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Recent Amendments to Portuguese Tax Law

26 Jul 2010

The Portuguese Budget Law for 2010 introduced several amendments to Portuguese tax law which reflect the current economic environment. After the enactment of the Budget law, which was postponed several times due to the current climate, the Portuguese Government, following a trend observed in several European Union States, had no alternative but to put together severe measures to cope with already announced budgetary constraints. Taxand Portugal provides a brief summary of the most relevant measures adopted by the Portuguese Government and identifies the impact on multinationals.

Having observed the situations in Greece and Hungary as well as political pressure towards effective public debt consolidation in the Southern European Union Member States including Portugal, these measures were presented and discussed in several "instalments". Some were initially included in the Stability and Growth Programme, aimed at achieving budget consolidation for 2011-2013; other measures merely reflected decisions taken at the highest level in the European Union.

As a result, whereas Budget Law entered into force late in April, other measures entered into force in June and more were published in the Portuguese Republic official gazette with effects as of July 1. Consequently there is an ongoing constitutional debate occurring, since several of the measures listed below are, directly or indirectly, meant to have an immediate and retroactive effect. This debate also gave rise to some last minute amendments as well as an additional delay in the enactment of the measures. For example the phase out of a Personal Income Tax exemption on capital gains derived by residents from the sale of some securities held for more than 1 year has been delayed. The key amendments are listed here:

Budget Law 2010 and Other Already Approved Measures
Among the tax measures included in law 3-B/2010, of April 28, 2010, we highlight the following:

Minimum corporate tax liability mechanism raised - The minimum corporate tax liability mechanism, which limits the amount of tax benefits used in a given fiscal year, was raised from 60% to 75% of the corporate tax that would be payable in the absence of (i) certain listed tax incentives (ii) deductions in respect of supplementary contributions to pension funds and (iii) deductions in respect of tax losses transferred in the context of a restructuring;

EEA outbound and inbound dividends equalised to EU similar payments - The withholding tax exemption on outbound dividends and the participation exemption regime on inbound dividends was extended to EEA countries (Norway, Iceland and Liechtenstein, although Liechtenstein is excluded as it does not have an exchange of information agreement with Portugal).

Loss carry-over period reduced to four years - The loss carry forward period was cut from 6 to 4 years. A grandfathering rule was not included. Thus, there is room for uncertainty with regard to the applicability of new rules to registered losses in years 2004 to 2010.

Tax amnesty for undeclared funds held abroad (RERT II) - Under the programme, interested taxpayers shall file a confidential statement with respect to eligible assets (ie deposits, securities and other financial instruments, including investment fund units and life insurance policies) held outside the EU/EEA with the Portuguese Central Bank or any other Portuguese-based bank using a special form, supplemented with documentation attesting ownership, deposit and registration of such assets as of 31 December 2009. In exchange for a 5% tax on the value of the assets declared, the taxpayer secures a protective shield (up to the value reported in the statement) from all tax obligations and infringements committed up to 31 December 2009 (criminal sanctions of a non-tax nature, eg money laundering, remain applicable). Physical transfer (repatriation) of assets held outside the EU/EEA is required. This measure should also be duly contextualised with the recent conclusion by the Portuguese tax authorities of several agreements concerning exchange of information on tax matters with the following jurisdictions: Andorra, Bermuda, Cayman Islands and Gibraltar.

Stamp Tax on share capital increases repealed - Together with other repeals of a less important nature, Stamp Tax share capital increases of any nature was repealed.

Immovable property tax exemptions repealed - A 50% exemption of Immovable Property Transfer Tax (IMT) and immovable property tax (IMI) for real estate investments made via closed-ended or mixed Portuguese funds held by non-qualifying financial investors was repealed.

Investment Funds tax regime extended - the tax regime applicable to investment funds, including the said amendment (for example, taxation at the level of the fund and exemption at the level of investors), to the new securities investment companies and real estate investment companies was extended.

Penalty taxation mechanism on payments to high-ranked management personnel - The penalty taxation mechanism was extended to include a) golden parachute payments (not linked to productivity bonus) to high-ranked management personnel - 35% rate; b) bonus and other similar payments to high-ranked management personnel when representing 25% of annual compensation and exceed EUR 27.500, unless effective payment is subject to deferral for a minimum period of three years based on the company obtaining positive results - 35% rates; c) with effects only for 2010 (unless extended), bonus and other similar payments made by credit and financial institutions to its high-ranked management personnel when representing 25% of annual compensation and exceed EUR 27.50 will be subject to penalty taxation at a 50% rate.

New Personal Income Tax (PIT) bracket created - A new PIT bracket of 45% for annual income exceeding EUR 150,000 was approved on 15 June 2010. Lower tax brackets remained unchanged. Meanwhile, under the Stability and Growth Programme 2010-2013, all tax brackets, including the recently enacted 45% rate, were increased in 0.58% (lower brackets) and 0.88% (higher brackets).

Stability and Growth Programme 2010-2013
Law 12-A/201, which entered into force on 30 June 2010 introduces several tax measures aimed at achieving budget consolidation until 2013. Here we present an overview of the most relevant measures:

PIT withholding tax rates raised by 1.5% - PIT withholding tax rates were generically raised by 1.5%, both in payments made to resident and non-resident individuals - eg dividends, interest and royalties payable to non-resident entities, are subject to a domestic withholding tax of 21.5%.

State Surtax - A State Surtax of 2.5% is now levied on the amount of taxable profits exceeding EUR 2,000,000 (applicable to both resident companies and permanent establishments). Such State Surtax is payable through an additional prepayment mechanism in three instalments, computed as 2% of last year's taxable profits in excess of EUR 2,000,000.

VAT rates increase -VAT rates will are raised in 1%, respectively to 6%, 13% and 21 % in Mainland and 4%, 9% and 15% for Azores and Madeira Archipelagos, with effects as of 1 July.

Heavier Stamp Tax rules on consumption credit - Credit used under consumption credit contracts is now subject to a heavier Stamp Tax rate framework: 0.07% for credit granted for less than 1 year (per month or part thereof), 0.9% for credit for 1 to 5 years, 1% for credit granted for more than 5 years and 0.07%, for credit usages in the form of revolving, overdraft or any other facilities where maturity is not determined or determinable.

Other austerity measures
PIT exemption on long term capital gains on the sale of securities by non-residents phased out - An existing capital gains exemption on the sale of shares, bonds and other debt securities held for more than 12 months by resident individual shareholders will be repealed under a law already approved by the Parliament but yet to enter into force. A new 20% tax rate applies without distinction regarding the holding period for which the investment is maintained (a 10% reduced taxation used to apply to capital gains derived from the sale of shares held for less than 1 year). A safe harbour provision for annual capital gains income under EUR 500 will apply.

Taxand's Take

The measures summarised above cover not only individuals' taxation but also the taxation of Corporations. They represent substantial changes on several core provisions of the Portuguese taxation, such as the State Surtax, that should be taken into account by multinationals, especially those investing in Portugal.

Your Taxand contacts for further queries are:
Paulo N?ncio

Miguel Pimentel

Taxand's Take Author