The general CIT rate is reduced to 23% in 2014 and a reduced 17% rate applies to the first EUR 15,000 of the taxable income of taxpayers who, directly and primarily, carry on an agricultural, commercial or industrial activity and qualify as a small or medium enterprise under the annex of Decree-Law no. 372/2007, of November 6th.
It is set as a goal to reduce the general CIT rate to 21% in 2015 and to establish said rate within a range between 17% and 19% in 2016. These are however programmatic measures whose enforcement will depend, for instance, on an evaluation of the results
achieved with the Reform, on the evolution of the economic situation of the country and shall be considered simultaneously with the recast of the Value Added Tax and of the Personal Income Tax, particularly as regards the reduction of the respective tax rates.
A new State Surcharge rate of 7% applicable to the taxable profit over EUR 35,000,000 is introduced.
TAX LOSSES CARRY-FORWARD
The carry-forward period for tax losses is extended to 12 years. This period applies to tax losses incurred in the tax periods starting on or after January 1st, 2014.
However, offset of tax losses may not exceed 70% of each tax period’s taxable profit. This threshold applies to the offset of tax losses against the taxable profits from the tax periods starting on or after January 1st, 2014.
The restriction on the offset of tax losses when the company’s business scope or activity is changed was eliminated.
However, the restriction on the offset of tax losses still applies when more than 50% of the share capital ownership or voting rights changes (except if the offset is duly authorized by the Minister of Finance), save in the following cases:
- Changes from direct to indirect ownership and vice-versa;
- Changes arising from transactions to which the tax neutrality regime applies;
- Changes arising upon death of the previous shareholder;
- The acquirer holds, uninterruptedly, directly or indirectly, more than 20% of the share capital or the majority of the voting rights of the company since the beginning of the tax period to which the losses respect;
- The acquirer is an employee or member of the governing bodies of the company, at least since the beginning of the tax period in which the tax losses were i n- curred.
SPECIAL PAYMENT ON ACCOUNT (“PEC”)
The deduction of PECs is extended until the sixth tax period following the one which the PEC respects to. If it is not possible to fully deduct the PECs by the end of this period, reimbursement may be requested without the need for conducting inspection work, as hitherto was required.
Taxpayers under the simplified taxation regime are not subject to PEC. However, if the simplified taxation regime ceases to apply due to non-compliance with any of the requirements relating to the annual value of income or total balance sheet, taxpayers must pay the corresponding PEC until the end of the 3rd month of the following tax period.
The autonomous taxation rates applicable to expenses incurred with light passenger vehicles, mopeds or motorcycles, excluding electric vehicles, are changed as follows:
- 10% for vehicles with an acquisition cost lower than EUR 25,000;
- 27.5% for vehicles with an acquisition cost equal or higher than EUR 25,000 and lower than EUR 35,000;
- 35% for vehicles with an acquisition cost equal or higher than EUR 35,000.
Certain expenses borne by taxpayers who adopt the simplified taxation regime, as well as expenses attributable to permanent establishments located outside the Portuguese territory, which relate to the activities carried on by said permanent establishments, are excluded from autonomous taxation.
Furthermore, expenses incurred with light passenger ve hicles, mopeds or motorcycles, are excluded from autonomous taxation when a written agreement between the employee and the employer grants the employee a specific vehicle, thus triggering Personal Income Tax.
LIMITATION ON THE DEDUCTION OF NET FINANCIAL COSTS
The limit on the deduction of net financial costs is reduced to EUR 1,000,000. The alternative limit of 30% of the earnings before depreciation, net financing costs and taxes ("EBITDA") remains unchanged.
Net financing costs not deductible within the subsequent five tax periods as well as the difference between the costs incurred and 30% of EBITDA may only be deducted after the net financing costs of the tax period at stake are considered. Older net financing costs shall be carried forward immediately afterwards.
However, this carry forward mechanism no longer applies if there is a change in the ownership of more than 50% of the share capital or of the majority of voting rights of the taxpayer, unless the exceptions for the carry-forward of losses apply or an authorization of the Minister of Finance is obtained.
If the tax unit regime applies, the dominant company may choose to apply this regime to the group’s net financing costs, when determining the group’s taxable profit. This option should be communicated to the Tax Authorities and the regime must be in force for a minimum period of 3 years.
When applying this regime, a specific concept of EBITDA must be considered, which although based on the accounting concept, is adapted for tax purposes by the following items:
- Gains and losses arising from fair value changes that are disregarded when determining the taxable profit;
- Impairment losses and reversals of non-depreciable or non-amortizable investments;
- Gains and losses resulting from the application of the equity method or, as regards joint ventures which are taxable persons for CIT purposes, the propo r- tional consolidation method;
- Income or expenses regarding participations to which the "participation exemption" regime applies;
- Income or expenses attributable to a permanent establishment outside the Portuguese territory regarding which the option for not computing its taxable income at the level of the Portuguese head-office was made;
- The extraordinary contribution on the energy sector.
The non-application of the abovementioned rules extends to securitization companies and to Portuguese branches of credit institutions and to other financial institutions or insurance companies with head office in third countries (i.e. outside the EU).
TRANSFER OF RESIDENCE ABROAD – EXIT TAX
Taxation upon the transfer abroad of residence of entities with its head office or place of effective management in Portugal is maintained. As previously, tax is levied on the difference between the market value and the relevant tax value of the assets, even if not expressly accounted for, as at the date of termination of the activity.
Nevertheless, further to the judgment of the European Union Court of Justice in Process C-38/10, which concerned an action brought by the European Commission against the Portuguese State, deferred payment of the CIT is now allowed when a company transfers its residence from Portugal to the territory of another EU Member State or EEA Member State (provided that in the latter case the rules regarding the administrative cooperation
in exchange of information and assistance in the collection of taxes equivalent to those established in the EU are set forth).
Thus, as an alternative to the immediate payment of the total amount of tax assessed on the income statement of the period of cessation of activity, CIT payment may be deferred as per one of the following options:
- With respect to each of the assets considered in determining the tax due, to the year following its extinction, transmission, detachment of the entities’ activity or transfer by any title, either material or legal, to a territory or country outside the EU or the EEA, as regards the part of the tax which would correspond to the tax result of each asset individually considered; or
- In 5 annual installments, in the same amount, beginning in the tax period in which the residence is transferred abroad.
The option for any of the deferred payment methods shall be made in the income statement of the tax period in which the cessation occurs. Said option gives rise to interest at the rate set forth for default interest, and may also demand the rendering of a bank guarantee corresponding to the amount of tax due plus 25%, under the conditions to be prescribed by order of the Minister of Finance.
As set forth prior to the Reform, the non-taxation of the transfer abroad of residence of a company relating to the assets that remain connected with a permanent establishment in Portuguese territory is unchanged.
The new payment rules above referred to do also apply in case of cessation of activity of the permanent establishment in the Portuguese territory of a non-resident entity or of transfer abroad of assets allocated to a permanent establishment located herein.
Finally, we highlight the repeal of article 85 of the CIT Code which provided for the taxation of the shareholders of the company transferring its residence abroad, who therefore are no longer subject to taxation.
DEDUCTIBILITY OF CAPITAL LOSSES ON SHARES
When the “participation exemption” regime does not apply, the negative difference between the realized capital gains and capital losses and other losses relating to shares is fully deductible for tax purposes, unless when related to shares of companies resident in a country, region or territory with a clearly more favorable tax regime.
MERGERS, DEMERGERS, TRANSFER OF ASSETS AND EXCHANGES OF SHARES (TAX NEUTRALITY)
The following reorganization operations taking place as from January 1st, 2014, are now expressly included in the tax neutrality regime:
- Mergers without attribution of shares to the shareholder of the merged company, when all the shares representing the share capital of the companies involved are owned by the same shareholder;
- "Reverse Mergers" when all the shares representing the capital of the receiving company are owned by the merged company;
- Demerger-mergers, when at least one branch of activity is spin-off and transferred to the company which holds all the shares representing the share capital of the company subject to the spin-off;
- Demerger-merger, when at least one branch of activity of the demerged company is spin-off and merged into another existing company whose capital is entirely owned by the same shareholder;
- Demerger, when at least one branch of activity of the demerged company is transferred to a company whose capital is entirely owned by the demerged company.
As a general rule, tax losses within this kind of operations are now automatically transferred, i.e., it is no longer required authorization of the Minister of Finance for such purpose. However, the transfer of tax losses resulting from a merger involving all companies’ part of a tax unit regime still depends on the authorization of the Minister of Finance.
On the other hand, it is expressly set forth for most situations that the deduction of transferred losses is limited to the proportion of the value of the net assets of the transferor company in the value of the net assets of the other entities involved in the operation.
It is established that the tax benefits of the merged companies are transferred to the recipient company, provided that the latter meets the necessary requirements for such transfer and the tax neutrality regime is applicable.
Similarly, tax benefits may also be transferred within demergers and transfers of assets provided that authorization from the Minister of Finance is granted for such purpose.
Additionally, it is stated that the amounts in excess which are not carried forward and the amounts which are not used related to the limitation on the deductibility of net financing costs rule by the merged companies may be taken into account for determining the taxable profit of the beneficiary company of a tax neutral merger.