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New Measures for Portugal
- INTEREST BARRIER RULE
Previous state of play: Portuguese thin-capitalization rules provided that financial expenses paid in respect to related party financing from non-EU resident lenders were not deductible for Corporate Income Tax purposes, if the global amount of the financing exceeded a 2:1 debt-to-equity ratio.
Approved measures: The 2013 Budget Law replaces the thin-capitalization 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 amortizations).
This means that net financial expenses up to Euro 3 million will be deductible in all cases. This is not an exempt amount, but a threshold which, once reached by net interest paid, will expose the entire net interest to the 30% deduction limitation.
The limits apply to all financing costs, regardless of the existence of special relations between the debtor and creditor, and the residence of the creditor (i.e. financing from EU resident lenders is no longer excluded).
The Budget Law includes an important transitional provision which establishes a phase-in system, according to which the EBITDA limit will be of 70% in 2013, 60% in 2014, 50% in 2015, 40% in 2016 and 30% in 2017.
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 five 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 barriers 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.
2. CORPORATE STATE SURTAX
Previous state of play: Portuguese CIT is levied at a 25% rate, to which may be added a municipal surtax (“derrama municipal”) up to 1.5% levied on taxable profits (depending on the municipality of the activities), as well as a state surtax (“derrama estadual”) of 3% on taxable profits exceeding Euro 1.5 million and 5% on taxable profits exceeding Euro 10 million. Such surtax is levied through an additional payment on account (an advance payment mechanism) equivalent to 2.5% and 4.5% of the share of previous fiscal year taxable profits exceeding Euro 1.5 million and Euro 10 million. The Surtax is imposed before any loss carry forward, and, for group taxation purposes, computed and payable at individual level.
Approved measures: Decrease of the threshold for the application of the 5% Corporate State Surtax to Euro 7.5 million. Consequently, additional payments on account are redefined as 2.5% and 4.5% of the share of previous fiscal year taxable profits exceeding Euro 1.5 million and Euro 7.5 million.