Next June 30, the transitional period of 8 years granted by the Directive 2003/49/CE to Portugal, for budgetary reasons, will expire. The transitional period allowed for Portugal to apply a withholding tax to interests and royalties paid by an associated company or PE situated in Portugal to the mother company or sister PE situated in another MS.
From now on, unless the Portuguese Government negotiates with the EU Commission for an extension of the transitional period, Portugal will be obliged to grant the tax exemption foreseen in article 1 of the Directive, provided that the requirements of Article 3(b) are met: i) direct minimum holding of 25% in the share capital of a company for the purpose of fulfilling the term “associated company” and ii) holdings must involve companies resident in Community territory. These requirements must be maintained for an uninterrupted period of at least 2 years, otherwise MS may opt not to apply the tax exemption.
Up to now, there are no specific draft law in discussion to adapt domestic law to the Directive, which means that, in such absence, companies are able to challenge in court the liquidation of taxes and fines, if imposed by the Portuguese tax authorities in violation of the Directive.
As can be seen, the scope of the Directive is to maximize the European ideal of a single market, to eliminate any discrimination or disparities between similar transactions carried out cross-border and carried out domestically and to eliminate double taxation. On what concerns the elimination of double taxation, the goal is for interests and royalties’ payments made between associated enterprises situated in different MS to be subject-to-tax and to be effectively taxed only once and only in one MS.
By application of the Directive, the only MS competent to tax shall be the MS where payments are received, i.e., the MS where the beneficial owner company is located. Thus, the MS where the payer company is located (Source State) is the one responsible for the exemption attribution.
The double taxation elimination methods foreseen in ADT’s are limited insofar they are only applicable to the Contracting States. On the other hand, the Directive covers for the most complex structures in which participate innumerous companies from innumerous MS.
One important perk of the Directive is the reduction of bureaucratic formalities and compliance costs and also the improvement of enterprises cash-flow.
Also, whereas by means of application of an ADT, the most common method used for the elimination of double taxation is the credit method - which implies that both States tax the same income and only afterwards one of those States allows for the deduction of the tax paid in the other State, demanding a certificate issued by the competent Tax Authorities proving the tax has been paid -, the Directive grants ad initium for a full tax exemption by one of the MS.
In any case, whenever an ADT goes beyond the provisions of the Directive and yields a better treatment of taxpayers, such ADT overrides the Directive in that matter.
Following the expiration date of the transitional period, Portugal will have to amend its Corporate Tax Code accordingly.
A draft reform to the Portuguese Corporate Tax Code is currently taking place and the final project shall be presented to the Portuguese Government by October, 1, 2013. One of the many announced measures is the revision of interest and royalties’ taxation, which we hope, will have into consideration the end of the transitional period. However, as we said above, companies are entitled to the exemption since the 1st. July and are able to challenge liquidation of taxes and imposed fines based on the violation of the Directive.