Update: Budget Bill Introduces Interest Barrier Rule
Portuguese thin-capitalisation rules currently provide that financial expenses paid in respect to related party financing from non-EU resident lenders are not deductible for Corporate Income Tax purposes, if the indebtedness exceeds a 2:1 debt-to-equity ratio. The 2013 Budget Bill foresees the replacement of the current thin-capitalisation rules by an interest barrier rule which limits the deductibility of net financial expenses to the higher of the following: (i) Euro 3 million or (ii) 30% of EBITDA (operating profits before interests, taxes, depreciations and amortisations). Taxand Portugal discusses the impact the new rule will have on multinationals.
The interest barrier rule also provides for an denied interest deduction and unused EBITDA carry forward clauses. Net financial expenses that cannot be deducted may be deducted in the following 5 fiscal years, jointly with those incurred in the relevant tax period, provided the general limits of Euro 3 million or 30% of EBITDA are not exceeded. When the actual net financial expenses in a year is less than the 30% rule, the difference can be added to the 30% limit for the purpose of deducting net financial expenses in the following five fiscal years.
The net expenses are computed at individual level. This means entities that are taxed as part of a tax group (which does not work as a pure consolidation or fiscal unity system) should apply the interest barrier rule in relation to each individual entity (including the parent).
Credit and financial institutions (including branches of foreign entities) under the supervision of Bank of Portugal and insurance companies under the supervision of the Insurance Institute of Portugal (ISP) are excluded from the interest barrier rule.
Despite the rather wide de-minimis and transitory clauses, it is expected that the proposed earnings-stripping rule may aggravate what is already a difficult situation for companies with high financial costs. As has been the case ever since the introduction of interest barriers in other jurisdictions such as Germany and more recently Spain, multinationals should review the funding requirements and funding sources of their business activities in Portugal and abroad in order to try to understand the planning possibilities available.