The 2013 draft Budget Law was presented to the Parliament on October 15, 2012. The goal is to establish measures aimed at controlling the national budget deficit by increasing the tax revenue and sending a positive sign to the international markets regarding the commitment to accomplish the goals determined by the European Commission, the European Central Bank and the International Monetary Fund.

The most significant measures will impact personal income tax although some other measures will also lead to an increase of the tax burden for corporate entities either operating in Portugal or deriving Portuguese sourced income.

The measures in the proposed law would apply to current and subsequent financial years with some transitional periods such as the one regarding the deductibility of net financial expenses.

Parliament is expected to approve the State Budget Law before end of November 2012.

Limitation of net financial expenses deductibility

Net financial expenses may only be deductible up to the higher of the following limits: EUR 3m or 30% of the profit obtained before depreciation, net financing expenses and taxes.

Nevertheless, the 30% threshold is only reached in 2017 due to a transitional period. The deductible percentages should be 70% in 2013, 60% in 2014, 50% in 2015, 40% in 2016 and 30% in 2017.

Net financial expenses, which are not considered as tax deductible as a result of such limitations, may be carried forward for a period of 5 fiscal years, as long as such limits are always complied with.

Furthermore, when the amount of net financial expenses does not reach the 30% threshold, the difference between the amount deducted and the 30% limit may be carried forward for the following 5 fiscal years.

The current thin capitalization rule, based on debt-to-equity ratio, will be revoked by the above mentioned new rule.

Corporate Tax Rate - State Surtax

The existing progressive rates (3% and 5%) are maintained. However, the State Surtax is aggravated via the lowering of the minimum taxable profit threshold (from EUR 10m to EUR 7.5m), from which the 5% rate begins to apply. This aggravation is applicable to fiscal years beginning as of or after January 1, 2013 and may lead to a maximum impact of EUR 50k a year.

Withholding tax rates

In general, Portuguese withholding tax rates are levelled at 25%. Therefore, from 2013 onwards, also on commissions, agency fees, services, lease of agricultural, industrial, commercial or scientific equipment, royalties, know-how and property rental income a withholding tax rate of 25% applies. Investment income paid or made available to entities resident in tax havens and investment income paid or made available in accounts opened in the name of one or more holders but on behalf of unidentified third parties are already subject to a higher withholding tax rate of 35% from October 30, 2012 onwards.

Stamp Tax on certain real estate

Stamp Tax will be levied on residential property with a tax registration value of at least EUR 1m.

This tax is already due in 2012 by the entities owning residential property as of October 31, 2012 and it will be assessed based on the buildings' tax registration value at the rate of 0.5% or 0.8%, depending on whether the buildings are already appraised under the new rules or not, respectively. For 2013, an increase of this rate to 1% is foreseen.

The Stamp Tax is levied at 7.5% for all types of real estate owned by companies located in tax havens. Considering that the real estate owned by entities in tax havens is also subject to a Municipal Property Tax of 7.5%, it means that the tax burden in these cases amounts to 15% of the real estate’s tax registration value.

Further tax legislation is expected to be introduced during 2013

Investment Tax Credit

With the approval of the State Budget Law, the Investment Tax Credit regime is extended until December 31, 2013. A further extension of its application until December 31, 2017 is expected to be introduced during 2013. Further, it is intended to review the annual cap of the CIT credit - to be set between 25% and 50% of the assessed CIT (currently 25%).

Reinvestments of profits and capital increases

Introduction of an additional tax incentive in case of reinvestment of profits and capital increases, by means of a CIT credit, of up to 10% of the retained and reinvested profits and capital increases made until December 31, 2017, whenever used in the acquisition of eligible assets.

Contractual tax benefits for investment

The Government will be authorized to broaden the scope of application of the contractual investment tax benefits to investments of an amount of at least EUR 3m (currently, EUR 5m).

Transfer abroad of a company’s residence

The Government is allowed to change the tax regime applicable to the transfer abroad of a company’s residence and to the termination of activity of non-resident entities, in conformity with the decision of the Court of Justice of the European Union, dated September 6, 2012, regarding process C-38/10.

This authorization aims to allow the introduction of a new tax regime applicable to the company whose tax residence is altered (or whose permanent establishment is terminated), in which it becomes possible for the company to opt for the deferred payment of the amount of tax computed over the difference between the market value and the amounts relevant for tax purposes of its assets and liabilities at the time of the transfer, in case the move takes place to another EU Member State or state belonging to the European Economic Area.

Such deferral can take place until the relevant assets and liabilities are no longer linked to the corporate activity or, alternatively, the payment of the tax amount due can be made in annual instalments.

The option for any such form of deferral of taxation shall imply, along with the fulfilment of specific declaratory obligations, the payment of interest and the provision of a suitable guarantee.