Brexit - What Changes? (Part 2)
As of January 31st 2020, the United Kingdom (UK) is no longer part of the European Union (EU), concluding the "Brexit" process that began in 2016 with the referendum on the UK's exit from the EU. A transition period was set until the end of 2020 while the UK and the EU negotiated the terms of exit. After several rounds of negotiations, both sides drafted a Trade and Cooperation Agreement (hereafter referred to as the Agreement). We have prepared a two-part analysis of the most significant changes that the new Anglo-European relationship brings for British and Portuguese businesses and individuals. In this second part, we will focus on the most relevant tax changes.
We encourage you, if you have not already done so, to read the first part of this analysis, where we focus on the changes for employees and customs processes.
Brexit - tax changes
Value Added Tax (VAT)
The transfer of goods between Portugal and the UK will no longer be treated as an intra-community transmission and will therefore be subject to the same rules that apply to imports and exports. For exports from Portugal to the UK there may be an exemption from VAT.
Under the Agreement, the transfer of goods between EU member states and Northern Ireland will continue to follow European laws. Taxable persons resident in Northern Ireland, whose principal activity is trade of goods, will have the prefix "XI". For these taxable persons, trade in goods with EU members will be treated as an intra-community acquisition.
As regards the transfer of services, it is important - in order to determine where they should be taxed - to identify the place where the services were actually provided, as well as where the acquirer of those services has its fixed establishment. These rules follow those described in Articles 6 and 6-A of the Portuguese VAT Code (CIVA).
Taxable persons registered under the MOSS VAT scheme may still declare, for tax purposes, services supplied to non-taxable persons in the United Kingdom until the end of the transitional period. Thereafter, the VAT MOSS scheme ceases to apply to those who supply telecommunications services and online trade services to UK residents.
Claims for VAT refunds on trade between the UK and the EU must be made under the refunds to non-EU residents rules, except for trade of goods between the EU and Northern Ireland, which is treated as a member of the EU for tax refund purposes.
Corporate Tax (IRC)
As a consequence of the withdrawal of the United Kingdom from the EU, there will be some changes in the taxation of income obtained in Portugal by companies resident in the United Kingdom.
- The exemptions provided for in EU legislation regarding interest and royalties will no longer apply, being replaced by the tax rate reduction provided for in the Portugal-UK Double Taxation Convention will apply.
- The option provided for in Article 46 (19) of the Portuguese Corporate Tax Code (CIRC) will no longer apply.
- The Participation Exemption regime will continue to apply to everything that does not involve the obligation to reside in another member state of the European Union (e.g., article 51 (7) of the CIRC)
- The deduction of 50% of the profits distributed by companies domiciled in the United Kingdom will no longer be included for the purposes of determining the global income of companies which do not carry out a commercial, industrial, or agricultural activity as their main business.
- The special regime for the taxation of groups of companies (RETGS) will no longer apply to companies residing in the United Kingdom.
- Companies will no longer have the option to pay corporate income tax in several instalments when transferring their residence from Portugal to the UK.
Brexit - What changes for companies in the financial sector?
Decree Law (DL) 106/2020 allows credit institutions, investment firms and collective investment undertaking (CIU) management companies, authorised in the UK to provide investment services in Portugal, to continue to provide those services to Portuguese investors until 31 December 2021. To do so, they must, within 3 months, send the respective form annexed to the DL 106/220 to the CMVM and request authorisation from the CMVM or the Bank of Portugal within 6 months.
Insurance contracts made with insurance companies based in the United Kingdom remain in force until the date of termination of the contract and cannot be extended.
Companies in the banking, payment services and cryptocurrency trading sector may continue their activities in Portugal if they obtain prior authorisation from the Bank of Portugal under the Securities Code and the General Regime for Collective Investment Undertakings.
Brexit - When is a tax representative required?
A tax representative is required in any situation where a person or company is a tax resident in the UK and subject to tax in Portugal. The appointment of a tax representative can be made online, or at a Portuguese Tax Authority delegation, without penalty, until 30 June 2021.
A tax representative is also mandatory whenever a person or company changes its tax residence to the United Kingdom. The fiscal representative must be a tax resident in Portugal and a taxable person for VAT in Portugal, if the non-resident carries out an activity subject to VAT.
Registering a company in Portugal will give UK investors full access to the European Union and the benefits of operating in a safe, innovative, entrepreneurial, and talent-rich country. NEWCO can help you with relocation services, tax representation, accounting, and tax compliance in Portugal. Download our Investing in Portugal Brochure, or contact us to find out more.