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Preliminary Budget Includes Earnings-Stripping Rule
Since this article was written the Portuguese Budget Bill 2013 has been published. The 2013 Bill foresees the replacement of the current thin-capitalisation rules by an interest barrier rule which limits the deductibility of net financial expenses. Read more here.
The preliminary version of the Budget Bill for 2013 includes an earnings-stripping rule providing that net financial expenses will be deductible up to a limit 30% of the operating profit (in substance EBITDA), subject to certain safe-harbour rules. Taxand Portugal investigates the impact this new rule will have on multinationals if the provisionals are approved by Parliament.
This general limitation on the deductibility of financial costs will replace the former thin cap rules (providing a 2:1 debt-to-equity ratio applicable to related party financing from non-EU resident lenders) and will affect all types of interest expenses, regardless both of the legal form of the business and on whether interest is paid to a foreign or domestic lender. It will also be irrespective of whether the lender is a third party, a shareholder or an affiliate entity.
This earnings-stripping rule has been made subject to the following:
- De minimis rule: Financial expenses up to EUR3 million will be deductible.
- Threshold/Exclusion rule: Net financial expenses up to EUR4 million will be deductible in all cases.
- Interest carry forward: Net financial expenses that cannot be deducted may be deducted in the following 5 tax periods, jointly with those incurred in the relevant tax period, up to the stipulated limit of 30%.
- 30% limit carry forward: 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 tax periods.
- Operating profit calculated at individual level: Tax groups should apply the rule in relation to each individual entity.
- Excluded entities: Bank of Portugal crefit institutions and ISP insurance companies.
Despite the rather wide de-minimis and exclusion 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, companies 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.