible and intangible assets. According to RFAI, depending on the region of the country where the investment is made, corporate income tax credits are granted as follows: 25% or 10% of investments up to EUR 10 million; and 10% for of the part of the investment which exceeds EUR 10 million. The deduction of the tax credits is capped to 50% of the corporate income tax due each tax year and, in case the full deduction is not possible, the outstanding credits may be carried forward in the following 10 tax years. The RFAI also includes a municipal real estate tax exemption (see section 5.2.) for a period of 10 years as of the date the relevant fixed tangible asset is acquired or built, as well as a real estate transfer tax and stamp duty exemption on the acquisition of relevant assets (see sections 9.2. and 9.3.). The RFAI may not be cumulated with other tax benefits or incentives with the same nature, including contractual incentives regarding the same assets (see section ). The only exception is the simultaneous application of the benefit regarding the reinvestment of retained earnings (see section ). 22