This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Sousa Machado, Ferreira Da Costa is an excellent option in Portugal.
The profits of companies operating in Portugal are taxable under the Corporate Income Tax Code (Código do Imposto sobre as Pessoas Colectivas – “CIRC”). The definition of “taxable profits” includes operating income and capital gains (i.e. there is no autonomous capital gains tax).
CIRC applies to companies and other corporate bodies and the applicable rules vary according to the tax residence of the taxpayer. Companies and other corporate bodies with head office or place of effective management in Portuguese territory are deemed resident in Portugal for tax purposes and subject to tax on worldwide profits. Despite the absence of statutory criteria laid down in the CIRC, in normal circumstances, a company’s place of effective management is located where the daily management of the company is carried out and the major decisions are taken (e.g. where the meetings of the company’s board of directors habitually take place).
Other resident corporate bodies that do not carry out a commercial, industrial or agricultural activity in Portugal (e.g. not-for-profit entities) are also subject to IRC although subject to different assessment rules and potentially benefitting from a total or partial exemption.
Non-resident entities (i.e. companies and other body corporates that do not have their head office, nor place of effective management in Portuguese territory, nor have a permanent establishment therein) are only taxed on Portuguese-sourced income. The CIRC foresees that the taxable income obtained by a non-resident company which is not attributable to a permanent establishment in Portugal should be determined in accordance with the scheduler income rules set out in the Personal Income Tax Code (Código do Imposto sobre o Rendimento das Pessoas Singulares – CIRS). The taxable income obtained in Portugal by a non-resident company without a permanent establishment in Portuguese territory will be subject to a withholding tax of 25%. These rates may be reduced in accordance with the applicable Double Tax Convention (DTC), provided certain formalities are complied with.
Non-resident entities with a permanent establishment in Portugal are also subject to corporate tax on the profit attributable to those permanent establishments.
A permanent establishment is defined in the CIRC as “any fixed installation or permanent representation through which an activity of commercial, industrial or agricultural nature is carried on”. In general terms, a permanent establishment is deemed to exist where a non-resident entity carries on its business enterprise in Portugal for a period of at least six months. Whenever a DTC applies, the Portuguese domestic concept of permanent establishment should be interpreted and applies in light of the concept foreseen in that DTC. In general terms, the taxable profits attributable to a permanent establishment are determined and subject to tax in accordance with the same rules that apply to resident companies, which means the permanent establishment is also required to prepare financial statements and have its own accounting records.
In summary, any company whose head office or place of effective management is not located in Portugal may be subject to IRC in Portugal as follows:
- regarding profits allocated to a permanent establishment located in Portugal, IRC will be charged on the (worldwide) taxable profits attributable to it;
- regarding profits not allocated to a Portuguese permanent establishment, IRC will be charged only on income that is deemed to be sourced in Portuguese territory (in principle according to the income classification that applies for CIRS purposes).
- Standard rate of 21%
- Municipal surtax (“derrama municipal”) up to 1.5% levied on taxable profits (depending on the municipality)
- State surtax (“derrama estadual”) of 3% on taxable profits exceeding € 1,5 million up to € 7,5 million, 5% on taxable profits exceeding € 7,5 million up to € 35 million and 7% on taxable profits exceeding € 35 million
- A reduced IRC rate is available for SME (“Small and Medium-Sized Enterprises”), as defined in the Decree-Law 372/2007 of 6 November. For these companies, taxable profits up to € 15,000 are subject to a reduced rate of 17%. The exceeding taxable profits are subject to the standard IRC rate.
- Companies with head office or place of effective management in the Autonomous Region of Azores benefit from a reduced 16,8% IRC rate and 13,6% for taxable profits up to € 15.000 derived by SMEs.
- Companies licensed under the Madeira International Business Centre (Madeira Free Trade Zone) may benefit from a reduced IRC rate of 5% until 2020, provided certain requirements are complied with (e.g. minimum number of workers in the payroll and maximum amount of taxable profits benefitting from the special IRC regime).
Assessment of taxable income
Resident companies are taxable on their worldwide income. Income and expenses should, as a general rule, be allocated to a financial period where such income and expenses are realized.
The taxable income of a resident company is based on its accounting records according to the applicable accounting rules and subject to the tax adjustments foreseen in CIRC. Portugal has adopted the International Accounting Standards effective within the European Union and according to the EU regulations on this matter. Resident companies may also carry forward tax losses up to five years.
Distribution of profits may be tax exempt pursuant to the “participation exemption” regime. According to this regime, dividends from qualified participations are not subject to tax at the shareholder company.
Under the participation exemption regime, domestic dividends are fully exempt in the hands of a non-transparent resident corporate shareholder if:
– the taxpayer, directly or indirectly, held at least 10% of the share capital or voting rights of the entity distributing the profits or reserves;
– that participation was held uninterruptedly, during the year prior to the distribution, or if it has been held less time, the participation must be maintained during the time necessary for the end of the period of one year;
– the taxpayer is not subject to the tax transparency regime;
– the entity that distributes the profits or reserves is effectively subject and not exempt to IRC or a tax of the same or similar nature to the IRC and the legal rate applicable to the entity is not lower than 60% IRC rate;
– the entity that distributes profits or reserves is not an offshore.
The special regime applicable to holding companies (SGPS) was revoked from 1 January 2014, and replaced by the participation exemption regime.
The participation exemption regime may also apply to dividends paid to non-residents, under some conditions.
Expenses and non-deductible items
Expenses related to the business activity are generally deductible for IRC purposes, insofar as they are properly documented and were incurred by the company to generate taxable profits or to safeguard its productive source.
Notwithstanding the above, certain expenses are not tax deductible, namely (i) interest paid pursuant to shareholder loans if the applicable rate exceeds EURIBOR 12M accrued with a spread up to 2% (except for transactions subject to transfer pricing rules where the arm’s length interest rate is higher than the foregoing), (ii) expenses documented by invoices or other documents without a valid taxpayer number, (iii) penalties or fines paid, (iv) IRC and surtaxes or (v) certain expenses related with vehicles, (vi) confidential or undocumented expenses, etc.
Depreciation and amortization
All fixed assets, except land, can be depreciated or amortized for tax purposes. The acquisition or production cost of certain assets is tax deductible in accordance with their expected useful life. Depreciation can be straight-line or reducing, over a term based on the useful life of the asset. As a general rule, fixed assets are depreciated under the straight-line method, although taxpayers may elect to apply the declining-balance method. Declining-balance method cannot be applied to building properties, passenger vehicles for private use or furniture, amongst others.
The depreciation rates are established by law and deductions above such rate are not recognized for tax purposes. Taxpayers may also opt to apply longer depreciation rate (up to 50% of the general rates).
As a general rule, provisions registered by a Portuguese company are not tax deductible, except for specific provisions foreseen in the CIRC, namely:
- Pending judicial litigations, when concerning bad and doubtful debts;
- Mandatory technical provisions, constituted in accordance with the Insurance Portuguese Institute and/or Bank of Portugal rules;
- Remedy of environmental damages.
Interest barrier rule
The Portuguese CIRC foresees an interest barrier rule which limits the deductibility of net financial expenses to the higher of (i) € 1,000,000; or (ii) 30% of EBITDA (operating profits before interests, taxes, depreciations and amortizations).
The interest barrier rule applies to all financial expenditure regardless of the existence of special relations between the debtor and creditor and the residence of the creditor. The interest barrier rule is also applicable to tax groups.
The interest barrier rule allows for the carry forward of the unused percentage (i.e. if the deduction percentage is not fully used, the gap may be added to the following five years). The excessive (non-deductible) financial expenditure may also be carried forward up to 5 years and deducted against future profits.
The costs with impairment losses derived from doubtful debts are tax deductible when an insolvency or recovery procedure has been submitted or when credits have been judicially claimed. Only impairment losses derived from debts outstanding for more than six months are qualified as tax deductible within the following limits on the amount in debt:
(i) From 6 to 12 months: 25%;
(ii) From 12 to 18 months: 50%;
(iii) From 18 to 24 months: 75%; and
(iv) More than 24 months: 100%.
In addition to the general CIT rate, autonomous taxation is applied on certain expenses of IRC taxpayers.
As way of example, the following expenses are subject to autonomous taxation:
- Expenses related with vehicles
- Representation expenses
- Undocumented expenses
- Payments made to entities resident in blacklisted jurisdiction
- Costs or expenses with bonus and other variable remunerations paid to managers and board members
Losses are deductible in computing the tax base of IRC taxpayers.
Tax losses generated as of tax year 2017 may be carried forward for a period of 5 years, and deducted up to to 70% of the future (annual) taxable profits. 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. The carry-forward period for losses generated in 2012 and 2013 was 5 years, and 4 years for losses generated in 2010 and 2011.
The right to carry losses forward is forfeited in case of change of ownership and control, i.e. if at least 50% of the share capital or the majority of the voting rights has been transferred. In case the losses are forfeited, a request may be submitted to the Minister of Finance who may authorize the carry-forward of the taxable losses, even if there is a change of ownership and control, provided there are valid economic reasons for such carry-forward.