International Tax Portugal Highlights In Plain English

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Phone : +1 202 792 6600 www.CastroAndCo.com Investment basics: adjustments), which consist of business/ trading income (based on Portuguese Currency – Euro (EUR) GAAP), passive income and capital gains. Foreign exchange control – Portugal does Expenses are deductible to the extent not have exchange controls and there are they are necessary for the purpose of no restrictions on the import or export of generating taxable income and are properly capital. Both residents and nonresidents documented. (See “Thin capitalization” may hold bank accounts in any currency. below, for limits on the deduction of However, a transfer of EUR 10,000 or more interest.) outside Portugal in foreign banknotes, gold, Small businesses are eligible for a simplified travelers’ checks or bearer securities must tax regime, under which taxable income is be declared to the Portuguese customs determined as a percentage (depending on authorities. activity) of turnover.

Portuguese financial institutions must Taxation of dividends – See “Participation report bank balances of residents and exemption,” below. nonresidents exceeding EUR 50,000 (in the same bank). Capital gains – Realized capital gains are included in taxable profits for corporate Accounting principles/financial statements tax purposes, but gains on the disposal of – Portuguese GAAP or IAS/IFRS financial shares may be exempt from tax under the statements must be prepared annually. participation exemption (see “Participation Principal business entities – These are the exemption,” below). The acquisition cost of corporation (SA), limited liability company capital assets disposed of after a minimum (Lda), general and limited partnership, ownership period of two years may be partnership limited by shares, branch of a adjusted for inflation, using official indices. foreign company, individual enterprise with Fifty percent of gains derived from the limited liability, investment fund and real disposal of tangible fixed assets, biological estate investment trust (REIT). assets and intangible assets (other than Corporate taxation: intangible assets acquired or sold to related entities or investment properties) held for Residence – A company is a resident if its at least one year may be excluded from legal seat or place of effective management taxation if the total disposal proceeds are is in Portugal. reinvested within a prescribed period. The reinvestment regime is not applicable to Basis – Resident companies are subject gains assessed in the context of mergers, to tax on worldwide profits; nonresident demergers or asset- for-share deals, nor will companies are taxed only on Portuguese- it apply when assets are transferred with source profits. Foreign-source profits purposes other than the business carried derived by residents are subject to out by the taxpayer. corporate tax in the same way as Portuguese-source profits. By election, Capital gains derived from the indirect profits arising from a foreign permanent disposal of certain immovable property establishment may be tax exempt. Branches located in Portugal are subject to corporate of nonresident companies are taxed only on income tax. This includes the disposal by Portuguese-source profits. a nonresident company of the shares (or similar rights) held in another nonresident Taxable income – Corporate tax is charged company, if, during the 365 days preceding on a company’s profits (calculated with tax the disposal, more than 50% of the value of those shares (or rights) is related, directly or resident company from a domestic or indirectly, to immovable property in Portugal foreign shareholding are exempt from tax, (subject to certain conditions). provided the shareholder is not considered a transparent entity and has held, directly Losses – Operating losses may be carried or indirectly, at least 10% of the capital or forward for five years (12 years for small voting rights of the other company for at and medium-sized enterprises (SMEs)). The least 12 months. The subsidiary may not be losses used in any year may not exceed resident in a listed tax haven and must be 70% of the taxable profits. If at least 50% subject to, and not exempt from, an income of the capital or the majority of the voting tax listed in the EU parent-subsidiary rights has been transferred, carryforward is directive or an income tax rate that is equal allowed only if authorized by the Minister to at least 60% of the Portuguese corporate of Finance. The carryback of losses is not tax rate. The exemption for dividends is not permitted. applicable if the payment is deductible for Capital losses on the sale of shares the payer. An ordinary tax credit is available that are not eligible for the participation when the conditions for the application exemption are deductible, subject to certain of the participation exemption regime restrictions. are not fully satisfied, with an option for an underlying tax credit for dividends on Rate – The standard corporate tax rate is foreign shareholdings of at least 10% held 21%. A reduced rate of 17% applies to the for at least 12 months. first EUR 15,000 of taxable profits of SMEs. Holding company regime – No (see Surtax – A state surcharge is levied on “Participation exemption,” above) taxable profits at the following rates: 3% for profits over EUR 1.5 million and up to Incentives – Profits from activities EUR 7.5 million; 5% on profits over EUR of licensed industrial, shipping and 7.5 million and up to EUR 35 million; and international service companies established 9% on profits exceeding EUR 35 million. A in the Madeira Island free-trade zone (where municipal surcharge is levied on taxable the income is not derived from Portugal, profits at rates up to 1.5%, depending on other than the free trade zone) are subject the municipality, resulting in a maximum to a reduced corporate tax rate of 5% if possible combined tax rate of 31.5%. the company has been granted a license to operate in the territory and certain Alternative minimum tax – No conditions are satisfied; no withholding tax is levied on dividends, interest (subject Foreign tax credit – Portugal grants a tax to certain conditions), royalties (subject credit up to the amount of Portuguese to certain conditions) and other business- tax payable on foreign income, which is related fees paid to nonresidents. calculated net of expenses on a per-country basis. A corporate tax credit of 32.5% of qualifying R&D expenses is available in the relevant By election, profits of foreign permanent year and may be carried forward for eight establishments may be exempt. Credit years. Taxpayers can take an additional for underlying tax may be available if the incremental credit of 50% of qualifying R&D conditions for the participation exemption expenses exceeding the average amount are not fulfilled. spent in the prior two tax periods, limited to EUR 1.5 million. Participation exemption – Under Portugal’s participation exemption regime, dividends A corporate tax credit between 10% and 25% received and capital gains realized by a of the amount of the relevant investment may be granted on the acquisition of new treaty. tangible and intangible fixed assets (with some exceptions and limitations), as well Branch remittance tax– No as a total or partial exemption from real property tax, transfer tax and stamp duty. Other – Other payments made to Up to 50% of income derived from the nonresidents may be subject to withholding licensing of patents, designs and industrial tax at various rates. models is exempt. Other taxes on corporations:

Companies may benefit from a 7% notional Capital duty – No interest deduction calculated based on the company’s share capital increase each year Payroll tax – No (up to EUR 2 million), provided no capital reduction (with a corresponding payment Real property tax – A real property tax to shareholders) is carried out in that same is levied annually by municipalities. The year, or in the five subsequent years. rates range from 0.3% to 0.8% of the taxable value of the property and the tax Withholding tax: is deductible for corporate tax purposes. A rate of 7.5% applies if the owner of the real Dividends – Dividends paid to a nonresident property is located in a listed tax haven. company are subject to a 25% withholding tax (35% if paid to a resident of a listed Entities or individuals owning residential tax haven). The rate may be reduced to real estate or “building land” are subject to 0% where the conditions for the domestic an additional real property tax (AIMI), the tax participation exemption regime are fulfilled base of which is the sum of the fiscal value and the recipient of dividends is resident in of all the eligible urban property owned by the EU/European Economic Area (EEA) or in each taxpayer. For individuals, the AIMI will a tax treaty jurisdiction. If the participation be levied at progressive rates up to 1.5%, exemption does not apply, the rate may be depending on the amount of the AIMI tax reduced under a tax treaty. base. For corporate taxpayers, the AIMI rate is 0.4%, regardless of the amount of Interest – Interest paid to a nonresident the AIMI tax base. For entities domiciled in company is subject to a 25% withholding listed tax havens, the AIMI rate is 7.5%. tax (35% if paid to a resident of a listed tax haven), unless reduced under a tax Social security – An employer is required to treaty. Under the EU interest and royalties contribute 23.75% of the uncapped monthly directive, payments to qualifying EU gross salary of its employees, including recipients are exempt. board members; the employee contributes 11%. The employer’s contribution is Royalties – Royalty payments made to a deductible for corporate tax purposes. nonresident company are subject to a 25% withholding tax (35% if paid to a resident Stamp duty – Subject to exemptions, of a listed tax haven), unless the rate is stamp duty is levied on various types of reduced under a tax treaty. Under the EU agreements, deeds and documents, as well interest and royalties directive, payments to as certain transactions not subject to VAT, qualifying EU recipients are exempt. such as the acquisition of real estate, leases and subleases, loans, guarantees and other Technical service fees – Technical service financial transactions, insurance premiums fees paid to a nonresident company are and certain bets. subject to a 25% withholding tax, unless the rate is reduced or eliminated under a tax Transfer tax – Real estate transfer tax is levied by municipalities at a maximum rate the CFC regime, undistributed profits of a of 6% on the transfer of residential property, nonresident company resident in a low-tax 5% on the transfer of rural property, 6.5% jurisdiction may be attributed to Portuguese on the transfer of other urban property and resident participators with a substantial 10% if the purchaser is located in a listed interest therein and taxed in proportion tax haven. to their holdings. A substantial interest is a direct or indirect ownership (including a Other – Special taxation rules apply to beneficial interest) of at least 25% of the entities engaged in certain activities, capital, voting rights or rights to income including oil exploration, prospecting and or assets, or a 10% stake where more than production (which are subject to a number 50% of the capital, voting rights or rights to of specific oil-related levies), and to those income or assets is owned by Portuguese operating in the gaming industry. resident participators.

Companies operating in certain sectors The CFC regime is not applicable if the are subject to special contributions: the nonresident company is resident in an EU extraordinary contribution on the energy member state or in an EEA member state sector, the bank sector contribution or with which an agreement for administrative the pharmaceutical industry extraordinary cooperation in tax matters equivalent contribution. to that established for the EU has been Various other taxes apply, including on concluded. carbon emissions, tobacco, alcohol and Disclosure requirements – Taxpayers alcoholic beverages, added-sugar drinks and or their agents must disclose to the high-salt content foods. Portuguese tax authorities certain corporate Anti-avoidance rules: restructurings or transactions in which they are involved that may lead to substantial tax Transfer pricing – Portugal’s transfer pricing benefits. rules generally follow OECD transfer pricing guidelines. The tax authorities may make Resident entities that are included in pricing adjustments if special relations multinational groups are required to file a exist between the parties. Companies must declaration disclosing certain financial and prepare documentation to support their tax information, on a country-by-country transfer pricing policies. Advance pricing basis. agreements are available (see “Rulings,” Starting in 2019, commercial entities must below). register their ultimate beneficial owners (or Thin capitalization – Specific limitations those with effective control). apply to the tax deductibility of interest Other – Under the general anti-abuse expense. Net financial costs are deductible clause, the tax authorities may disregard only up to the greater of the following a transaction for tax purposes if one of thresholds: EUR 1 million or 30% of EBITDA the main objectives of the transaction is as adjusted for tax purposes. Companies to reduce or eliminate tax. Payments to reporting under a tax group regime may entities located in listed tax havens are, apply the relevant thresholds at the group in principle, not deductible. An entity level. The amount exceeding the threshold located in a listed tax haven also will not in a given year may be carried forward for benefit from the exemption on gains from the following five years, up to the 30% the disposal of shares or other securities threshold. otherwise available to nonresidents. Controlled foreign companies – Under Compliance for corporations: instances of noncompliance with the tax law. Tax year – The tax year generally corresponds to the calendar year, although Rulings – Three types of rulings are a different tax year is possible for resident available to taxpayers: general, advance companies and nonresident companies with and advance pricing agreements (APAs). A a permanent establishment in Portugal, if general ruling provides the tax authorities’ it coincides with the reporting/accounting general interpretation of the law. An period. advance ruling provides the taxpayer with the tax authorities’ position on a specific Once selected, the same tax accounting transaction. In an APA, the taxpayer obtains period must be maintained for at least five an agreement on the transfer pricing years. policies to be adopted in transactions Consolidated returns – Aggregate tax between related entities. returns may be filed by resident groups. A Personal taxation: group consists of the dominant company and 75% or more directly or indirectly held Basis – Resident individuals are taxed on subsidiaries (with more than 50% of voting their worldwide income; nonresidents are rights held by the dominant company). taxed only on their Portuguese- source income. The following requirements must be met to file a consolidated return: (1) all members Residence – An individual is resident if he/ of the group must have their seat or she stays in Portugal for 183 days or more place of effective management in Portugal in any 12-month period or, if the individual’s (group members may be held indirectly main residence is located in Portugal, if he/ by a company resident in an EU/EEA she stays in Portugal at any time during the member state, provided the latter is held, year. Individuals that were not Portuguese directly or indirectly, at least 75% by the resident in any of the five tax years before dominant company), and must be subject moving to Portugal may request a special to the general tax regime; (2) the dominant non-habitual tax residency status for 10 company must hold the participation in years. Non-habitual residents are taxable on the group companies for more than one worldwide income, but exempt from tax on year; (3) the dominant company may not certain foreign-source income. Portugal also be considered dominated by another has the concept of part-year residency. Portuguese eligible company; and (4) the dominant company may not have opted Subject to certain conditions, a favorable out of the consolidated regime within the tax regime also may apply to individual previous three years. taxpayers previously resident in Portugal for tax purposes who regain tax residence Filing requirements – Self-assessment status between 1 January 2019 and 31 applies and electronic filing is mandatory. December 2020. For qualifying individuals, The tax return must be filed within five 50% of employment income or professional/ months of the end of the accounting period. self-employment income is excluded from The supporting accounting and tax report taxation for a five-year period between must be filed by the 15th day of the seventh 2019 and 2023 or between 2020 and 2024, month following the company’s year end. depending of the first year of residence. Advance corporate tax and the national surtax are payable in installments. Filing status – Married individuals are taxed separately, but may choose to file a joint tax Penalties – Penalties and interest are return unless one spouse is nonresident, imposed for late filing, failure to file or other in which case the resident spouse files a separate tax return. Rates – Rates are progressive up to 48%. An additional surcharge of 2.5% applies Taxable income – There are six categories to income between EUR 80,000 and EUR of income that are subject to personal 250,000. For income over EUR 250,000, income tax: employment income, business the additional surcharge rate is 5%. Non- and professional income, investment habitual resident individuals are eligible for income, real estate income, increases a flat 20% rate on income related to work in net worth and pensions. Investment or services rendered in Portugal involving income, real estate income and capital activities defined in a ministerial order. gains on securities are taxed at a flat rate of 28%. The remaining income is taxed at Other taxes on individuals: progressive rates. Capital duty – No Capital gains – Capital gains on the sale of an individual’s main residence are exempt if the proceeds are used to purchase another Stamp duty – See “Stamp duty,” above permanent residence in Portugal or in Capital acquisitions tax – See “Inheritance/ another EU/EEA member state, provided estate tax,” below that, in the latter case, arrangements are in place for an exchange of information in tax Real property tax – See “Real property tax” matters. If the seller is 65 years old or older, under “Other taxes on corporations,” above such capital gains also may be exempt if the proceeds are invested in a pension plan that Inheritance/estate tax – For gifts and complies with certain criteria. inheritances, stamp duty is imposed at 10% (unless the heir is the spouse, descendant Only 50% of gains from the sale of or ancestor of the donor/deceased, in which immovable property is subject to tax as case an exemption applies). income at the progressive rates. Capital gains on shares are subject to tax at 28%. Net wealth/net worth tax – No A 50% exemption applies to capital gains Social security – The employee contributes on the disposal of participations in unlisted 11% of his/her gross salary, and the small and micro companies. employer contributes 23.75%. Capital gains realized by nonresident Other – Various environmental taxes apply, individuals on the sale of shares (or similar including a tax on plastic bags. There are tax rights) in a nonresident company may be incentives for the acquisition of electric and regarded as Portuguese-source income hybrid cars. (and therefore subject to tax in Portugal) if, during the 365 days preceding the disposal, Compliance for individuals: more than 50% of the value of those shares (or rights) is related, directly or indirectly, to Tax year – Calendar year immovable property in Portugal (subject to Filing and payment – Personal tax returns certain conditions). must be filed between 1 April and 30 June Deductions and allowances – Deductions following the year end. Final payment of (up to specified limits) are available, tax is due by 31 August following the year including deductions for health and to which the income relates. There is an education expenses. Personal tax credits optional filing extension to 31 December if in varying amounts also are available, the taxpayer requests foreign tax credits. depending on the number of family Penalties – Penalties apply for failure members. to comply with tax payment and filing obligations.

Value added tax: Source of tax law: Portuguese Constitution, EU Regulations and Directives (namely, on Taxable transactions – VAT generally is indirect taxation), the codes regarding the levied on the supply of goods and services, various taxes in force, the General Tax Law and on imports. and other tax legislation

Rates – For the mainland, a standard rate Tax treaties: Portugal has 77 tax treaties of 23%, an intermediate rate of 13% and a in force. Portugal signed the OECD reduced rate of 6% apply. The rates are 22%, multilateral instrument (MLI) on 7 June 12% and 5% in Madeira, and 18%, 9% and 4% 2017. The deposit of Portugal’s instrument of in Azores. ratification for the MLI is pending.

Registration – A reverse-charge mechanism Tax authorities: Tax and Customs Authority may apply to local supplies made (Autoridade Tributária e Aduaneira) by nonresident entities, avoiding the registration obligation for the supplier. However, nonresident suppliers generally are required to register for VAT in Portugal on the transfer of their own stocks to Portugal for the purposes of their own undertakings, or if they sell goods or supply services to private customers.

Filing and payment – Monthly returns must be filed when annual turnover exceeds EUR 650,000 (otherwise, returns are filed quarterly). Monthly VAT returns must be filed by the 10th day of the second month following the end of the relevant month.

Quarterly returns must be filed by the 15th day of the second month following the end of the relevant quarter. Payment is required by the deadline for filing the return (however, there is a legislative proposal under discussion for the payment deadline to change to five days later).

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