Law 32/2019 of May 3, which implements into domestic law the
Directive (EU) 2016/1164 of July 12 2016 (ATAD 1), amended by
the Directive (EU) 2017/952 of May 29 2017 (ATAD 2), entered
into force on May 4 2019.
Firstly, we highlight the fact that the law adopting ATAD 1
into Portuguese domestic law does not foresee a transitional
period. Although the law entered into force in May 2019, it is
unclear whether the tax authorities will apply the new rules
throughout the whole taxable period.
Notwithstanding, and as set out in the preamble to the draft
law, Portuguese legislation already foresees most of ATAD 1
measures to avoid tax evasion, meaning that the coming into
force of this law will not entail, in general, a major shift in
the playing field for companies acting in Portugal.
Despite measures foreseen in ATAD 1 not being completely
innovative vis-à-vis the Portuguese legal framework,
players acting in Portugal should acknowledge the impact of the
amendments to the Portuguese tax regime and, most importantly,
be prepared for the increasing paradigm shift in the way tax
planning is globally perceived (and how Portugal follows the
What’s new in the Portuguese regime?
In a nutshell, the key focus of the ATAD 1 was amendment of
the existing rules on interest deductibility limitation and
review of the existing general anti-avoidance rule (GAAR) and
of the existing controlled foreign corporations (CFC) and exit
tax rules. The implementation of anti-hybrid mismatch
arrangements rules was postponed to later this year. The fact
that Portugal has no such rules yet in force implies that there
are several key decisions to be made by the Portuguese
legislator that require deeper and further analysis.
The Portuguese existing GAAR is amended to accommodate a
wider concept of tax abuse, aligned with ATAD 1 GAAR, focused
on business-like arrangements. The wording of the existing GAAR
was adjusted to foresee that a structure may be considered
abusive if only one of the main purposes of the arrangement is
to get a tax advantage, as it is no longer required that the
arrangement is wholly or mostly aimed towards obtaining a tax
The fact that the amendment to the GAAR is made through a
fine-tuning of the existing rule, may give rise to
interpretation issues, as the existing case law is mainly
focused on the previous wording and the prongs constructed
around it that were being followed by the Portuguese Court may
need to be updated to fit the revised concept of tax abuse.
As a result, we anticipate increasing litigation based on
the GAAR under the new wording.
The existing Portuguese CFC rule determined that an entity
is considered to be subject to a more favourable tax regime if
the nominal tax rate is less than 60% of the tax due under the
Portuguese Corporate Income Tax (CIT) Code. The regime now
foresees that an entity is considered to be subject to a
clearly more favourable tax regime if the actual corporate tax
paid is less than 50% of the tax that would have been charged
according to the CIT Code.
This amendment results in a more complex rule and brings the
CFC rule to the standard analysis of the compliance departments
of companies, to a daily-basis verification, snatching it away
from the rationale of purely anti-abusive provisions. In fact,
the Portuguese resident shareholder may not be able to
anticipate the actual tax that is going to the paid by the CFC
– a key question is to understand how the
comparability test (foreign income tax vs. Portuguese CIT) will
be carried out in practice.
Also, we must highlight that the existing Portuguese CFC
rule was extended to apply to foreign companies even if their
commercial activity is not directed towards the Portuguese
market. The previous wording clearly excluded foreign companies
that were engaged solely in international (non-Portuguese)
Furthermore, we take the view that the moment of the
adoption of the directive would have been a good opportunity to
foresee a general exclusion based on economic substance which
is currently limited to the EU and EEA, subject to
administrative cooperation countries. The fact that the
exclusion is not applicable to third countries may be used as
an argument to challenge the application of the CFC rule when
the CFC is in a non-EU or EEA country.
In what concerns the exit tax rules, the existing ones were
amended and are now aligned with the wording of the ATAD.
Also, the existing interest limitation rule is amended to
accommodate a wider definition of borrowing costs that
contribute to determining taxable profit or tax loss, as the
existing legal regime is already in accordance with that
foreseen in the ATAD. This may imply a material impact on
companies resorting to derivative financial instruments which
are now covered by the interest limitation rule.
The coming into force of this amendment in the middle course
of a taxable period raises some temporal application challenges
that might be safeguarded.
This article was written by Francisco Cabral Matos and
Rita Pereira de Abreu of Vieira de Almeida &
||Francisco Cabral Matos
||Rita Pereira de Abreu