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Portugal: Portuguese corporate tax reform in the making: draft report proposals



Fernando Castro Silva and Tiago Cassiano Neves, Garrigues

The Commission appointed by the Portuguese government to consider options for the Portuguese corporate income tax (CIT) reform has recently released its draft report, including a first draft law. The proposals are intended to modernise and further enhance the Portuguese corporate tax system and reflect changes in the global landscape. This update covers the key proposals affecting international investors.

Lowering of the CIT rate over five years

The target on a five-year spectrum is a nominal CIT rate within the first quartile of rates in force within the EU member states (between 19% and 17%). The three situations proposed by the Commission provide for a reduction for 2014 of the CIT rate from 25% to 23% coupled with gradual reductions and eliminations of the surtaxes in the following years.

Participation exemption

The draft report addresses both the income tax exemption for dividends and divestment gains received by a Portuguese company (inbound) and withholding tax exemption for distribution of dividends by a Portuguese company (outbound).

For the exemption on both inbound dividends and gains from the sale of shares, the main criteria are: (i) 2% minimum shareholding; (ii) one year holding period; (iii) not geographically limited (except for blacklisted jurisdictions); and (iv) the company distributing the dividends is fully subject to income tax comparable to the Portuguese CIT and a minimum statutory rate of 10%.

For the outbound withholding tax (WHT) exemption, main proposed requirements are: (i) 2% minimum shareholding; (ii) one year holding period; (iii) geographically limited to EU/EEA (provided exchange of information mechanism is in force), as well as other jurisdictions that entered into a double tax treaty (DTT) with exchange of information with Portugal; (iv) company receiving the dividends shall be fully subject to income tax comparable to the Portuguese CIT and a minimum statutory rate of 10%.

If these measures are approved they fundamentally enhance the attractiveness of the Portuguese holding companies regime – placing it among other competitive European holding structures.

Exemption method for foreign branch profits

Under the draft report, Portuguese resident companies may elect on a jurisdiction by jurisdiction basis not to take into account profits attributable to a permanent establishment (PE) situated abroad, provided such PE is fully subject to income tax comparable to the Portuguese CIT with a minimum statutory rate not lower than 10%. This election is not available for PEs located in blacklisted jurisdictions. The corollary of electing for exemption of foreign profits is that foreign PE losses will no longer be taken into account in determining taxable profits and no credit for tax paid by the PE will be given in Portugal. Specific recapture rules are also included.

Patent Box

The draft report provides for a partial exemption (50%) from CIT for companies exploiting (licensing or sale) patented inventions and other innovations such as models and industrial designs protected by intellectual property (IP) rights. Trademarks and other IP are excluded from the regime. The 50% exemption applies on gross income, so costs incurred in the development of the qualifying IP rights remain fully deductible. The patent box regime applies to income received from related parties (subject to restrictions) and unrelated parties. Among the main requirements to apply are: (i) qualifying IP must be self-developed, (ii) the licensee cannot be a resident of a blacklisted jurisdiction, (iii) qualifying IP must be effectively used for business activities, (iv) if the licensee is a related company, the IP cannot be used to create deductible expenses for the taxpayer.

Extension of period for tax losses carryforward

The Commission proposes to extend to 15 years the carryforward period for losses originated as from January 1 2014. Offsettable losses will remain limited to 75% of the taxable profit of the year. Current provisions countering maintenance or transfer of loss carryforwards upon change of shareholder or under a reorganisation are relaxed.

Review of the interest barrier rules

The last Budget Law enacted a major change by replacing the old thin-capitalisation rules (2:1 debt-to-equity ratio – only applicable to non-EU-resident lenders) by an interest barrier rule which limits the deductibility of net financial expenses to the higher of the following: (i) €3 million ($4 million), or (ii) 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA). The draft report proposes: (i) a reduction of the first barrier to €1 million, (ii) adjustments to the calculation of the EBITDA, and (iii) tax group calculation of the thresholds (presently computed at individual level). The draft report maintains in place the important phase-in provision according to which the EBITDA limit will be 70% in 2013, 60% in 2014, 50% in 2015, 40% in 2016 and 30% from 2017 onwards.

Tax group and reorganizations

The draft report also proposes changes to the tax group regime, particularly the reduction of the minimum holding percentage from 90% to 75%, as well as the possibility to meet such requirement via non-resident companies that are resident in the EU/EEA (sandwich grouping). The draft report also addresses reorganisations by revamping the tax neutrality rules and eliminating pre-request to transfer losses in the framework of tax neutral transactions.

Other measures

The draft report includes other relevant changes affecting international investors, such as: (i) increase to 20% the related party threshold and from €3 million to €5 million of net sales or revenues the requirement for contemporaneous transfer pricing documentation; (ii) streamline treaty-relief documentation; (iii) review certain tax incentives and international tax policy; (iv) overall simplification of several compliance areas.

Next steps

The release of the draft report opens the period for public consultation until end of September. It is expected that final proposals will integrate a Bill to be delivered to Parliament by the end of October 2013. If approved, the proposed changes to the CIT Law are projected to be enacted as from January 1 2014.

Fernando Castro Silva ( and Tiago Cassiano Neves (


Tel: + 351 231 821 200

Fax: +351 231 821 290


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