Following approval of the State Budget for 2014 by the Assembly of the Republic, and the reform of corporate taxation, various changes have been made to the Portuguese tax regime, some of them of relevance to the International Business Centre of Madeira (IBCM).
We therefore wish to disclose some of the more relevant changes.
CORPORATE INCOME TAX:
- The general corporate income tax rate has been reduced to 23% (for Small and Medium Enterprises the rate applicable to the first 15,000 Euros of taxable income is 17%), while for companies licensed to operate within the scope of the IBCM the reduced rate of 5% still applies.
- A tax exemption (withholding tax) applies to the distribution of profits/reserves by a company resident in Portugal, subject to and not exempt from corporate income tax, for entities that:
- Are resident in another EU Member State or the European Economic Area (EEA) – provided that administrative cooperation is guaranteed with respect to taxation in terms equivalent to those established in the EU – or in a state with which it has signed a convention to avoid double taxation (provided there is administrative cooperation regarding taxation in a manner equivalent to that which has been established in the EU);
- Are subject to and not exempt from a tax mentioned in the Parent-Subsidiary Directive (companies resident in the EU) or a tax that is identical or similar to Corporate Income Tax, providing the rate applicable to the entity is not less than 60% (13.8%) of the corporate income tax rate (other cases);
- Hold, directly or indirectly, and uninterruptedly for the 24-month period prior to distribution, a participation no smaller than 5% of the shareholder capital or voting rights of the Portuguese company that distributes the profits or reserves;
- (Participation Exemption) The profits and reserves distributed to companies resident in Portugal by their subsidiaries and the capital gains or losses obtained via transfer with consideration of shareholdings in these subsidiaries, in any way and regardless of the percentage of the transferred participation, no longer contribute to their taxable profit, provided that:
- The Portuguese company holds, directly or indirectly, and uninterruptedly, for the 24 months that precede the distribution or transfer, a participation that is no less than 5% of the shareholder capital or the voting rights of the entity that distributes the profits/reserves or whose participation has been transferred (in the case of distribution of profits, if the participation has been held for less time, it must be maintained throughout the time necessary to complete the 24 months);
- The entity that distributes the profits/reserves or whose participation has been transferred is subject to and not exempt from corporate income tax (Portuguese companies), any tax referred to in the Parent-Subsidiary Directive (companies resident in the EU) or a tax of an identical or similar nature to that of corporate income tax, provided that the rate applicable to said entity is not less than 60% (13.8%) of the corporate income tax rate (other cases, with the possibility of dispensation in certain cases);
- The entity that distributes profits/reserves or whose participation was transferred is not resident in a tax haven;
- The distributed profits/reserves do not correspond to costs deductible by the entity that distributed it;
- The company is not subject to a tax transparency regime.
- For cases in which the Participation Exemption regime does not apply, a unilateral tax credit for international double taxation is now available, namely income tax paid abroad by the entity resident outside of Portuguese territory on profits/reserves distributed to the Portuguese company, provided that it directly or indirectly holds a participation of no less than 5% of the shareholder capital or voting rights of the entity that distributes the profits/reserves; that said participation has been owned by it uninterruptedly during the 24 months prior to distribution or is maintained during the time necessary to complete such a period; and that the subsidiary entity is not resident in a tax haven.
- The income or loss from stable establishments pertaining to companies resident in Portugal and located outside national territory can now be excluded from their tax base providing the establishment is subject to income tax no lower than 60% (13.8%) of the corporate income tax rate in the state where the establishment is located.
- The income resulting from the sale and sharing of a company’s assets, minus the purchase value of the acquisition of the corresponding shareholdings, is now considered as capital gains in its entirety, allowing for application of the Participation Exemption referred to above, providing the respective requirements are complied with; any losses shall be deductible providing the participation has been held for at least 4 years.
- (Patent Box) Only half of the income obtained from the assignment or temporary use of patents and designs or industrial models, which is subject to registration (registered after 1 January 2014), is taken into account in determining taxable profit, provided certain conditions are met.
- The time period for carrying forward tax losses has been increased to 12 years, i.e. tax losses (as of 1 January 2014) can now be deductible from calculated profit during the 12 subsequent taxation periods; however, the deduction to be made is limited to 70% of taxable profit calculated during the respective financial year and the longest-standing losses must be deducted first (FIFO method).
- As regards transfer prices, the concept of special relationships has changed, the percentage participation between an entity and the owners of the respective capital having increased from 10% to 20% of the respective capital on the basis of which it is determined that there is a special relationship for the purpose of applying transfer price rules, among other changes.
- The taxation applicable to the re-domiciling in another EU or EEA Member State of a company resident in Portugal can now be deferred subject to certain conditions.
- The deduction provided for within the scope of the unilateral tax credit for international double taxation can be made within the 5 taxation periods that follow.
- Net financing costs that are deductible in terms of determining taxable profit have been reduced to the higher of the following limits: 1,000,000 Euros or 30% of EBITDA (the Government Budget Law of 2013 remains in force, in accordance with which the latter limit is transitionally 60% in 2014, 50% in 2015 and 40% in 2016).
- Autonomous taxation rates on charges related to lightweight passenger vehicles or motorcycles, excluding vehicles powered exclusively by electrical energy, with an acquisition cost of less than 25,000 Euros shall now be 10%. If the acquisition cost is equal to or greater than 25,000 and less than 35,000 Euros the rate shall be 27.5%. If the acquisition cost is equal to or greater than 35,000, the rate shall be 35%. If the company has tax losses, the aforementioned rates shall be increased by 10%.
- Amortizations of some types of industrial property are now accepted as tax costs, along with amortizations on goodwill acquired within a concentration of corporate activities over a period of 20 years and only for assets acquired after 1 January 2014.
- A retained and reinvested profits deduction regime (RRPD) has been established that benefits small and medium enterprises, allowing a deduction of up to 10% of retained profits from their corporate income tax up to a limit of 5,000,000 Euros and up to 25% of taxable corporate income for each taxation period, reinvested in eligible assets within a period of 2 years counted from the final taxation period that the retained profits pertain to, providing they are held and accounted for during a minimum period of 5 years; eligible assets are tangible fixed assets acquired in brand new condition, with the exception of land, buildings (including construction, acquisition and repair), vehicles, recreational boats or tourism aircraft; companies that benefit from this RRPD must create a special reserve on the balance sheet in an amount corresponding to that of the retained and reinvested profits, and which may not be used for a period of 5 years.
- It is clarified that copyright transfers benefit from the exemption applicable to the transfer of copyright when made by the authors themselves or their heirs.
- A period of 2 years has been established, to be counted as of the first day of the following calendar year, for the deduction of VAT relating to doubtful debt or bad debt; in the case of bad debt, the person acquiring the good or service must be notified of the total or partial cancellation of the tax in order to rectify the initially made deduction.
- The tax base of the members of the governing bodies ceases to have a limit and now corresponds to the amount of effectively earned remunerations
PERSONAL INCOME TAX:
- Health insurance that is generally granted by employers to their workers or family members shall cease to be considered income received from salaried work.
- The amount awarded to the partners of a company due to the sale and sharing of its assets, minus the acquisition value of the corresponding shareholdings, shall now be considered in its entirety as income from capital gains.
- The autonomous taxation rate applicable to charges related to lightweight passenger or mixed type vehicles with an acquisition price equal to or greater than 20,000 Euros paid by individual persons that may or should possess organized accounts within the scope of the performance of business or professional activities, shall now be 20%.
- The means for proof of residence in another state, for the purpose of dispensing with withholding tax on income paid to non-residents or the reimbursement of undue withholding tax, have been simplified and the official 21-24 RFI forms may be filled out without certification, but accompanied by a document that proves tax residence during the respective period issued by the relevant authorities of the respective state of residence.
TAX COURTS AND OTHER MATTERS:
- With regard to decisions by the Tax Authorities within the scope of a binding information request, taxpayers shall now have legal recourse to contest, via autonomous litigation, the taxation-legal framework of the facts stated in the response to the request, non-existence of the pre-requisites for providing binding information, and refusal to provide binding information.
- The criteria that the government must follow when creating the list of countries or territories with a tax regime that is clearly more favourable (tax havens), such as the inexistence of a tax similar to corporate income tax, or if it exists, the applicable tax is less than 60% of the corporate income tax rate, have been systematised; the countries or territories that are on the list may request revision of the respective framework.
If it is in your interest to obtain clarifications regarding the International Business Centre of Madeira please do not hesitate to contact us.