A "participation exemption" regime is introduced and generally applies to all CIT resident taxpayers that are not subject to the tax transparency regime, both for purposes of eliminating double economic taxation on distributed profits and reserves and regarding capital gains and capital losses arising from the sale of shares or other equity instruments.
Inbound – Qualified Participation
A minimum shareholding of 5% of the subsidiary’s share capital or voting rights (previously, 10%), held either directly or indirectly, is required.
For purposes of distributed profits and reserves, the referred qualified participation must be uninterruptedly held for a period of 24 months prior to the distribution (previously, a 12-month period) or, if it is held for a lower period, it should be kept uninterruptedly during the time period required to complete said 24 months. Regarding capita l gains and capital losses, the qualified participation is only of relevance in respect to the shareholding selling date, being the 24-month holding period determined by reference to the shareholdings being sold.
Inbound – Subsidiary
Regarding the subsidiary, which may in no case be resident or domiciled in a country, territory or region subject to a clearly more favorable tax regime included in the list approved by the Ministerial Order of the Finance Minister, the same should be subject to and not exempt from CIT (or special tax on gambling), to a tax referred to in Article 2 of Directive No. 2011/96/UE, of the Council, of November 30, 2011 ("Parent -Subsidiary Directive"), or to a tax identical or of a similar nature to the CIT whose applicable rat e is not lower than 60% of the standard CIT rate. The requirement for liability to tax may be waived depending on the nature of the activity undertaken or on the patrimony of the subsidiary.
Inbound – Regime
Provided that the above requirements are met, the profits and reserves distributed to and the capital gains/capital losses obtained by CIT taxpayers resident in the Portuguese territory shall not be included in their taxable income.
For purposes of this new regime, the concept of profits or reserves includes capital repayments resulting from the amortization of shareholdings without a share capital reduction and also the fraction of taxable income allocated to shareholders that corresponds to profit distributed to entities subject to the tax transpar ency regime.
Capital gains/capital losses are, however, expressly excluded from this regime, being therefore included in the taxpayer’s taxable income, whenever the value of the properties held by the subsidiary represent, directly or indirectly, more tha n 50% of its assets (except if the properties are allocated to an agricultural, commercial or industrial activity other than the purchase and sale of real estate, in which case the new regime applies).
The regime also applies to profits, reserves and capital gains/losses attributable to a Portuguese permanent establishment of an EU Member State or EEA resident entity, in this last case subject to cooperation obligations identical to those of the EU, provided that the requirements and conditions set forth in Article 2 of the Parent-Subsidiary Directive or equivalent requirements and conditions, if it is an EEA’s resident, are met.
The regime also applies to profits, reserves and capital gains/losses attributable to permanent establishments of entities resident in other States, not included in blacklisted jurisdictions, with which Portugal has signed an Agreement for the Avoidance of Double Taxation providing for administrative cooperation regarding taxation equivalent to the cooperation provided within the EU and that in said State are subject to and not exempt from a tax of identical or similar nature to CIT.
If an entity holds a qualified participation during 24 months prior to the distribution (or keeps it for the necessary time to complete the 24-month period) but the other requirements of the “participation exemption” regime are not met, the Portuguese resident taxpayer may choose to apply for new tax credit regime for eliminating international economic double taxation.
Outbound – Profits and Reserves
Regarding non-resident CIT taxpayers, the “participation exemption” regime in the form of exemption will apply to profits and reserves distributed by Portuguese resident entities that are subject to and not exempt from CIT (or special tax on gambling) and not subject to the tax transparency regime, provided that the other requirements related to the qualified participation and the beneficiary entity are complied with.
Outbound – Qualified Participation
A qualified participation is of at least 5% of the subsidiary’s share capital or voting rights, uninterruptedly held, either directly or indirectly, for 24 months prior to the distribution date (or held uninterruptedly during the time required to complete said period, in which case the law provides for the reimbursement of the tax withheld on the profits or reserves that have been meanwhile distributed).
Outbound – Beneficiary Entity
The beneficiary entity should be a resident (i) in another EU Member State, (ii) in an EEA Member State bound to administrative cooperation in the tax area equivalent to that established in the EU, or, (iii) in a State with which Portugal has signed an Agreement for the Avoidance of Double Taxation providing for administrative cooperation regarding taxation equivalent to the cooperation within the EU.
The beneficiary entity should also be subject to and not exempt from a tax referred to in Article 2 of the Parent-Subsidiary Directive or to a tax of identical or similar nature to CIT, being also required that for entities outside the EU or EEA that the applicable tax rate is not lower than 60% of the standard CIT rate. If all the other requirements are met, this regime also applies to permanent establishments of the aforementioned entities that are located in other EU or EEA Member States.
Outbound – Capital gains
The new “participation exemption” regime does not refer to capital gains obtained by non-resident entities upon disposal of shares. However, such capital gains continue to benefit from income tax exemption regime currently foreseen in Article 27 of the Tax Benefits Statute.
The new regime applies to the positive balance of capital gains and losses obtained prior to January 1, 2001 that hitherto were under a "suspended taxation" status;
When determining the percentage of the subsidiary’s properties value on the total balance–sheet value, only the properties acquired after January 1, 2014, should be accounted for. Thus, the new regime may apply to the capital gains and losses derived from the sale of shareholdings of a company whose properties represent more than 50% of its assets, if said properties have been purchased before the CIT Reform Law entered into force;
The minimum shareholding period also applies to the shareholdings already held at the moment the CIT Reform Law entered into force, being computed for purposes of the 24 - month period the holding period already elapsed until such date.
SIMPLIFIED TAXATION REGIME
Portuguese resident taxpayers may now opt for a simplified regime for determining the taxable income, to the extent that they are not tax exempt or subject to a special taxation regime, carry out primarily an agricultural, commercial or industrial activity and that meet cumulatively the following requirements:
- Have obtained, in the previous tax year, a gross annual income lower or equal to EUR 200,000.00 and a total balance–sheet value of less than EUR 500,000.00;
- Are not legally bound to statutory audit;
- The share capital is not held, directly or indirectly, in more than 20% by entities that do not comply with the above-mentioned requirements, except if such entities are venture capital companies or venture capital investors;
- Adopt the accounting standardized system applicable to micro entities, as set out in Decree-Law No. 36-A/2011, of March 9;
- Have not waived the application of the simplified regime in the previous three years, with reference to the date in which the regime starts applying.
The simplified taxation regime ceases to apply when the respective requir ements are no longer met or when the taxpayer waives its application or fails to fulfill the issuance and communication of invoices obligations provided for, respectively, in the VAT Code and Article 3(1) of the Decree-Law No. 198/2012, of August 24.
The effects of the termination or waiver of the simplified taxation regime are produced with reference to the first day of the tax period in which one of the above requirements is not met or the waiver is communicated.
For purposes of applying the simplified taxation regime, the relevant taxable income results from the use of the following coefficients:
- 0.04 of the sales of goods and the supply of services rendered by hotels and similar activities, restaurants, catering and beverage services;
- 0.75 of the professional activities specifically provided for in the list referred to in Article 151 of the Personal Income Tax Code;
- 0.10 of the income derived from other supplies of services and of the amount of operational subsidies received;
- 0.30 of the non-operating subsidies received;
- 0.95 of the income derived from contracts providing for the temporary assignment or use of intellectual or industrial property or the provision of indu s- trial, commercial or scientific know how, other capital income, real estate rental income, the positive balance of capital gains and losses and of other patrimonial increases;
- 1.00 of the acquisition value of the gratuitous patrimonial increases.
The taxable income cannot be lower than 60% of the annual value of the minimum monthly wage. Moreover, this limit and the coefficients above mentioned in a) and c) are reduced by 50% and 25% in the tax period of commencement of activity and in the following tax period, respectively.
As for the entities operating in retail fuel, tobacco, vehicles subject to Motor Vehicle Tax ("ISV") and alcohol and alcoholic beverages sectors, the taxable income does not comprise the amounts corresponding to the Excise Duties ("IEC") and the ISV.
As regards the purchase and sale of real estate, taxpayers under this regime should comply with the rules laid down in Article 64 of the CIT Code, i.e., should adopt fair market prices, which may not be lower than the fiscal value that was considered for purposes of Real Estate Transfer Tax (“IMT”) assessment or which would have been used for such purposes if indeed IMT had been due.
Taxpayers covered by the simplified taxation regime that opt to apply the capital gains reinvestment rollover regime set forth in Article 48 of the CIT Code, but fail to make the required reinvestment within the due deadlines will have to add to their taxable income the difference (or the proportion) not previously included in the taxpayer’s taxable income, increased by 15%.
Taxpayers under this regime may deduct to their taxable income the tax credit for international double taxation (ordinary tax credit) and withholding taxes not compensated or reimbursed under the applicable law.
Finally, taxpayers choosing to apply this regime are exempted from the special payment on account ("PEC") and certain expenses, such as representation expenses, daily allowances and travel costs in their own vehicle incurred on duty and not charged to clients, severance payments, bonuses and other variable income paid to board members, will be excluded from autonomous taxation. In regard to the autonomous taxation due on other type of expenses, the increase of 10% over the autonomous taxation rates whenever the taxpayer has tax losses shall not apply to these taxpayers.
TAX REGIME FOR PATENT AND OTHER INDUSTRIAL PROPERTY RIGHTS– “PATENT BOX”
A new specific tax regime is introduced on income derived from the assignment or temporary use of patents and industrial designs or models, which provides for a CIT exemption on 50% of such income, provided that the following requirements are cumulatively met:
- The industrial property rights are the result of research and development activities undertaken or contracted by the taxpayer;
- The transferee uses the industrial property rights in a commercial, industrial or agricultural activity;
- The proceeds of the use of the industrial property rights by the transferee do not result in the delivery of goods or services that give rise to tax deductible expen s- es at the level of the transferor or of a company with which it fo rms part of a tax group, whenever any of the entities and the transferee are qualified as related parties;
- The transferee is not an entity resident in a country, territory or region with a clearly more favorable tax regime.
For the purpose of eliminating international double taxation, when such income derives from outside of Portugal the computation of the corresponding ordinary tax credit will also take into account only 50% of such income.
Finally, it should be noted that the "Patent Box" regime applie s only to patents and industrial designs or models registered on or after January 1, 2014.
TAX REGIME APPLICABLE TO PERMANENT ESTABLISHMENTS ABROAD
This new regime allows taxpayers with head office or place of effective management in Portugal to opt for excluding from their taxable income the profits and losses attributable to a foreign permanent establishment provided that:
- The profits attributable to the permanent establishment are subject to and not exempt from a tax referred to in the Parent-Subsidiary Directive or a tax identi- cal or similar in nature to CIT whose rate applicable to such profits is not lower than 60% of the standard CIT rate; and
- The permanent establishment is not located in a country, territory or region with a clearly more favorable tax regime.
This regime does not apply to the profits attributable to the permanent establishment, up to the amount of the losses attributable to the same that have been considered for purposes of the computation of the taxable income of the taxpayer in the prior 12 taxation periods.
If the taxpayer opts for this regime, the same should cover all of the taxpayer’s permanent establishments in the same territory and be applied for at least 3 years.
Whenever this regime ceases to apply, the following rules should be considered:
- Tax losses of the permanent establishment shall not be included in the taxpayer’s taxable income up to the amount of the taxable profits attributable to the permanent establishment that were not accounted for in the taxpayer’s taxable profit of the last 12 tax periods
- In case of transformation of the permanent establishment into a company, the profits and reserves distributed by the new company, as well as the capital gains from the sale of shareholdings and from the winding-up of said company, will not benefit from the “participation exemption” regime up to the amount of the permanent establishment’s profits that have not been accounted for the taxable income of the taxpayer in Portugal in the prior 12 tax periods.
DEDUCTIBILITY OF NON-AMORTIZABLE INTANGIBLE ASSETS
A new regime is introduced allowing a 20-year tax deduction (annual 5% rate) of the acquisition cost borne with certain types of intangible assets provided they have been acquired on or after 1 January 2014.
This regime is applicable to industrial property elements such as brands, licenses, production processes, models or other similar rights onerously acquired and that do not have a limited useful life period. The same is also applicable to goodwill acquired within the context of a corporate restructuring process.
However, this new regime does not apply to (i) assets acquired within the context of corporate restructurings that benefit from the tax neutrality regime, to (ii) goodwill arising from shareholdings and to (iii) assets acquired to entities resident in a country, territory or region with a clearly more favorable tax regime.
INTERNATIONAL DOUBLE TAXATION - UNDERLYING TAX CREDIT
Taxpayers may now opt for an underlying tax credit when distributed profits and reserves by a non-Portuguese resident entity have been included in the taxpayer’s taxable amount and the requirements for the application of the “participation exemption” regime are not verified.
In this context, taxpayers may choose to deduct to the tax due part of the income tax paid abroad by its own subsidiary, provided that the profits and reserves distributed by the subsidiary do not qualify for purposes of the “participation exemption” regime.