Portugal’s new VAT grouping regime, introduced by Law No. 62/2025 and applicable to tax periods starting on or after July 1 2026, represents a long-awaited step in the country’s VAT system. However, its practical impact may be far more modest than the concept of VAT grouping might suggest, adopting a narrower scope in comparison with other EU jurisdictions.
The Portuguese regime: eligibility and design
The regime applies where a dominant entity holds, directly or indirectly, at least 75% of the share capital and more than 50% of the voting rights of dependent entities. Members must also be closely linked in financial, economic, and organisational terms and only entities with a head office or fixed establishment in Portugal may be included.
The scope is further narrowed by the requirement that members carry out, at least in part, activities giving rise to input VAT deduction. Entities without relevant taxable activity may be excluded, even when part of a wider taxable group. Financial and insurance groups may also be excluded or limited where their activities are predominantly exempt, which is common in those sectors.
Recent administrative guidance adds nuance: although a Portuguese fixed establishment of a non-resident entity is not excluded merely because the head office is abroad, the financial link may fail where the participation chain runs through an entity outside Portugal, the EU, or the European Economic Area, making the territorial design a constraint for multinationals.
In practice, the regime may improve cash-flow management by offsetting VAT payable and recoverable positions and reducing refund friction. However, its benefits differ from those available where intra-group supplies are disregarded.
A narrower model than the VAT Directive allows
Article 11 of the VAT Directive allows EU member states to treat closely linked persons as a single taxable person. Some jurisdictions, such as the Netherlands, disregard transactions between VAT group members. Germany follows a different construction under its Organschaft regime but reaches a similar result: intra-group supplies are outside the scope of VAT.
Portugal has adopted a more conservative approach: where one entity supplies services to another group member with limited recovery rights, VAT may still become a cost. The regime may help address timing mismatches but is less likely to deliver neutrality where the main issue is irrecoverable VAT on intra-group supplies. Accordingly, the new Portuguese VAT grouping regime does not resolve the long‑standing frictions around internal cost‑sharing, particularly in the financial sector. Typical cost‑sharing structures used by banks and insurers – notably, complementary business groupings (agrupamentos complementares de empresas, or ACEs) providing back‑office and shared services – often fail the ‘dominant entity/75% capital and voting rights’ test and the common‑management requirement and have already been found by the tax authority not to qualify for VAT grouping on that basis. As a result, intra‑group services channelled through ACEs remain exposed to the narrow and heavily litigated cost‑sharing exemption in Article 9(21–22) of the Portuguese VAT Code, with the associated risks, leaving internal transactions structurally uncovered.
Sensitive exclusions and neutrality concerns
The exclusion of entities without activities giving rise to input VAT deduction is debatable from a neutrality perspective. Article 11 is based on financial, economic, and organisational links, not on each member carrying out deductible transactions. The Portuguese regime therefore appears to narrow VAT grouping beyond what is needed to identify a genuine group.
While the policy concern may be anti-abuse, the practical effect may be over-exclusion, as economically integrated and centrally managed groups may still be unable to include entities that do not meet the Portuguese activity test. The financial and organisational links may also be difficult to apply to structures outside a conventional share capital and voting rights model. As highlighted above, this was illustrated in a recent binding ruling excluding an ACE with no share capital, contribution quotas, or parity governance — a relevant precedent for joint ventures and consortium-type structures.
Cost-sharing arrangements may still matter, particularly in financial services and healthcare. However, since Portuguese VAT grouping does not remove VAT on intra-group transactions, they cannot replace a broader VAT grouping regime.
CJEU case law: unresolved pressure points
The Court of Justice of the European Union (CJEU) case law remains relevant, even though Portugal has not adopted a strict single taxable person model. Skandia America and Danske Bank confirm that head office/branch transactions may become taxable where one is part of a VAT group and is no longer treated as the same taxable person. In Portugal, the immediate impact may be limited, but those cases expose the tension between CJEU logic and national regimes that only partially replicate it.
Conclusions
Portugal’s VAT grouping regime seems a lost opportunity for an in-depth reform, with a cautious model focused on consolidation rather than neutrality. Limitations seem to hinder the appetite for its adoption, as there is:
No single taxable person;
No neutralisation of intra-group transactions;
Possible exclusion of entities without current taxable activity;
Limited relevance for financial and insurance groups;
Constraints for branches held through third-country chains; and
Unresolved interaction with CJEU case law and foreign VAT groups.
Let’s see how it works with boots on the ground from July 2026, but it may fall short where the aim is to eliminate irrecoverable VAT on intra-group services.
