Pillar two in Portugal: years of uncertainty ahead after transposing legislation enacted

In a significant move aligning with recent international tax reforms, Portugal enacted Law No. 41/2024 on November 8 2024, finally transposing into national legislation Council Directive (EU) 2022/2523. Applying broad criteria, these rules ensure that large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction in which they operate, thereby addressing concerns over profit shifting and tax base erosion.

With a relatively small domestic market and without a detailed statistical analysis, the pillar two rules are expected to affect several dozens of entities acting as ultimate parent entities (UPEs) and around 3,000–4,000 Portuguese subsidiaries that are part of MNE groups operating in the country.

This legislation, introduced in Portugal on October 18 2024, imposes a minimum tax of 15% and targets multinational and domestic groups with consolidated annual revenues of €750 million or more in at least two of the previous four fiscal years. Following general international practice, the Portuguese pillar two rules are built around the typical three components of the income inclusion rule (IIR), the undertaxed profits rule (UTPR), and the qualified domestic minimum top-up tax (QDMTT), without major innovations.

The pillar two rules apply to fiscal years beginning on or after January 1 2024, except for the UTPR, which is applicable to fiscal years beginning on or after January 1 2025 (which could be suspended, depending on international developments).

Even before Portugal’s domestic transposition of the pillar two rules, the majority of the subsidiaries operating in the country already complied with the rules by the time the UPE of their MNE groups had to adhere to the rules in its home jurisdiction.

In any case, each constituent entity in Portugal is obligated to file a return identifying the entity responsible for submitting the GloBE Information Return (GIR), which is due nine months after the end of the relevant fiscal year (typically by the following September), with an extended deadline of 12 months for the first year of application (typically by the following December).

Portuguese entities must also submit the GIR, unless it is filed by the UPE, or a designated filing entity located in a jurisdiction with which Portugal has a qualifying competent authority agreement. In addition, Portuguese entities liable for paying any top-up tax under the IIR, UTPR, or QDMTT must file a tax assessment return and pay the corresponding tax.

The filing deadline for UTPR and QDMTT returns is 15 months following the end of the relevant fiscal year (typically in March of the second following year). However, this period is extended to 18 months for the initial year of application and any associated tax must also be paid within these timeframes (by June 2026).

The Portuguese legislation incorporates a transitional safe harbour based on country-by-country reporting (CbCR) for fiscal years commencing on or before December 31 2026, and ending on or before June 30 2028, as well as applying substance carve-outs until 2032, with adjustments regarding the salaries and tangible assets quantification. It is also worth mentioning that there is an express provision on the scoping of MNEs that are not subject to CbCR.

In addition, Portugal applied the de minimis jurisdictional exclusion where the total revenue for all group entities in the country is lower than €10 million, and where the net income for all group entities is lower than €1 million in Portugal.

Furthermore, the top-up tax determined under the UTPR, with respect to the jurisdiction of the UPE, will be reduced to zero for fiscal years beginning on or before January 1 2026, and ending on or before December 31 2026, provided that the jurisdiction in question applies a nominal corporate income tax rate of at least 20%.

The Portuguese law also includes an exclusion from the IIR and UTPR rules; under which, the top-up tax due from an ultimate or intermediate parent entity is reduced to zero for the first five years following the entry into force of the new regime, provided the group is in the initial phase of its international activity and certain conditions are met.

Finally, Portugal also took a balanced approach regarding timings, including an eight-year period for the statute of limitations, which is higher than typical domestic liability (generally, a deadline of four years) but lower than that concerning taxable events linked with tax-haven jurisdictions, which is extended to 12 years. The legislation not only establishes extended deadlines for filing returns and the statute of limitations, but also sets a four-year period for submitting administrative claims for GloBE purposes.

Portugal is aligned with the broader international effort to promote tax fairness and address profit shifting by MNEs. By implementing the IIR, QDMTT, and UTPR, and establishing a dedicated unit within the tax authorities, Portugal is positioning itself as an initiative-taking player in global tax reform, reinforcing its commitment to transparency and establishing the ‘fair share’ of tax that MNEs should be paying.

As these new rules come into effect, businesses operating in Portugal and throughout the EU must remain prepared to navigate the evolving tax compliance landscape, carefully assessing the impact on their global structures and operations, and the links between jurisdictions that may impact the overall assessment.

While this legislation ensures consistency with international standards, it introduces a new tax regime distinct from corporate income tax, accompanied by specific administrative offences and additional compliance obligations, leading to new controversies and increased interaction with the tax authorities when analysed in consideration of domestic tax-constitutional principles.

For quite some time, companies have been actively working on these new tax assessments, with many practical concerns and problems not yet addressed by local authorities, and waiting for international discrepancies and different approaches to impact MNEs. This has created an additional level of complexity in the tax governance of these entities.