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Portugal: Developments and trends in tax controversy and dispute resolution


Jaime Esteves PwC

For the past two years, the Portuguese government has been under intense pressure to reduce its budgetary deficit and outstanding public debt in the context of the Memorandum of Understanding on Specific Economic Policy Conditionality with the European Commission, the World Bank and the International Monetary Fund. Under these circumstances, a strong effort is being made to lower public spending and increase tax revenue. Income and consumption statutory tax rates have peaked in recent years, and economic agents and society at large will strongly oppose any further increase in tax rates.

In this context, the Portuguese government has expressly endorsed a strong focus on tax enforcement. The tax authorities are behaving both more strategically and more aggressively.

Tax audit personnel doubles and quality increases

The tax audit services' total headcount has doubled to approximately 3000 agents in the last two years, many of which were recruited through a lengthy and demanding selection process, attracting a group of young lawyers and economists with a profile that makes us expect an increase in the quality of tax audit reports and a smarter approach to specific issues, such as cross border transactions, tax planning and transfer pricing. This number increase in the tax audit workforce will also inevitably lead to an increase in audit frequency and intensity for most taxpayers.

Large taxpayers should expect specialised horizontal monitoring

Large taxpayers will be audited by the recently created Large Taxpayers Unit. This unit is in charge of designing tax risks criteria, closely monitoring and cooperating with large taxpayers, and conducting audits and assessments. Large taxpayers, identified in an official list, should expect to be audited by a more specialised team which will likely have an approach to tax controversy that looks deeper into the substance of each issue.

On the other hand, these taxpayers will have the privilege of a continuous interaction with the tax authorities through a one-stop-shop approach and a dedicated tax manager who will be available to answer specific questions. Large taxpayers will need to adapt their tax management strategy to this new paradigm of cooperation and continuous scrutiny.

Tax arbitration provides fast and substantial judicial protection

Arbitral tax courts, created a couple of years ago, are now at cruise speed, delivering speedy, affordable and quality decisions. Decisions take an average of four months to be issued by a single arbitrator, or a panel of three arbitrators, and there is a noticeably more substantive approach when compared to traditional courts, mainly due to the mixed composition of the panels – including retired judges, academics, tax practitioners – and to procedural rules that enable a closer interaction between the parties and the panel. Arbitral tax courts are also a possible quick route to gain access to the European Court of Justice (ECJ) in a preliminary ruling procedure. Taxpayers should consider the strategic advantages of bringing their tax cases before an arbitral tax court, instead of a traditional court.

Challenging transfer pricing audits and APAs

In the past, transfer pricing audit teams were neither highly qualified nor specialised. As a result, most of the transfer pricing litigation in Portugal has focused on the misuse of transfer pricing legislation or, in some cases, the use of other mechanisms such as cost deduction rules or anti-avoidance provisions, instead of the specific applicable transfer pricing rules.

This has begun to change. In fact, as a result of the fiscal pressure, the government has invested in the hiring and training of highly qualified human resources and assigned them to the transfer pricing audit teams. The first APA was signed in Portugal in 2012, and a few more are being negotiated by the competent authorities, though there are no official figures. Transfer pricing audits will be conducted using a risk-based approach and it is expected that areas such as intangibles and intra-group financing will be given special attention by the tax authorities.

Tax enforcement becomes more aggressive

Resident and non-resident taxpayers face a more bellicose tax force, through automated tax debt collection and aggressive foreclosure procedures. Company directors or representatives are also subject to reversion procedures and, increasingly, to tax offences and penalties.

Selected current tax controversy issues

Tax incentives

The tax authorities have been scrutinising major tax incentive regimes, either before granting the status, or on an ex post facto basis. There are several outstanding administrative and judicial disputes concerning tax benefits, but controversies related to investment tax credits, or the transmission of tax incentives in corporate restructuring procedures, are common.


VAT litigation exists, and is expected to rise, as companies make a stronger use of recovery and refund procedures. Also, the recent change in VAT statutory rates has resulted in disputes between taxpayers and tax authorities, such as over golf course fees.


Portuguese tax authorities have intensified control over corporate income tax issues in different areas. Losses from reverse mergers, and the deduction of interest associated with reverse mergers, as well as the questioning of debt push down operations, are examples of common litigation disputes between taxpayers that have undergone a restructuring process and the tax authorities.

Also, the tax authorities have opposed the deduction of financing costs by holding companies based on an internal ruling which restricts the deduction of interest based on a formulary approach. An arbitral court decided in December that the establishment of a formula in an internal ruling is a violation of the tax legality principle set out in the Portuguese Constitution.

Regarding non-resident taxpayers, the Portuguese tax authorities have been very closely monitoring the application of withholding taxes and broadening their permanent establishment concept, for instance, using the VAT registry for this purpose. Furthermore, deeper investigation on actual effective place of management of non-resident sub-holdings is expected and should be duly considered.

Stamp duty

Stamp duty assessments upon audit are becoming increasingly common, especially in the case of intra-group financing and guarantees or security.

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