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Budget Bill for 2008 - tax proposals
The government Budget Bill for 2008 was presented to Parliament on 12 October 2007. The Bill includes a number of tax amendments, which once approved by the Parliament will generally apply from 1 January 2008. The most significant proposals included in the Bill are summarized below.
1. CORPORATE INCOME TAX (IRC)
Following the European Commission request for Portugal to end its discriminatory taxation of dividends paid to foreign companies, the Budget Bill proposes to amend the minimum holding required to qualify for exemption from withholding tax on outbound dividends paid by Portuguese subsidiaries their EU parent company or made available to an EU-based permanent establishment of an EU company.
According to the Budget Bill, no withholding tax is levied on dividends paid by a resident subsidiary to its EU parent company, if the parent company has directly held either at least 10% of the distributing company's capital or any capital percentage valued at EUR 20 million or more for an uninterrupted period of at least 1 year prior to the distribution.
Under the current regime, a liquidation payment of less than the acquisition cost of the underlying participation constitutes a deductible capital loss only if the shares of the company are held for at least 3 years prior to the dissolution of the company.
The Budget Bill proposes to include two further limits to the deductibility of the capital loss in a liquidation scenario. In first place, the capital loss is limited to the amount that exceeds the tax losses transferred in the framework of the group taxation regime. Secondly, the capital loss is disallowed if the liquidated entity is resident in one of the listed tax havens.
Formal requirements to benefit from reduced rates or exemption under Tax Treaties and EU Directives
Portugal currently requires the fulfillment of strict formal requirements connected with the certification of the tax residency of the recipient in order for the reduced rate or exemptions under the Treaty to apply, which require the Portuguese resident payor of the income to hold certain forms before the date when the liability to withhold tax arises. Otherwise, the applicable domestic rate must be withheld.
The Budget Bill relaxes the formal requirements by:
- -Extending the compliance date for the above mentioned forms to the 20th day of the month following the one in which the liability for withholding arises;
- -Extending the validity of the forms to two years (application of the interest and Royalty Directive) or one year (in all other cases); and
- Providing the possibility to the payor to prove, at any time, the fulfillment of the conditions for the reduced rate or exemption to apply.
Advance Pricing Agreements (APAs)
Following the authorized amendment included in the Budget Law for 2007, the Budget Bill provides for the introduction of APAs, which may only be concluded with States having concluded with Portugal a tax treaty.
According to the Budget Bill, an APA will only concern transfer pricing methods, comparables and appropriate adjustments and not a definite transfer price and may relate to transactions between related legal entities or between a head office and its branch. The procedure and information required to apply for an APA will be set by ministerial order.
The Budget Bill foresees that the government should submit a Bill providing the alignment of the insurance sector new accounting norms approved in 2007 and the corporate income tax.
2. TAX INCENTIVE STATUTE (EBF)
Following a forthcoming amendment to the legal regime applicable to venture capital companies and funds, in order to introduce the figure of qualified venture capital investors (business angels), the Budget Bill proposes to extend the tax regime applicable to pure holding companies (SGPS) and venture capital companies (SCR) to qualified venture capital investors (ICR).
Extension of the participation exemption
The participation exemption regime available since 2007 to profit distributions derived from companies resident in African countries with Portuguese as their official language, will be extended to dividends derived from East Timor.
The Budget Bill includes a special regime for certified urban rehabilitation projects, which covers renovation, restoration or reconstruction of urban buildings. The tax incentives under the proposed regime include:
- Municipal Property Tax (IMI) exemption on the buildings included in the rehabilitation project;
- Reduced VAT rate of 5%;
- Corporate Tax (IRC) exemption on the income of new investment funds where at least 75% of assets are allocated to rehabilitation projects; and
- Taxation at a reduced 10% tax of the income derived from the participation units.
The tax incentive is limited to projects starting between 1 January 2008 and 31 December 2010 and that are concluded by 31 December 2012.
Investment in less developed areas
Under the Budget Bill, companies operating in less developed listed areas in mainland Portugal will benefit from a reduced 15% corporate tax rate (currently 20%).
For new entities setting up operations in less developed listed areas, a 10% reduced corporate tax rate will be available, during the first five years of activity.
The tax incentive resulting from application of the reduced rate continues to be limited to EUR 100,000 per corporate investor over a maximum period of 3 years, in accordance with the de minimis amounts of financial aid established by the European Commission Regulations.
SME notional deduction
The Budget Bill proposes the introduction of a tax measure, which existed prior to the 1989 tax reform, which is directed to incentive the capitalization of small and medium enterprises.
According to the Budget Bill, SME may benefit from a notional deduction, for corporate tax purposes, calculated by multiplying a fixed percentage of 3% on the share capital realized by the shareholders in cash upon incorporation or share capital increase, provided the shareholders are individuals, venture capital companies or qualified venture capital investors.
It should be noted that for purposes of the defining SME, the Budget Bill refers to Commission Regulation N? 70/2001 of 12 January 2001 on the application of State aid to SME and not to the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises.
3. STAMP TAX (IS)
Share capital increases
Following the ECJ decision on the Optimus case (C-366/05), the Budget Bill adapts its legislation to state that share capital increases paid cash will be exempt from 0.4% stamp duty levied on share capital increases. Based on the proposed amendment, it remains unclear whether the exemption also applies on conversions into share capital of shareholder loans or supplementary capital contributions.
4. INDIVIDUAL INCOME TAX (IRS)
Voluntary social security contributions
Following the approval of a new social security law in January 2007, the government plans to introduce a complementary individual account system which will be financed by voluntary contributions of the taxpayers covered by the social security system.
The voluntary contributions will benefit from a tax credit corresponding to 20% of the annual contributions limited to a maximum of EUR 350 per taxpayer. According to the Budget Bill the income paid to the beneficiaries under the complementary individual account system is qualified as pension income.
Employment and pension income derived by non-residents
Employment and pension income derived by non-resident individuals will be subject to withholding tax at a rate of 20% (currently 25%).
Temporary or life annuities
Under the current rules, the taxable base of temporary or life annuity payments should be considered net of the capital contributions. Nevertheless, in case a taxpayer is not able to demonstrate the capital element of temporary or life annuity payments, 80% of the gross payment will be considered deductible. The Budget Bill increases the ratio from 80% to 85%.
Allowance for pension income
Following the gradual elimination of the difference between the annual allowance for employment income and pension income, taxpayers will be able to deduct the first EUR 6,000 of their pension or annuity income (currently, EUR 6,100). Gross pension income exceeding EUR 30,000 (currently, EUR 35,000) will be entitled to the same deduction, but reduced by 13% (currently, 15%) of the portion that exceeds that annual limit.
Progressive rate table
The taxable income for the purposes of the progressive rate table will be adjusted upwards by 2.1%. The tax rates that range from 10.5% to 42% remain unchanged.
The lump-sum credit available for each dependent child will be doubled for families that have dependents with less than 3 years old.
The tax credit for disabled will be increased to three times and a half the national minimum monthly salary if the taxpayer is disabled. If the disabled is the taxpayer's dependent or ascendant, the applicable tax credit will be set at one and a half of the national minimum monthly salary. The national minimum monthly salary for 2007 is EUR 403.
In addition, several of the existing tax credits for specific expenses will be adjusted upwards by 2.1%.
The Budget Bill foresees that the government should submit a Bill establishing an option for non-resident taxpayers to be taxed as resident taxpayers when at least 90% of their worldwide income is derived from Portuguese source income.
4. VAT (IVA)
Deduction of input VAT
The Budget Bill provides for new rules concerning the deduction for input VAT paid by an entrepreneur on purchases of goods and services which the entrepreneur subsequently uses in for both taxable (including zero-rated) and exempt-without-credit transactions. Under current rules, taxpayers carrying out taxable and tax-exempt transactions are normally allowed to choose between calculation of input VAT on the basis of the pro rata and the actual use method.
The proposed changes, which are designed to be a clarification following recent decisions of the ECJ concerning the right to deduct input VAT, seem to indicate a preference to the actual use method.
Waiving VAT exemptions on lease of real estate
Under the current rules, the transfer and letting of Portuguese real estate is generally a VAT exempt transaction, unless the vendor waives the right to exemption. In case the option for taxation is exercised in a Lease, the current rules require that the annual rent must be equal or higher than 1/15 of the acquisition or construction value of the real estate. The Budget Law proposes to increase the said threshold to 1/20 of the acquisition or construction value of the real estate.
5. OTHER CHANGES
The Budget Bill also includes other minor changes to the Municipal Property Tax Code, Municipal Property Transfer Tax Code, Excise Duties, General Taxation Law and Code on Tax Procedure and Appeals.