Anti-tax avoidance legislation in Portugal

The anti-evasion general rule determines the inefficiency in tax matters of acts or legal transactions, essentially or mainly directed to the reduction, elimination or deferral of taxes that would be due to facts, acts or legal transactions of identical economic purposes, through artificial means, fraud and abuse of legal forms, or to obtain tax advantages that would not be achieved in whole or in part, without the use of such means.

In these cases, and given the ineffectiveness of such acts or transactions, the taxation of such income is made in accordance with the applicable rules without the desired tax benefits.

According to the Portuguese Controlled Foreign Company (CFC) rules, the income generated by a CFC should be subject to taxation regardless of any dividend distribution, provided that some requirements are met.

This regime applies to any individual or corporate shareholder resident for tax purposes in Portugal that holds, directly or indirectly, including through a nominee, fiduciary, or an intermediary, an interest representing, at least, 25% of the capital, vote, rights to income or assets of a CFC.

In broad terms, a CFC is a non-resident corporate entity that is subject to a more favourable tax regime. A non-resident entity is subject to a more favourable tax regime when:

• It is established or a resident in territory included in the Portuguese list of tax havens; or
• The tax effectively paid is lower than 50% of the Portuguese Corporate Income Tax rate that would be due if the entity were resident in Portuguese territory.

The CFC rules do not apply to:

• Companies resident in another Member State of the EU or in an EEA country, provided in the latter case that there is an agreement allowing administrative cooperation in tax matters, and they carry on substantial activity in agricultural, commercial, industrial, or service sectors supported by personnel, equipment, assets, and facilities; and
• CFCs whose specified passive income (e.g. royalties, dividends, interest) does not exceed 25% of total income.

Portuguese rules regarding transfer prices align with OECD recommendations and thus within the standard for developed countries.

The  Corporate Income Tax Code (CIRC) clearly states that for commercial operations, including operations or a series of operations regarding goods, rights or services and financial operations performed between a taxpayer and any other entity, whether or not they are subject to corporate income tax, with which there are special relationships, terms or conditions that are substantially identical to those that would normally be contracted, accepted and  practised between independent entities concerning comparable operations must be employed.

This principle is applicable to:

• Related-party transactions performed between the corporate income taxpayer or personal income taxpayer and a non-resident entity;
• Operations performed between a non-resident entity and its stable establishment, including those performed between a stable establishment located in Portugal and other stable establishments of the same entity located outside Portugal;
• Operations between a resident entity and its stable establishments located outside Portugal or between the stable establishments located outside Portugal;
• Related-party operations performed between entities residing in Portugal and corporate income taxpayers or personal income taxpayers.

Special relationships are considered to exist between two entities in situations where one has the power to directly or indirectly exercise significant influence over the management decisions of the other, which is verified namely between:

1. An entity and the holders of the respective capital or their spouses, ascendants or  descendants that directly or indirectly hold a stake of no less than 20% of the capital or voting rights;
2. Entities in which the same holders of capital, respective spouses, ascendants or descendants directly or indirectly hold a stake of no less than 20% of the capital or voting rights;
3. An entity and the members of their governing bodies or any administrative bodies, boards of directors, management or auditing bodies and respective spouse, ascendants and descendants;
4. Entities in which most of the members of the governing bodies or members of any administrative bodies, boards of directors, management or auditing bodies, whether they are the same persons or different persons, are related to each other by marriage, legally recognised cohabitation or line of descent;
5. Entities related by subordination or same-level group contract or any other contract of an equivalent level;
6. Companies that are in a dominating relationship in accordance with applicable legislation;
7. Entities whose legal relationship allows, as per their terms and conditions, that one affects the decisions of the other in accordance with the facts or circumstances that are foreign to the actual commercial or professional relationship;
8. A resident or non-resident entity with a stable establishment located in Portugal and an entity subject to a clearly more favourable tax regime residing in a country, territory or region on the list approved by the Ministry of Finance Order in Council.

As such, companies must adopt, in order to determine the terms and conditions that would normally be agreed, accepted or practiced between independent entities, the method or methods that are likely to ensure the highest level of comparability between operations or series of operations that they perform and other substantially identical ones under normal market conditions or situations free of special relationships.

The following methods shall be used:

The determination of the most appropriate method to be adopted in the definition and evaluation of the terms and conditions of transactions between related entities is in line with the most recent OECD guidelines. No hierarchy of methods is advocated.

In the case of a related transaction of a unique or individual nature or in the absence or scarcity of reliable comparable information and data on similar transactions between independent entities, in particular where they concern rights in rem in immovable property, shares in unlisted companies, credit rights or intangibles, a taxpayer may choose a method other than the comparable market price method, the resale-minus method, the cost-plus method, the split-profit method or the net margin method.

Where another generally accepted method, technique or model of economic valuation of assets is applied, the taxpayer's choice shall be duly supported by a description of the chosen method or technique and the reasons for its choice.

Obligation of Preparing Transfer Pricing Documentation

Ministerial Order no. 268/2021, of 26 November created two distinct documentation models: the standard and the simplified model.

The standard model includes a main dossier and a specific dossier, which must be delivered together, each containing a set of elements specified in detail in its own annexes in Ordinance no. 268/2021, of 26 November.

The new legislation now explicitly provides that the documentation obligation is only considered to have been met when the documentation file submitted contains all the relevant elements relating to the related transactions in which the taxpayer has been involved.

Taxpayers who, in the period to which the obligation relates, have attained a total annual income of less than 10,000,000 Euros are exempt from submitting this documentation.

Even if this limit is exceeded, the said exemption will apply to related transactions which, in the period, did not exceed, per counterparty, 100,000 Euros and, as a whole, 500,000 Euros, considering the respective market value.

The exemptions do not cover related transactions carried out with individuals or companies resident outside Portuguese territory and subject to a clearly more favourable tax regime there, nor when the taxpayer is notified to prove that the terms and conditions practised in the related transactions are in accordance with the arm's length principle.

The simplified form will apply to taxpayers who, not being monitored by the Large Taxpayers Unit and not being covered by the exemptions already mentioned in relation to the standard form, qualify as a small or medium-sized enterprise. However, the preparation of the simplified dossier is without prejudice to the obligation to provide the Tax and Customs Authority, whenever the taxpayer is notified to do so, with all relevant information with a view to proving that the terms and conditions practised in the related operations comply with the arm's length principle.

Taxpayers that are obliged to prepare the standard model or the simplified documentation model must prepare the documentation within the period foreseen for the submission of the Annual Return of Accounting and Tax Information ("IES"), i.e., until the 15th day of the seventh month after the end of the financial year (15 July, if the tax year coincides with the calendar year), and only submit it if so is requested by the AT.

Companies are, additionally, obliged to maintain a tax documentation file for each taxation period in good order for a period of 12 years at an establishment or installation located in Portugal.

This file must contain the company’s organised documentation related to its transfer price policies, including the directives or instructions pertaining to its application, contracts and other legal acts formed with entities with whom the company has a special relationship, indicating the modifications that have occurred and information regarding respective compliance, documentation and information related to such entities and the companies and goods or services that are used as comparatives, functional and financial analyses and sector data, as well as information taken into consideration to determine the terms and conditions normally agreed, accepted or practised between independent entities and used to select the method or methods used.

Similarly, companies are obliged to indicate the existence or inexistence of operations, for the respective taxation period, with entities with whom they have special relationships in their annual accounting and tax information declaration.

Taxpayers may ask the Tax Authorities for a ruling to establish a prior method or methods of determining the terms and conditions that would normally be agreed, accepted or practised between independent entities with respect to commercial and financial operations, including intragroup services and cost-sharing agreements made with entities with whom they have special relationships or involving operations performed between the head office and the stable establishments.

Such a ruling can be bilateral or multilateral in the case of operations with entities residing in a country with whom Portugal has signed an agreement to avoid double taxation. The taxpayer must request that the ruling be submitted to the respective applicable authorities within the scope of the amicable procedure instituted for such purposes.

The ruling may cover tax periods for which the taxpayer has already filed a corporate income tax return, provided that the relevant facts and circumstances verified in those periods are identical or similar and, at the date of the execution of the agreement, no more than 2 years have elapsed since the deadline for filing the tax return

The Tax Authorities may undertake the necessary corrections to determine taxable profit as a result of special relationships with another corporate income taxpayer or personal income taxpayer, which implies that when determining the taxable profit of the personal income taxpayer, the appropriate adjustments must be made to reflect the corrections made when determining the corporate income taxpayer.

The Tax Authorities can also undertake the correlative adjustment referred to in the previous paragraph when it is the result of international conventions signed by Portugal, as per the terms and conditions stipulated therein.

In determining the taxable amount for VAT on transactions between taxable persons who have special relations, but only in certain situations, the prevailing criteria is of its normal value, rather than the value of the consideration obtained or to obtain from the purchaser, consignee or a third party.

However, this deviation from the general rule for determining the taxable value, may be dismissed if there is proof that the difference between the normal value and the consideration is justified by circumstances other than the special relationship between the parties.

Net financing costs contribute to determining taxable profit up until the greater of the following limits: 1 million euros or 30% of EBITDA.

Net financing costs that are not deductible under the aforementioned terms can also be considered when determining taxable profit of one or more of the subsequent taxation periods, after net financing costs for this period, taking into account the aforementioned limitations.

Whenever the amount of financing costs deducted is less than 30% of the result before depreciation, amortization, net financing costs and taxes, the unused part of this limit shall be added to the maximum deductible amount up until the 5th period subsequent taxation period.

These rules apply to the permanent establishments of non-resident entities, with the necessary adaptations.

As a rule, exit taxes aim to tax potential gains related to the patrimonial elements held by a taxpayer in the moment he decides to transfer its residency to another State.

Since the transfer of residency determines that the taxpayer will no longer be taxed in the residency State, the goal of these rules is:

• To protect the right of the residency state to the revenues generated in its territory;
• To work as an anti-avoidance clause in order to prevent tax schemes in which the taxpayer, prior to obtaining a significant gain, transfers its residency to a country with a lower taxation.

These rules establish that, in order to determine the taxable profit in the period when the taxpayer (with head office and effective management in the Portuguese territory) has ceased its activity or transferred its head office or effective centre of management to another State, the positive and negative components to be consider should correspond to the difference between the market value of the assets and liabilities and their tax value.

For this exit tax to apply the companies must have their head office and effective management in the Portuguese territory. Please note, in this respect, that our tax law does not require a minimum stay period in Portugal and that the relevant taxable fact is the transfer of residence. This transfer of residence must comprise both the transfer of the head office and of the effective centre of management.

Currently, these rules state that transfers of residence to other countries in the European Union or in the European Economic Area (provided, in this latter case, that an exchange of information agreement has been concluded), deferred tax rules may apply.

Exit taxes may be paid:

1. Immediately, comprehending the total amount of CIT due upon exit;
2. During the year following that in which any asset being transferred out of Portugal is sold, written off, or detached from the company’s activity, provided such sale is made to a country other than the EU or the EEA (in this latter case, if there is an exchange of information agreement with Portugal); and
3. Annually, over a fifth of the total amount of the tax due.

Upon the change of residence, the taxpayers must opt for one of the above alternatives. However, the following tax consequences must be taken into account:

1. The deferral of the tax payment triggers late payment interest (currently the annual late payment interest rate is of 5,476%);
2. Under certain circumstances, the possibility to defer the exit taxes will be subject to the provision of a guarantee corresponding to the amount of tax due plus 25%;
3. In case the taxpayer opts to defer the taxation to the moment when the capital gains are obtained, he must submit annually, and on an ongoing basis, a tax return, since the failure to comply with this obligation may trigger the payment of the tax due.

In the event the taxpayer selects option 3, the payment of the tax should occur: a) the first 1/5 upon the submission of the tax return referring to period when the activity was ceased or the when the transfer occurred, and b) the remaining 1/5 every year until the last day of May (the late payment interests due should be accrued to the amount of tax). The failure to comply with one of these payments determines the maturity of the whole tax due;

If, after electing option 2 or 3, the taxpayer decides to subsequently transfer its residence to a non-EU or non-EEA Member State, it must pay the total amount of tax still due.

The change of residence results in the termination of activity for CIT purposes and in the assessment of gains and losses determined by the difference between the market value and the tax value of the assets and liabilities. All assets and liabilities comprise fixed tangible assets, intangible assets, non-consumable biological assets, investment properties, financial instruments except those recognized at their fair value, and all other assets owned by the company and part of its inventory.

The gains obtained under these exit tax rules should be determined in accordance to the ones established in case of onerous transfer of assets, i.e., the coefficient of currency devaluation should be considered, as well as any amortizations or depreciations.

Normally, the transfer of residence should not trigger the taxation of the respective shareholders.

The system of exemption from capital gains with the onerous transfer of shares, other securities, autonomous warrants issued by entities resident in Portugal and traded on regulated stock markets and derivative financial instruments made on regulated stock markets, by entities or individuals that are not domiciled in Portugal and there is no permanent establishment to which said income is imputable, is not applicable if resident in a tax haven.

The possibility of reinvestment of capital gains made by way of the transmission with consideration of parts of the share capital, including remission and amortization with reduction of share capital, is void where such transmissions with consideration and the acquisitions of parts of the share capital are carried out with entities resident in Tax havens.

The Tax administration has the power to access all banking information and documents and is not contingent upon any previous consent from the holder of the account and protected information:

• When there is evidence of tax fraud;
• When there is evidence of the lack of veracity regarding the filed tax return, or when the tax return does not comply with the necessary requirements;
• When there is evidence of unjustified increase in wealth;
• For the purposes of confirming information submitted in the supplemental documents of the taxable entities under the organized accounting regime;
• When the need exists to control the basis for privileged tax regimes that a taxable entity benefits from;
• When it is not possible to verify the direct and exact quantification of taxable items, and in general, when the grounds for a request of evaluation have been checked.

The tax administration also has the power to directly access bank documents, in situations of refusal of disclosure or authorization to review documents by family members or third parties that have a special relationship with the taxable entity.

All of the above referenced actions are subject to legal appeal.

In this context, we advise all of our clients to solely perform bank transactions related to the licensed activities of their companies in Portugal, which should be duly reported and fully supported with documents by the company.

Under Portuguese law, payments made by Portuguese companies to entities residing in Tax havens are not deductible for the purpose of calculating taxable profit, but are subject to a specific tax at the rate of 35%, unless the purchaser can prove that said charges correspond to operations effectively implemented in circumstances that are not abnormal and the amount involved was also not excessive.

Similarly, it shall not be deductible amounts paid or due, indirectly, to entities resident in tax havens, where the taxpayer has or should have known of the destination of such amounts, unless it can demonstrate that such costs correspond to operations effectively implemented in circumstances that are not abnormal and the amount involved was not excessive.

It is presumed to exist such knowledge when there are special relations between the taxpayer and the entity resident in the tax haven, or between the taxpayer and an agent, trustee, or intermediary.

Charges incurred or paid related to lightweight passenger vehicles, lightweight commercial vehicles and motorcycles, excluding vehicles powered exclusively by electrical energy, shall be taxed autonomously at the following rates:

• 10% in the case of vehicles with an acquisition cost of less than €27,500;
• 27.5% in the case of vehicles with an acquisition cost equal to or greater than €27,500 and lower than €35,000;
• 35% in the case of vehicles with an acquisition cost equal to or greater than €35,000.

Charges related to lightweight passenger vehicles and motorcycles include depreciation, rentals, insurance, maintenance and conservation, fuels and taxes on their possession or usage.

If the motor vehicle is used personally by a worker or member of a governing body and creates costs for the employer, and if there is a written agreement between the worker or member of the governing body and the employer regarding attribution of the vehicle to the worker or member of the governing body, then the aforementioned autonomous taxation shall not apply, since taxation shall be applied via income tax.

The aforementioned autonomous taxation rates shall be increased by 10 percentage points for taxpayers who report a tax loss during the period of the respective taxation occurrences.

Companies licensed to operate within the International Business Centre of Madeira benefit from a reduction of the autonomous taxation rates, in proportion to the applicable corporate tax rate (in this case, a reduction of 76,2%).

The tax rate applicable to confidential or undocumented expenses made ​​by companies in Portugal is 50% and these are not deductible for the purpose of calculating taxable profit. The applicable rate shall be increased by 10% to companies that have tax losses in the respective year.

Entertainment expenses, which are basically expenses related to receptions, meals, trips, excursions, and shows offered to clients, suppliers or any other entities, are taxed at the rate of 10%, irrespective of whether the company is exempt from corporate income tax or not.

Companies licensed to operate within the International Business Centre of Madeira benefit from a reduction of the autonomous taxation rate, in proportion to the applicable corporate tax rate (in this case, a reduction of 76,2%).