One step beyond the Portuguese transfer pricing rules on interest deductibility
Ana Helena Farinha and Tiago Martins de Oliveira of Cuatrecasas say that the intragroup financing of Portuguese companies could be affected by a rule that is out of kilter with several other EU jurisdictions
Like many other jurisdictions, Portuguese corporate income tax (CIT) rules have several limitations on interest deductibility. The most common regulations correspond to the interest barrier rule (introduced in 2013, thereby replacing the thin capitalisation regime and establishing that interest may be deductible up to €1 million or 30% of tax-adjusted EBITDA) and the transfer pricing rules (under which, interest due between related parties should be deductible under the arm’s-length principle).
However, besides these rules (which are common to several EU tax systems), there is an additional limitation to the deductibility of interest, which states that interest related to shareholders’ loans should not be deductible for CIT purposes in the part that exceeds the interest rate fixed by a ministerial order, unless transfer pricing rules may be applied.
Under this wording, interest due to shareholders that are not qualified as related entities for transfer pricing purposes may not be fully deductible for CIT purposes, even if the interest rate is fixed at the market standard rates.
Considering that under the Portuguese transfer pricing rules, shareholders are generally only considered as related parties if the corresponding stake is higher than 20%, interest due to minority shareholders that have a stake below this threshold may, under this wording, not be fully deductible for CIT purposes.
Currently, the interest rate provided by the aforementioned ministerial order is the Euribor 12M plus a 2% spread (a 6% spread in the case of small and medium-sized companies), which was fixed in 2014 and has not been updated. Therefore, if a minority shareholder (with a stake lower than 20%) grants a shareholder loan to a Portuguese company that is not qualified as a small or medium-sized company at the current Euribor 12M rate plus a spread of 4%, this may lead to the conclusion that the interest corresponding to the excess 2% should not be deductible for CIT purposes.
Bearing in mind the above, this rule goes much beyond the interest barrier rule provided by Anti-Tax Avoidance Directive 3 and the transfer pricing rules commonly applied in several tax systems, and entails a distinction between:
Third-party financing and shareholders’ loans granted by a shareholder with a stake higher than 20%; and
Shareholders’ loans granted by a shareholder with a stake lower than 20%.
At first glance, there are no anti-avoidance or other tax reasons that justify this limitation on interest deductibility, which is directly fixed by a ministerial order and cannot consider all the changes on the interest rates market.
Finally, given the rapid increase of interest rates recently in the financial markets, this rule could represent a constraint to the financing of Portuguese companies through shareholder loans and is not aligned with other EU tax systems.