Portugal - Taxation of cross-border mergers and acquisitions
Taxation of cross-border mergers and acquisitions for Portugal.
Taxation of cross-border mergers and acquisitions for Portugal.
This report briefly describes the main tax issues that resident and non-resident entities may face in mergers and acquisitions (M&A) involving Portugal, from both inbound and outbound perspectives.
The information in this report is based on the tax legislation in force as at 31 January 2021.
On 26 November 2020, the State Budget Law for 2021 was approved without introducing major modifications with relevance for this report.
On 21 July 2020, Portugal has transposed the Council Directive (EU) 2018/822 of 25 May 2018, commonly known as “DAC6”, into its domestic legislation, which establishes the obligation to report to the tax authorities certain domestic or cross-border arrangements with tax relevance, and has approved the form that will be used for the reporting obligations last 29 December 2020.
In general terms, Portugal follows the terms of the Directive; however, some particularities were introduced: (i) the mandatory disclosure rules (MDR) reporting obligations also apply to certain domestic arrangements; (ii) the taxes covered by the MDR for the domestic arrangements also cover value-added tax (VAT); and (iii) in case the intermediary is subject to a professional privilege, the reporting obligation must be complied, ultimately, by the intermediary.
To this end, the Portuguese MDR Law has extended the same reporting obligations to domestic arrangements, which are defined as those that are applicable or produce effects (totally or partially) in the Portuguese territory and that are not considered cross-border arrangements. Thus, according to the Portuguese MDR Law, these arrangements, that are not contemplated in the Directive, also need to be reported to the Portuguese tax authorities (PTAs), in the same terms as established in the Directive for cross-border mechanisms.
In addition, the Directive establishes a scope of taxes that are covered by the MDR applicable to cross-border arrangements and that exclude certain taxes such as VAT, customs duties and compulsory social security contributions. Although the Portuguese Law has transposed the same rule, for domestic arrangements, the scope of the Law expressly includes VAT, which means that domestic mechanisms with VAT consequences must be reported to the PTA as well.
Finally, in case an intermediary has been involved in a certain arrangement, it will be the primary responsible to report it. However, in case the intermediary is subject to a professional privilege, the Directive states that the reporting obligation is transferred to the relevant taxpayer. Notwithstanding the Portuguese Law establishing the same reporting obligation hierarchy, it has been added that if the relevant taxpayer does not comply with its reporting obligation and/or fails to notify and demonstrate to the intermediary that the reporting was made, the obligation is again transferred back to the intermediary.
In this regard, the Portuguese Law enforces that the reporting obligation is considerably more important than the professional privilege, which is waived when the reporting obligation is not complied with by the relevant taxpayer.
On 6 July 2020, the measures to combat hybrid arrangements foreseen in ATAD I and ATAD II were transposed into Portuguese tax law and made applicable to tax years starting on or after 1 January 2020 (except reverse hybrid mismatches that shall apply to tax years starting on or after 1 January 2022).
On 3 July 2020, a supplementary budget law was approved, which arose from the need to adjust the state budget for 2020 to the exceptional context caused by COVID-19 and with the purpose of executing an Economic and Social Stabilization Program.
Asset purchase or share purchase
An acquisition in Portugal is usually conducted through the acquisition of shares in a company, rather than its assets, because an acquisition of assets often triggers real estate transfer tax and stamp duty for the buyer.
A share sale is also usually more efficient for the seller. Capital gains on the sale of shares may benefit from a full exemption in certain cases, whereas capital gains on a sale of assets are generally fully taxable or only partly exempt at the level of the seller.
Purchase of assets
An asset deal can be more attractive for the buyer than a share deal because of the non-transfer of tax contingencies faced by the target company, greater flexibility in funding options and the ability of the buyer to acquire only specific assets.
However, some features of an asset deal make it less tax-efficient, such as real estate transfer tax, stamp duty and the inability of transferring to the buyer eventual tax losses carried forward by the target company.
For tax purposes, the purchase price corresponds to the acquisition value agreed upon in the respective contract or the property tax value (for real estate assets), whichever is higher.
Transfer pricing rules must be complied with where the deal is undertaken between related entities. Under these rules, the acquisition value agreed upon between the parties must correspond to the value that would be agreed upon between non-related entities, in compliance with the arm’s length principle.
The acquisition cost of certain intangible assets with no defined useful life period, namely, goodwill on the acquisition of a business unit (but not shares), can be amortized for tax purposes over a 20-year period.
According to the Corporate Income Tax (CIT) Code, depreciation costs are allowed for tax purposes based on the rates set out in Regulatory Decree no. 25/2009, of 14 September 2009.
Land is not depreciable for tax purposes.
No tax attributes, such as tax losses carried forward and tax incentives, are transferred to the buyer as part of an asset deal.
The limitation on transferring tax losses may be reduced by offsetting them against an eventual capital gain obtained by the seller and the corresponding step-up in the acquisition value of the assets for the buyer.
According to the Portuguese VAT Code, a sale of assets (or services) is considered a supply of goods (or services) subject to VAT.
However, the transfer of assets as a going concern, whether for consideration or not, or as a contribution to a company, is not subject to VAT, provided certain requirements are met.
This no-supply rule serves the purpose of simplicity and is aimed at preventing the successor from being overburdened with a large VAT payment, which can normally be recovered through the input VAT deduction.
Where the assets being transferred do not constitute a business unit, the transferred assets (or services) have their own VAT treatment because the seller is normally obliged to charge VAT on the goods (or services) that are being sold, such as stocks and movable goods.
For example, stocks that are sold or contracts that are assigned are normally subject to VAT at the standard rate, whereas the sale of, for example, real estate is VAT-exempt.
Where the recipient is not wholly liable to tax, the tax authorities may take measures to prevent distortion of competition and require VAT adjustments to prevent tax evasion or avoidance through the abuse of this rule.
Therefore, according to the VAT law, a seller that executes a VAT-exempt sale of real estate may be obliged to perform VAT adjustments in the VAT previously recovered.
To avoid these adjustments, the seller and buyer can jointly opt to waive this exemption and charge VAT on the transaction, provided certain requirements are met.
Where VAT is not charged, the operation is subject to stamp duty. Where the VAT exemption is waived, no stamp duty is applicable. Either way, any applicable real estate transfer tax is still due, unless a specific exemption applies (as mentioned below).
The purchase of assets comprising real estate located in Portuguese territory triggers real estate transfer tax and stamp duty on the acquisition value or the property tax value, whichever is higher. Rates vary from 5 to 6.5 percent for real estate transfer tax. The stamp duty rate is 0.8 percent. Both taxes are borne by the buyer.
Some real estate transfer tax exemptions (total or partial) may be available for acquisitions of:
- urban properties in areas benefiting from incentives for less-developed inland areas that are permanently allocated to a company’s activities
- property in areas of business location carried out by the respective management companies and by the companies that are located there
- assets for resale, where undertaken by a real estate company, provided the assets are re-sold within 3 years
- property for urban rehabilitation, provided that the construction work is initiated within 3 years
- immovable property classified as of public interest.
Additionally, under certain circumstances, the transfer of assets as a going concern (‘trespasse’) may trigger stamp duty at the rate of 5 percent.
Purchase of shares
The purchase of shares is usually more attractive from a tax perspective for both the buyer (since it generally does not trigger real estate transfer tax or stamp duty — please refer to our comments below on the circumstances in which the purchase of shares may trigger transfer tax) and the seller (since it facilitates access to a capital gains exemption).
However, a purchase of shares can give rise to significant disadvantages for eventual tax contingencies within the target company.
Therefore, a thorough investigation of the target is essential to identify any possible tax contingencies based on a review of tax returns, documents and procedures. Such a review should cover all taxes, including CIT, VAT, personal tax, stamp duty and social security contributions.
Tax indemnities and warranties
Under a purchase of shares, tax liabilities and claims are transferred with the target companies, although protection may be sought in the sale-purchase agreement or any formal letter signed by both parties.
Any future assessment by the tax authorities will continue to be claimed from the target company, so usually the buyer requests and the seller provides indemnities or warranties regarding any undisclosed tax liabilities of the target company.
The Portuguese tax law operates a system of self-assessment under which companies are subject to periodic tax audits by the tax authorities for most taxes, after which tax assessments can be raised in respect of the preceding 4 fiscal years. Until this period has expired, tax returns are not closed but remain open for review and inspection.
Where companies have tax losses, the period open to fiscal audits may be extended to the period during which the tax losses can be carried forward.
For social security purposes, a tax audit and assessment may be carried out for the preceding 5 fiscal years. Real estate transfer tax and stamp duty on the acquisition of real estate are open for tax audit and assessment for 8 years.
In Portugal, tax losses may be offset against taxable profits assessed in the subsequent 5 years (12 years for tax losses assessed from 2014 to 2016). The deduction of tax losses is limited to 70 percent of the annual taxable profit.
However, regarding the tax losses computed in 2020 and 2021, there was an extension of the tax losses carry forward loss period (from 5 to 12 years) and an increase in the allowed loss offset from 70 percent of the taxable income to 80 percent for losses computed in the abovementioned fiscal years.
Additionally, the Portuguese tax law foresees the suspension during 2020 and 2021 of the carry forward period for the tax losses available on 1 January 2020. The deductibility of tax losses is restricted where there is a change of ownership of more than 50 percent of the share capital of a company or of most of its voting rights, although several exceptions may apply.
In this case, the utilization of tax losses carried forward requires pre-authorization from the tax authorities in response to a request filed by the company in advance, explaining its economic reasons. The PTAs do not automatically approve such requests; they are analyzed case-by-case.
Portuguese tax law has no specific rules for the distribution of a pre-sale dividend.
Under Portuguese tax law, dividends paid by a Portuguese subsidiary to a non-resident entity are subject to withholding tax (WHT) at a flat rate of 25 percent, which may be reduced by a tax treaty (for entities resident in tax havens, the rate is increased to 35 percent). The Portuguese CIT Code foresees a CIT exemption (and thus no WHT obligation) for dividends distributed by Portuguese-resident companies to entities resident in a country:
- of the European Union (EU) or European Economic Area (EEA)
- bound to an administrative cooperation mechanism similar to the one established in the EU, or with which Portugal has entered into a tax treaty and such agreement foresees a similar administrative cooperation agreement to the one above.
The exemption also depends on the following.
- The non-resident shareholder is subject to, and not exempt from, one of the income taxes referred in article 2 of the EU Parent-Subsidiary Directive or an income tax that is similar to the Portuguese CIT, as long as the statutory tax rate applicable is not lower than 60 percent of the Portuguese CIT rate, which is currently 21 percent.
- The non-resident shareholder holds directly, or directly and indirectly, a participation in the Portuguese company’s share capital or voting rights of at least 10 percent and has held that participation continuously during the 12 months preceding the dividend distribution.
- The ownership structure was set up for valid economic reasons and not for the purpose of obtaining a tax advantage.
- The Portuguese entity that makes the dividend distribution complies with the reporting obligations regarding the effective beneficiary of the income.
A global participation exemption regime has been adopted for dividends obtained by Portuguese entities, excluding those obtained from tax havens, provided the following requirements are met.
- The beneficiary holds at least 10 percent of the share capital or voting rights, and the participation has been continuously held throughout the year prior to the distribution of the profits or is maintained during that period.
- The company distributing the profits is not exempt from CIT and is subject to a tax referred to in the EU Parent-Subsidiary Directive or similar tax whose rate is not lower than 60 percent of the CIT rate, or, where this requirement is not met, where most of its profits are derived from a business activity or its assets are not qualified as portfolio investments.
Participation exemption regime for capital gains
Under the participation exemption regime for capital gains, and subject to the same conditions as the participation exemption regime for dividends, capital gains and losses assessed by a Portuguese company from the sale of shares are not taxable or deductible unless more than 50 percent of the assets of the company whose shares are being sold is composed of real estate assets located in Portugal and held for resale.
Although real estate transfer tax is generally not due on a share deal, the Portuguese Real Estate Transfer Tax Code states that the acquisition of shares or quotas in public limited liability companies (S.A.) and private limited liability companies (Lda.) holding real estate is subject to real estate transfer tax when all the following requirements are met.
i) The value of the company’s assets results, directly or indirectly, in more than 50 percent of real estate located in the national territory, taking into account the balance sheet value or the tax equity value, if higher;
ii) Such properties are not directly linked to an agricultural, industrial or commercial activity, excluding the purchase and sale of real estate assets; and
iii) Through that acquisition, amortization or any other factors, one of the shareholders owns at least 75 percent of the share capital.
In this case, the Real Estate Transfer Tax Code establishes that the tax base is the higher of:
- the property tax value or
- the book value of the assets, as stated in the company’s balance sheet.
The real estate transfer tax is due by the buyer of the share capital and must be paid before registering the public deed of acquisition.
The tax rate varies from 5 to 6.5 percent (normally 6.5 percent).
No stamp duty is due on a purchase of shares.
Real estate transfer tax is due on the acquisition of participation units in private subscription closed-ended real estate investment funds and on operations (e.g. increase or reduction of capital), provided the outcome of the operations is that one holder, or two holders who are married or unmarried partners, will dispose of at least 75 percent of the participation units representing the fund’s assets.
Where the fund is dissolved and all or some of its immovable assets become property of one or more unit holders whose assets have already been taxed, the tax will be payable on the difference between the value of the assets acquired and the amount of tax previously paid. Additionally, the real estate transfer tax base is the property tax value corresponding to the majority unit holding, or the total value of those assets, according to each case. In both cases, however, the value of the managing company’s asset report will be considered if that value is higher.
Similarly, real estate transfer tax is payable on:
- transfers of immovable property by the unit holders on the subscription of participation units in private subscription closed-ended real estate investment funds
- transfers of immovable property by merger of closed-ended real estate investment funds
- allocations of immovable property to unit holders as a participation unit refund on liquidation of a private subscription closed-ended real estate investment fund.
In these cases, the real estate transfer tax base is the higher of the property tax value and the value at which the property became one of the fund’s assets.
Choice of acquisition vehicle
The choice of the acquisition vehicle largely depends on the nature of the transaction (asset or share deal), the nature of the assets involved, the financing structure and the nature of the income to be extracted from the target company.
The following vehicles may be used in an acquisition of shares or assets:
- Portuguese holding company
- foreign parent company
- non-resident intermediate holding company
- Portuguese branch
- joint venture.
Local holding company
Under Portuguese law, a Portuguese pure holding company (Sociedade Gestora de Participações Sociais — SGPS) is incorporated as a regular company (S.A. or Lda.) but has a specific social purpose in its articles of incorporation restricted to the holding and management of share capital participations.
As such, an SGPS company is subject to the same tax obligations and the same tax regime as a regular company.
Foreign parent company
Where the Portuguese subsidiaries are held by a foreign parent company, the corresponding tax implications vary significantly, depending on the country in which the parent company is resident.
Apart from differences among Portugal’s tax treaties with other countries, there are significant differences in the tax treatment depending on whether the parent company is located in or outside the EU, EEA or treaty country where the treaty foresees the same administrative cooperation (see ‘Pre-sale dividend’ earlier in this report).
Where the parent company is located in the EU (or the other mentioned territories), in addition to the possibility of reduced WHT rates under tax treaties, the parent company may also benefit from a WHT exemption on dividends (see ‘Pre-sale dividend’).
The parent company only benefits from reduced WHT rates where the corresponding country has signed a tax treaty with Portugal.
Portugal’s tax treaties generally do not entitle Portugal to tax capital gains on the sale of shares in a Portuguese company. Even where a treaty allows Portugal to tax the capital gain, a foreign parent company (EU-resident or not) may benefit from an exemption on capital gains on the sale of share capital participations in Portuguese-resident companies unless:
- the parent company is owned, directly or indirectly, 25 percent or more by a Portuguese tax-resident entity
- the parent company is resident in a tax haven jurisdiction
- more than 50 percent of the assets directly or indirectly held by the Portuguese company consist of real estate property located in Portugal.
A branch of a foreign company is subject to Portuguese CIT on its attributable income at the rate of 21 percent. In addition, a state surcharge applies to the part of the taxable profit exceeding 1.5 million euros (EUR) as follows:
- from EUR1.5 million to EUR7.5 million — 3 percent
- from EUR7.5 million to EUR35 million — 5 percent (on the part exceeding EUR7.5 million)
- more than EUR35 million — 9 percent.
This taxation may be increased by a municipal surcharge of up to 1.5 percent levied over the taxable income, giving rise to a maximum standard CIT rate of 31.5 percent. There is no WHT on distributions to the foreign head office.
A commercial disadvantage of a branch may be that the branch is not a separate legal entity, leaving the head office fully exposed to the liabilities of the branch. Additionally, the tax authorities may deny the deduction of interest charged or allocated to the branch by the head office, depending on the circumstances.
Under Portuguese tax law, profit distributions have the same treatment as in a Portuguese company when made to and received by a Portuguese permanent establishment of a parent company located in the EU, EEA or treaty country where the treaty foresees the same administrative cooperation, as discussed in this report’s earlier section on pre-sale dividends.
Generally, joint ventures are set up as regular Portuguese companies held by the joint venture partners.
Choice of acquisition funding
Funding is critical to the success of a transaction. The mix of debt and equity and the type of debt may have a significant tax impact under Portuguese law, as summarized below.
Apart from WHT on interest, financing operations undertaken within a group with Portuguese-resident companies may also trigger significant tax charges under stamp duty.
Although exemptions may apply, the costs of setting up stamp duty-efficient debt structures may exceed the related tax savings.
Generally, interest costs are deductible for tax purposes, provided they are considered necessary for generating taxable income or undertaking the company’s activity.
According to the earnings-stripping rules, the deductibility of net financing expenses (interest and other) is limited to EUR1 million or 30 percent of tax adjusted earnings before net interest, taxes, depreciation and amortization (tax EBITDA), whichever is higher.
From 2019 onwards, the computation of the tax EBITDA should correspond to the taxable profit (or tax loss), subject and not exempt from CIT, added by the net financing expenses and depreciations and amortizations deductible for tax purposes.
Any amounts of net interest and other financing expenses that exceed the applicable limit (and are not tax-deductible) may be carried forward and offset against the taxable profit of the following 5 years, together with the net interest and other financing expenses of that year, to the extent they do not exceed both limits.
In addition, where the net interest and other financing expenses deducted for tax purposes do not exceed 30 percent of the tax EBITDA, the part of the limit that was not exceeded can be considered for the purposes of increasing the limits applicable in the following 5 years.
Where the group relief regime applies, this limitation could be applied to the group’s EBITDA, provided certain requirements are fulfilled.
For companies taxed under the group taxation relief that have opted to calculate the earnings-stripping limit on a consolidated basis, such limits must be calculated based on the sum of the tax EBITDA of all the companies that are part of the tax group.
Interest (with reference to the supportable debt level) charged between related entities must be agreed upon under the same conditions as those agreed upon between entities that do not have a special relationship (see ‘Transfer pricing’ under ‘Other considerations’ later in this report).
Stamp duty is levied on the use of credit, in any form, at rates that vary according to the maturity of the loan, as follows.
Credit in the form of a current account, bank overdraft or any other form in which the maturity is not determined or determinable is subject to stamp duty at a rate of 0.04 percent on the average monthly balance, calculated by dividing the sum of the daily debt balance by 30.
Stamp duty also applies at the rate of 4 percent on interest charged by credit institutions, financial companies or other financial entities.
Some exemptions from stamp duty may be available, for example, on shareholder loans where the parties establish an initial period of no less than 1 year during which no reimbursement occurs, on loans granted for less than 1 year as part of a cash pooling system, in favor of companies in a group or control relationship (defined as at least 75 percent participation for at least 1 year).
Bonds and commercial paper
Bonds and commercial paper are not subject to stamp duty, in compliance with the Council Directive 69/335/EEC of 17 July 1969 on indirect taxes on the raising of capital.
Deductibility of interest
Interest charged to Portuguese-resident companies is generally deductible for tax purposes, provided the loan is related to the company’s activity, the earnings-stripping rules are observed, and, where granted by related entities, the interest rates comply with transfer pricing rules.
WHT on interest and methods to reduce or eliminate it
WHT on interest applies at a rate of 25 percent, which may be reduced under a tax treaty or by applying the provisions of the EU Interest and Royalties Directive. No WHT applies to interest on loans granted by a non-resident financial institution to a Portuguese-resident credit institution.
WHT exemptions may apply to interest charged on bonds, provided certain requirements are met.
Checklist for debt funding
- Interest expenses are deductible for tax purposes, provided they are incurred in order to obtain taxable income, although the earnings-stripping rules may limit deductibility.
- Compliance with the transfer pricing rules where the funding occurs between related parties.
- Relief for WHT on interest may be obtained under a tax treaty (partial) or the EU Interest and Royalties Directive (full).
- To benefit from stamp duty exemptions regarding the principal amount and/or the interest, the intervening entities should carefully address the nature of the financing, the existing lender-borrower relationship and the repayment period.
Portuguese-resident companies are entitled to a deduction of 7 percent of the share capital corresponding to cash contributions of the shareholders for incorporating the company or increasing its share capital.
Contributions in kind resulting from the conversion of shareholder loans are also eligible for this tax benefit, provided certain requirements are met.
Dividends paid by a Portuguese subsidiary to a non-resident entity are subject to WHT at a flat rate of 25 percent, which may be reduced under a tax treaty signed by Portugal.
In addition, no WHT applies if, among other conditions, the parent company has held a minimum of 10 percent of the share capital of the Portuguese affiliate for at least 12 months.
Where the minimum holding period is not met at the time the dividends are distributed, the parent company can file a reimbursement claim with the PTAs within 1 year from the end of the minimum holding period.
As a result of the transposition of the EU Merger Directive, the Portuguese tax law foresees a special tax neutral regime for certain operations performed as part of group reorganizations. Among other conditions, this regime only applies to operations performed for sound economic reasons (i.e. that do not have tax avoidance as their sole or main purpose).
The operations discussed in the following sections may qualify for the special tax neutrality regime.
A merger qualifying for tax neutrality occurs in the following circumstances:
- where one or more companies transfer all their assets and liabilities to another existing company in exchange for the issue to their shareholders of shares representing the share capital of that other company and, where applicable, a cash payment not exceeding 10 percent of the nominal value of the shares attributed or, in the absence of a nominal value, the accounting par value of those shares
- where one or more companies transfer all their assets and liabilities to a company to be incorporated in exchange for the issue to their shareholders of shares representing the share capital of that new company and, where applicable, a cash payment not exceeding 10 percent of the nominal value of the shares attributed or, in the absence of a nominal value, the accounting par value of those shares
- where a company transfers all its assets and liabilities to the company holding all the shares representing its share capital
- where a company transfers all its assets and liabilities to another existing company and both companies have the same shareholder\
- where a company transfers all its assets and liabilities to another company and the share capital of the latter is entirely held by the former (downstream merger).
Transfer tax and stamp duty exemptions may also apply to the transfer of real estate as a result of mergers, provided specific requirements are met.
A demerger qualifying for tax neutrality may take one of the following forms:
- simple demerger, whereby a company, without being extinguished, transfers one or more business units (keeping at least one business unit) to a new company, in exchange for the pro rata issue to its shareholders of shares representing the share capital of the new company, and, eventually, a cash payment not exceeding 10 percent of the nominal value of the shares or, in the absence of a nominal value, the accounting par value of those shares
- demerger/merger, whereby a company, without being dissolved, transfers one or more business units (keeping at least one business unit) to an existing company, in exchange for the pro rata issue to its shareholders of shares representing the share capital of that company, and, eventually, a cash payment not exceeding 10 percent of the nominal value of the shares or, in the absence of a nominal value, the accounting par value of those shares
- demerger-dissolution, whereby a company, on being dissolved, transfers its assets and liabilities to two or more companies to be incorporated or to merge them with existing companies or with assets and liabilities of companies divided by similar processes and with the same purpose, in exchange for the pro rata issue to its shareholders of shares representing the share capital of the existing companies or of the new companies and, eventually, a cash payment not exceeding 10 percent of the nominal value of the shares attributed or, in the absence of a nominal value, the accounting par value of those shares.
Other demergers may be carried out under the tax neutrality regime whereby:
- a company transfers one or more business units (keeping at least one business unit) to its single shareholder
- a company transfers one or more business units (keeping at least one business unit) to another existing company and both companies have the same shareholder
- a company transfers one or more business units (keeping at least one business unit) to another company and the share capital of the latter is entirely held by the former.
Transfer tax and stamp duty exemptions may also apply to the transfer of real estate as a result of demergers, provided specific requirements are met.
Contribution in kind (“entrada de activos”)
A contribution in kind is an operation whereby a company transfers, without being dissolved, all or one or more business units to another company in exchange for shares representing the share capital of the company receiving the business unit(s).
Exchange of shares (“permuta de partes sociais”)
An exchange of shares is an operation whereby a company acquires a share capital participation in another company, which grants it the majority of the voting rights in that company, or whereby a company already owning the majority of the voting rights acquires a new participation in the same company in exchange for the issue to the shareholders of the latter company, in exchange for their shares, of shares representing the share capital of the former company and where applicable, a cash payment not exceeding 10 percent of the nominal value of those shares or, in the absence of a nominal value, the accounting par value of the shares issued in exchange.
For the purposes of the special tax neutrality regime, a ‘business unit’ is defined as all the assets and liabilities of a division of a company that, from an organizational point of view, constitutes an independent unit; that is, an entity capable of functioning by its own means.
The above-noted operations involving non-Portuguese EU-resident companies may also benefit from the special tax neutrality regime, subject to the fulfillment of certain conditions.
Following the transposition of ATAD I and II, new provisions were introduced into Portuguese law in order to prevent hybrid mismatches, namely with the inclusion of the definition of hybrid mismatches (situations giving rise to a deduction without taxation in different tax jurisdictions or to a double deduction), double deduction, deduction without inclusion, associated company and hybrid entity.
The Portuguese tax law now sets out the expenses that must be disregarded for corporate income tax purposes (i.e. costs related to payments, even if fictitious, expenses or losses originating, (i) incurred or suffered in another jurisdiction, related to a hybrid mismatch that gives rise to a double deduction; (ii) incurred or suffered in Portuguese territory related to a hybrid mismatch that gives rise to a double deduction except if such deduction is denied in the investor’s jurisdiction; (iii) related to a hybrid mismatch that gives rise to a deduction without inclusion that does not correspond to taxable income under the legislation of the investor’s jurisdiction; or that intend to finance deductible expenses that give rise to a hybrid mismatch through an operation or series of operations between associated companies), as well as the income that must be included in the taxable profit (i.e. corresponding to payments made, or deemed to have been made, in another jurisdiction related to a hybrid mismatch leading to a deduction without inclusion [with exceptions, namely when this deduction is refused by the payer’s jurisdiction] or income attributable to a permanent establishment not considered when involved in a hybrid mismatch, except when this income must be exempt under a convention to avoid double taxation concluded with a third country).
Additionally, Portugal has opted for the possibility provided for in ATAD II of allowing the deduction to be carried forward to a subsequent tax period, until the moment in which that deduction is effectively set off against income that is not double inclusion income in the other jurisdiction.
Under Portuguese tax law, expenses associated with the issue of discounted securities, such as bonds, are tax- deductible, provided they are incurred in order to obtain taxable income.
Because discounted securities correspond to non-interest-bearing money market instruments issued at a discount and redeemed at maturity for full face value, a company’s income on the securities’ maturity is subject to CIT at a rate of up to 31.5 percent.
Where settlement of the consideration is deferred, the buyer should address the following issues:
- where the transaction involves related parties, interest may have to be charged over the deferral period to comply with the transfer pricing rules
- where the deferral period is significant, there is a risk that the deferred consideration will be deemed as a financing and thus subject to stamp duty.
Concerns of the seller
The possibility of achieving capital gains exemption leads most sellers to prefer a share deal over an asset deal.
In this regard, the new Portuguese generally accepted accounting principles (GAAP) establish that, where the cost of a merger for the merging company at fair value is higher than the net assets of the merged company, the difference must be allocated to the assets and liabilities transferred that can be identified.
However, this type of imputation is not accepted for tax purposes.
Currently, Portuguese GAAP requires that any difference between the net assets being merged and the value of the share capital participation held by the merging company in the company being merged should be accounted for as a merger reserve and included in an equity account.
The adoption of International Financial Reporting Standards (IFRS) for Portuguese tax purposes has not changed the tax treatment of mergers, demergers, contributions in kind or exchanges of shares.
A qualifying group for the group relief regime consists of a parent company holding, directly or indirectly, a share capital participation of at least 75 percent in one or more subsidiaries, provided that the participation represents more than 50 percent of the voting rights.
The following main conditions must also be met.
- The parent company did not waive the application of this regime in the previous 3 years.
- The parent company is not owned by another Portuguese-resident company also qualifying as parent company under the group relief regime.
- The share capital participation was held for more than 1 year prior to the beginning of the application of the regime. This requirement does not apply to companies incorporated by the parent company where the participation has been held since the date of incorporation.
- The registered head office and effective place of management of the parent company and its subsidiaries are in Portuguese territory.
Companies indirectly held by the parent company through companies resident in the EU or EEA also qualify for the 75 percent shareholding requirement.
For the regime to apply, the parent company must notify the tax authorities of its adoption. The regime remains valid indefinitely where there are no changes in the group that trigger its cessation.
The tax group cannot include companies that:
- have tax losses carried forward in the 3 years prior to the start of the regime, except where the share capital participation is held by the parent company for more than 2 years
- are inactive for more than 1 year or have been dissolved
- are in a bankruptcy or judicial recovery procedure
- are subject to a more favorable CIT rate and have not waived this benefit
- have a tax year different from that of the parent company
- do not assume the legal form of an Lda. company, S.A. company or partnership by shares.
The group’s taxable profit is determined by adding together each company’s tax result, thereby obtaining an aggregated taxable profit or loss.
The above-noted waiver of a lower CIT rate in order to apply the higher standard rate must be kept for a minimum period of 3 years.
Intragroup dividends, interest and royalties paid among the companies of the group are not subject to WHT, provided this income relates to periods during which the group relief regime is in force.
The regime ceases to apply whenever any of the necessary requirements are not met or the tax authorities assess the taxable income of any company of the group companies through indirect methods (applied in exceptional cases when the accounting records of the company are not considered as reliable).
Where the parent company ends up being held by another company that qualifies as the parent company of the group, the latter may opt for the continuation of the regime, provided the tax authorities are informed by the end of the third month of the fiscal year following the inclusion of the new parent company.
The application of the group taxation relief is also possible if the parent company is resident for tax purposes in an EU or EEA member state.
On termination of the regime, all unused tax losses generated while the regime was in force are lost.
Arm’s length principle
The Portuguese transfer pricing rules follow the OECD guidelines.
The arm’s length principle applies both to domestic and cross-border transactions involving tangible or intangible assets, rights or services, including cost sharing arrangements and intragroup service provision, as well as to financial transactions and to restructuring transactions involving changes to the business structures, the termination or substantial renegotiation of existing contracts, namely those that involve the transfer of tangible or intangible assets, rights over intangible assets or compensation for emerging damages or lost profits.
The term ‘related entity’ is defined widely for this purpose. According to number 4 of article 63 of the CIT Code, special relationships are deemed to exist between two entities when one entity has or may have, directly or indirectly, a significant influence over the management of another entity, including:
- an entity and the shareholders of the respective share capital or voting rights, or their spouses, ascendants or descendants, who hold directly or indirectly a stake of not less than 20 percent of the capital or voting rights
- entities in which the same shareholders or their spouses, ascendants or descendants, hold directly or indirectly a stake of not less than 20 percent of the capital or voting rights
- entities whose legal relationship allows, by its terms and conditions, the control of the management decisions of the other, arising from facts outside the commercial or professional relationship itself
- transactions established between a resident entity and entities resident in a clearly more favorable tax regime (as listed in Ministerial Order no. 309-A/2020, December 31)
- other situations.
The transfer pricing rules apply also to transactions established between a permanent establishment located in the Portuguese territory and its foreign headquarters or other foreign permanent establishments, and to transactions between resident entities in Portugal and all its foreign permanent establishments and among its permanent establishments.
Adjustments to the taxable income by taxpayers are limited to positive transfer pricing adjustments with reference to cross-border transactions. Year-end adjustments recorded in the following year are limited to certain situations.
Pre- and post-restructuring value contribution functional analysis, procedures review and market profitability tests are crucial to evaluate the impact of the business model reorganization and assess, define and implement a consistent and robust group pricing policy.
Alignment of the transfer pricing policies under a restructuring process with reference to the business models should be taken into account at a first glance. Disclosure is mandatory in the annual transfer pricing documentation.
Documentation and other declarative obligations
Corporate taxpayers that have recorded an annual total net sales and other income equal to or greater than EUR3 million, in the previous fiscal year, are required to prepare and maintain contemporaneous transfer pricing documentation supporting the arm’s length nature of their transactions (commercial, financial or others) established with related parties.
In addition, major taxpayers must submit the transfer pricing documentation no later than the 15th day of the 7th month after the corresponding tax year-end, for 2020 onwards, in accordance with the provisions of article 130 of the CIT Code.
Major taxpayers comprise the following entities:
a. entities under the supervision of the Bank of Portugal; of the Insurance and Pension Funds Supervision Authority, with the exception of insurance brokers; of the Securities Market Commission; or with a turnover higher than EUR200 million;
b. holding companies with total income higher than EUR200 million;
c. entities with a global amount of taxes paid higher than EUR20 million;
d. companies that are considered relevant, in particular in view of their corporate relationship with the companies covered by the previous paragraphs;
e. companies under a tax group (REGTS), in which any entity of the tax group, either dominant or dominated, is covered by the conditions defined in any of the preceding paragraphs [(a) to (d)].
Documentation should comprise the following information:
- group organizational structure and description of the respective business strategy
- identification of the economic circumstances prevailing in the industry and its impact on the taxpayer’s activity
- identification of the value-added activities performed within the group, as well as a functional and risk analysis of the taxpayer and its related entities with reference to each controlled transaction
- identification, description and quantification of the controlled transactions, for the last 3 years, including the description of the pricing methodology associated with those transactions
- selection of the most appropriate transfer pricing method for the controlled transactions, the respective economic analysis, its results and supporting information
- appendices/list of the agreements and other legal documents supporting the transactions analyzed.
Portugal has not yet adopted the Action 13 documentation structure (master file, local file), although Portugal follows the Code of Conduct on Transfer Pricing Documentation.
Under the Portuguese transfer pricing regime, taxpayers must also disclose the following information on the Annual Tax and Accounting Return (IES):
- identification of related entities and the parent company (including the nature of the special relationship);
- the activity code (SIC Code) of each related entity;
- further information on the Group and its consolidated accounts;
- amounts of related-party transactions, per transaction category, for both domestic and cross-border transactions;
- the transfer pricing methods applied to the related-party transactions and of any changes with reference to previous years;
- modifications in the taxpayer business model, with reference to the previous fiscal year;
- identification of the amount of any transfer pricing adjustment, resulting from non-compliance with transfer pricing rules; and
- whether the transfer pricing documentation was compiled when filing the Annual Tax and Accounting Return (IES).
The IES is due by the 15th day of the 7-month period following the tax year-end.
Advance pricing agreements
Unilateral, bilateral and multilateral advance pricing agreements (APAs) are binding for a 4-year period.
The submission of the request at the preliminary phase is free of charge. The submission of the proposal entails a fee that may vary up to EUR35,000, depending on the taxpayer’s revenue.
APAs renewals or reviews require a filing fee, calculated in a similar way, but with a discount of 50 percent of the initial fee.
Mandatory automatic exchange of information
Portugal has signed the Multilateral Competent Authority Agreement for the exchange of tax information, which follows Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) project. Portugal has signed several qualifying competent authority agreements with other jurisdictions that enable the exchange of country-by-country (CbyC) reports.
This obligation applies to multinational enterprises with annual consolidated group revenue equal to or exceeding EUR750 million in the previous year.
The CbyC report is a requirement for the ultimate parent entity of a multinational group, as well as for an entity resident in Portugal, owned or controlled by one or more non-resident entities not covered by a similar obligation or if a qualified agreement between the competent authorities is not in force at the date of submission, or if a systemic failure occurs in the tax residence of the ultimate parent entity. When more than one constituent entity exists, the multinational group may appoint any of those as the reporting entity.
The CbyC reporting requirement applies for fiscal years beginning on or after 1 January 2016. The secondary local filing requirement for non-parent constituent entities in Portugal applies for fiscal years beginning on or after 1 January 2017. The surrogate parent entity option is not applicable in Portugal.
Taxpayers need to notify the tax authorities by the last day of the 5th month following the fiscal year of the identification and the country or tax jurisdiction of the Group’s reporting entity (Form 54).
The CbyC report must be filed electronically no later than 12 months after the last day of the entity’s accounting period. The Ministerial Order 383-A/2017, dated 21 December 2017, approved the form and instructions for meeting the CbyC reporting requirement (Form 55).
CbyC reports must be filed in Portuguese. The CbyC report (Form 55) can be submitted electronically.
Mandatory automatic exchange of information is also required for cross-border tax rulings and APAs issued, amended or renewed in the national territory. The information to be reported to the competent authorities of all the member states and to the European Commission, includes (among other things) the identification of the company, a summary of the tax rulings and/or the APAs, the expiration date of the tax rulings and/or APAs and the amount(s) of the cross-border transaction(s).
Transfer pricing audit and penalties
Recent audits focused on taxpayers that record operating losses, as well as on intragroup services other than low value services, financial transactions and guarantees, complex intangible property transactions and business restructuring processes, as well as centralized business models with reference to the digital economy.
A deep thorough analysis of the economic benefit, the non-duplication of activities and the pricing model is usually conducted during a tax audit.
The latest strategic plans against fraud and tax evasion foresee the reinforcement of transfer pricing audits, the increase of the number of technicians assigned to the transfer pricing department, as well as the application of anti-abuse rules.
Transfer pricing adjustments are regulated by the general tax penalty regime. If an adjustment is sustained, general penalties may be assessed from EUR375 to EUR45,000 and the correspondent tax assessment subject to compensatory interest of 4 percent per year, plus default interest if tax is not paid by the deadline.
Moreover, penalties of up to EUR10,000 plus a 5 percent increase per day of delay apply for not complying in a timely fashion with the transfer pricing documentation reporting requirements, failing to file the CbyC report, or failing to file a notification. Failing to submit the transfer pricing documentation is subject to a penalty of up to EUR150,000.
Under Portuguese tax law, a company qualifies as tax-resident where its headquarters or place of effective management is located in the Portuguese territory.
Portugal’s tax treaties include rules to avoid situations of dual residency. In the experience of KPMG in Portugal, no issues have been raised by the PTAs with regard to dual residency.
Foreign investments of a local target company
The Portuguese tax law attributes profits obtained by foreign companies resident in tax haven jurisdictions to a Portuguese-resident entity where it holds, directly or indirectly (even if through an agent, trustee or intermediary), at least 25 percent of the share capital of the foreign companies.
This anti-avoidance rule is not applicable (among other situations) where:
- the non-resident entity is resident for tax purposes in an EU or EEA member state (provided the state is bound to provide administrative cooperation on taxation equivalent to the one that exists within the EU)
- the entity is set up and maintained for valid economic reasons
- the entity primarily carries on an agricultural, commercial, industrial or services activity, using persons, equipment, assets and facilities.
Comparison of asset and share purchases
Advantages of asset purchase
- Possible to acquire a specific part of a company.
- Deductibility of higher depreciation costs in most cases.
- No previous (tax) liabilities of the company are inherited.
- Greater flexibility in funding options.
Disadvantages of asset purchase
- May be unattractive to the seller because of capital gains taxation, thereby increasing the price.
- May be subject to transfer taxes and stamp duty.
- Previous real estate transfer tax (RETT), stamp duty and real estate tax (RET) liabilities related with the assets may be inherited.
- May constitute a VAT event.
- Certain items are not depreciable (e.g. goodwill), although goodwill related to assets acquired as from 1 January 2014 can be deducted for tax purposes, in equal parts, during the first 20 tax years following its initial accounting register.
- Accounting profits may be affected by the creation of acquisition goodwill.
- Benefit of tax losses incurred by the target company remains with the seller.
Advantages of share purchase
- More flexibility to achieve capital gains exemption for the seller, thereby reducing the price.
- Not subject to transfer tax in most cases.
- Buyer may benefit from tax losses of target company (subject to limitations).
Disadvantages of share purchase
- Transfer of outstanding claims and possible hidden liabilities.
- No deduction for purchase price.
- Less flexibility in funding options.
KPMG in Portugal
KPMG & Associados — SROC
Av. Fontes Pereira de Melo, 41–15º
T: +351 210 110 087
KPMG & Associados — SROC
Av. Fontes Pereira de Melo, 41–15º
T: +351 210 110 958
KPMG & Associados — SROC
Av. Fontes Pereira de Melo, 41–15º
T: +351 212 487 391
KPMG & Associados — SROC
Av. Fontes Pereira de Melo, 41–15º
T: +351 210 110 874
This country document does not include COVID-19 tax measures and government reliefs announced by the Portuguese government. Please refer below to the KPMG link for referring jurisdictional tax measures and government reliefs in response to COVID-19.
Click here — COVID-19 tax measures and government reliefs
This country document is updated as of 31 January 2021.