On 3 May 2019, Portugal published Law n. 32/2019 in the Official Journal which introduced amendments to the Portuguese Tax Law in line with the European Union (EU) Anti-Tax Avoidance Directive (ATAD) provisions. The law amends the following measures:
Interest limitation rule:
The Portuguese Corporate Income Tax (CIT) Code already included an interest limitation rule under which the taxpayer is allowed to deduct its net financing expenses up to 30% of the tax EBITDA (earnings before interest, tax and amortization) or EUR 1 million. The Law amended with expanded definitions of financing expenses and net financing and their computation/interaction with the concept of tax EBITDA in order to comply with ATAD’s provisions.
CFC rule:
Earlier, the CFC rules provided that a Portuguese resident entity owning (directly or indirectly) at least 25% of the share capital of a CFC was subject to tax on its allocable share of the CFC’s net profit or income, if not distributed. The rule providing that the 25% participation is reduced to 10% if at least 50% of the capital or rights of the CFC are owned by Portuguese residents is revoked.
Under the new rule, criteria to define a “CFC” based on its effective tax rate are introduced: A “CFC” is considered any non-resident entity whose effective tax rate is below 50% of the tax that would be due in Portugal. Until now such qualification would arise if the nominal tax rate applicable to such entity was below 60% of the Portuguese nominal CIT rate, i.e., 12.6% (21% x 60%). Entities domiciled or resident in a blacklist jurisdiction continue to be considered CFCs, regardless of other conditions.
PE rule:
The rules regarding the exclusion of profits of a Permanent establishments (PE), which are amended to include the condition that the PE is subject to tax on its profits that is at least 50% of the tax that would be paid in Portugal.
GAAR rule:
The new wording of the General anti-abuse rule (GAAR) provides that an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the objective or purpose of the applicable tax law which are not genuine considering all relevant facts and circumstances should be disregarded and the tax advantages should not be granted. For these purposes, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. Instead, the operation should be taxed in accordance with the rules that would be applicable to the substance or economic reality.
If such arrangements or series of arrangements have resulted in the non-application of withholding tax or a reduction in withholding tax, it will be considered that the tax advantage is produced at the level of the recipient of the income, although the person responsible for withholding may be held liable if the person has or should have knowledge of the arrangement(s).
The compensatory interest due will be increased by 15%.
The application of the new GAAR depends on a specific procedure which includes a prior hearing of the taxpayer and a tax audit.
The Law generally entered into force on 4 May 2019.
