Recently, the Portuguese Government has submitted to Parliament the Bill No.177/XIII introducing changes to the Income Tax Act to implement certain ATAD-1 rules. The bill proposed rules for the limitation of interest deductions and rules for controlled foreign companies (CFC). However, the legislation does not propose hybrid mismatches as the government intends to further investigate these rules.
Interest deductibility rule:
The proposed law introduced amendments to the Income Tax Code regarding the limitation on deductibility of financing expenses. The amendments propose to adjust only the definition of net financing expenses since, according to the Draft Law, current Article 67 of the Income Tax Code appears to align with Article 4 of ATAD 1 in that net finance expenditure can be deducted up to the higher of either €1 million or 30% of profit/loss before depreciation, amortization, net financing expenditure, and taxes.
CFC rule:
Changes in the conditions for controlled foreign companies (CFCs) to include a clear low-tax condition of less than 50% of the tax that would be paid in Portugal, as well as adjusted rules on imputation of CFC income, and general exemptions where specified passive income does not exceed 25% of total income and where the CFC is established in an EU or EEA member state and carries on substantive economic activity.
