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Portugal: Ruling on toll manufacturing and distribution activities and permanent establishment

23 August 2017

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Tiago Cassiano Neves Dinis Tracana

The Portuguese tax authorities (PTA) issued a ruling on July 21 2017 that has the novelty of providing for the first time some guidance on the interpretation of the permanent establishment (PE) concept for corporate income tax (CIT) proposes in the framework of some operating models. The following is a brief summary of the facts and conclusions underpinning this ruling.

A non-resident company (jurisdiction not identified) without physical presence in Portugal that is engaged in manufacturing and distributing several products within the EU market inquired the PTA on whether the activities taking place in Portugal would give rise to a local PE, namely:

  • Manufacturing of products through toll manufacturing contracts with non-related Portuguese resident companies – non-resident company provided raw materials for the local Portuguese manufacturing services while maintaining ownership of the goods. Portuguese manufacturers would be responsible for product quality and bear the product defect risk but were subject to detailed instructions regarding the production schedule. All Portuguese manufacturers (except one single manufacturer) were not exclusively engaged with the non-resident company; and
  • Distribution of products via outsourcing of logistics, warehousing and distribution services to a non-related Portuguese resident company – Portuguese distributor rendered storage and delivery services of finished goods to customers without acquiring ownership of the products. The non-resident entity would control the logistic process through a storage management system. The Portuguese distributor would not bear inventory risk, product quality risk, supplier selection risk or freight provider selection risk.

The PTA concluded on the ruling that neither the toll manufacturing process nor the distribution activity gave rise to a PE in Portugal for the non-resident entity.

From the outset the PTA ruled that the manufacturing and distribution activities outsourced to Portuguese service providers did not imply that the fixed place of business was available and therefore concluded that no fixed PE of the non-resident entity may be deemed to exist in Portugal.

For the purposes of analysing the existence of an agency PE, the PTA started by analysing the legal dependence of the Portuguese service providers. On this point, the PTA considered that despite indications of strong legal dependence one may not argue that this is an "absolute dependence" since Portuguese companies were not subject to a general control, were able to carry out legal acts in its own name and maintain the right to decide the manner in which the work should be carried out (including the choice of employees).

The PTA went on to analyse the potential economic dependence of the Portuguese companies (agent). On this point, the PTA indicated that no information on the remuneration of the toll manufacturers was provided that would indicate that their remuneration would not be at arm's length (as this could be relevant for this analysis). The PTA also ruled that only the toll manufacturer working exclusively to the non-resident entity could be deemed as economically dependent.

On the last point of the ruling, the PTA considered that the Portuguese service providers (both toll manufacturer and distributors) do not enter into contracts with customers in the name and on the behalf of the non-resident company.

In short, the PTA considered that the facts and circumstances indicated that no agency PE would be deemed to arise in Portugal as a result of the activities of the Portuguese manufacturers or distributors. The PTA did not address on the part of the ruling made available any particular aspect of the applicable tax treaty or whether the segregation of businesses could be deemed an artificial fragmentation of contracts or other BEPS Action 7 related developments.

A final note to mention that under the Portuguese provisional list of expected reservations to the MLI, Portugal reserves the right for the entirety of Article 12 (artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies) and Article 14 (splitting-up of contracts) not to apply to its covered tax agreements.

Tiago Cassiano Neves ( and Dinis Tracana (
Tel: + 351 231 821 200
Fax: +351 231 821 290

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