Portugal is on the brink of a significant shift in VAT landscape as the Portuguese Government presented last September, to the Parliament, Draft Law no. 28/XVII/1.ª, which intends the introduction of the VAT group regime. This long-awaited reform is set to be debated in Parliament and promises to streamline tax management and optimize liquidity for business groups.
For years, Portuguese companies operating within the same economic group have faced the challenge of managing disparate VAT balances, having some entities in a payable situation, while others held VAT credits waiting for refund. The new regime aims to address this imbalance by allowing groups to consolidate their VAT positions, potentially reducing the administrative burden and improving cash flow.
Nevertheless, the Portuguese model stops short of the more comprehensive systems seen elsewhere in other European models or as in the VAT Directive itself. Unlike regimes that exclude intra-group transactions from VAT altogether, Portugal’s proposal focuses solely on consolidating balances of the Group companies.
Access to the regime is tightly controlled and globally mirrors CIT group requirements. Only groups of companies with close financial, economic, and organizational links are eligible. Therefore, in regards financial link, the dominant company must hold, at least, 75% of the share capital and more than 50% of the voting rights in its subsidiaries and must hold this stake for at least a year, unless the companies are incorporated by the group within the last year.
Conversely, economic and organizational links require companies to share similar or complementary economic objectives and a common management structure, although these concepts are not clearly defined in the proposal draft law.
Participation is optional and must be initiated by the dominant entity, covering all qualifying group entities. Only companies with a registered office or permanent establishment in Portugal, subject to the standard monthly VAT regime, and entitled to VAT deductions, may participate. Those under special or exemption regimes, or which are mere VAT registrations, are excluded.
Each company will continue to assess its VAT individually and submit its own returns, but the tax authorities will aggregate these into a consolidated group return. Then, the dominant company will be responsible for confirming the group’s overall position and handling payments or refund requests, with all members jointly liable for any tax obligation.
Under the general terms of the VAT Code, the tax credit may be carried forward to subsequent tax periods or requested as a refund. However, a company's accumulated credit prior to joining the group may only be used up to the amount of tax that may become payable by that same company.
Once a group has joined the regime, it must remain in it for a minimum period of three years. After this period, the dominant entity may terminate the regime at its discretion. The regime automatically ceases if any financial, economic or organizational requirements are no longer met, or if an entity has not carried out any taxable transactions for over a year or has entered into insolvency, revitalization or extrajudicial recovery proceedings. Excluding an entity does not affect the maintenance of the group, except in the case of the dominant entity.
The main advantages of this regime include centralized procedures, fewer payment and refund requests, and the ability to offset VAT balances within the group. This improves liquidity and simplifies tax management. However, strict internal controls are necessary to prevent errors or omissions in declarations. Companies may also be exposed to tax risks arising from possible non-compliance within the group due to joint liability.
Although the new VAT group regime represents a step towards modernizing Portugal’s tax system and bringing it into line with European best practice, it remains less ambitious than what is seen in other jurisdictions. For now, the exclusion of intra-group transactions from VAT is not under consideration, but future reforms could bring further alignment with EU standards.
If Parliament approves the proposal, the regime is expected to take effect in July 2026, offering Portuguese business groups a new tool for managing their tax affairs and boosting competitiveness in the integrated European market.
Co-authored by:
Isabel Vieira dos Reis, Partner, Direct and Indirect taxes
João Comenda António, Associate, Direct and Indirect taxes
