As a rule, exit taxes aim to tax potential gains related to the patrimonial elements held by a taxpayer in the moment he decides to transfer its residency to another State.
Since the transfer of residency determines that the taxpayer will no longer be taxed in the residency State, the goal of these rules is:
- To protect the right of the residency state to the revenues generated in its territory;
- To work as an anti-avoidance clause in order to prevent tax schemes in which the taxpayer, prior to obtaining a significant gain, transfers its residency to a country with a lower taxation.
These rules establish that, in order to determine the taxable profit in the period when the taxpayer (with head office and effective management in the Portuguese territory) has ceased its activity or transferred its head office or effective centre of management to another State, the positive and negative components to be consider should correspond to the difference between the market value of the assets and liabilities and their tax value.
For this exit tax to apply the companies must have their head office and effective management in the Portuguese territory. Please note, in this respect, that our tax law does not require a minimum stay period in Portugal and that the relevant taxable fact is the transfer of residence. This transfer of residence must comprise both the transfer of the head office and of the effective centre of management.
Currently, these rules state that transfers of residence to other countries in the European Union or in the European Economic Area (provided, in this latter case, that an exchange of information agreement has been concluded), deferred tax rules may apply.
Exit taxes may be paid:
- Immediately, comprehending the total amount of CIT due upon exit;
- During the year following that in which any asset being transferred out of Portugal is sold, written off, or detached from the company’s activity, provided such sale is made to a country other than the EU or the EEA (in this latter case, if there is an exchange of information agreement with Portugal); and
- Annually, over a fifth of the total amount of the tax due.
Upon the change of residence, the taxpayers must opt for one of the above alternatives. However, the following tax consequences must be taken into account:
- The deferral of the tax payment triggers late payment interest (currently the annual late payment interest rate is of 5,476%);
- Under certain circumstances, the possibility to defer the exit taxes will be subject to the provision of a guarantee corresponding to the amount of tax due plus 25%;
- In case the taxpayer opts to defer the taxation to the moment when the capital gains are obtained, he must submit annually, and on an ongoing basis, a tax return, since the failure to comply with this obligation may trigger the payment of the tax due.
In the event the taxpayer selects option 3, the payment of the tax should occur: a) the first 1/5 upon the submission of the tax return referring to period when the activity was ceased or the when the transfer occurred, and b) the remaining 1/5 every year until the last day of May (the late payment interests due should be accrued to the amount of tax). The failure to comply with one of these payments determines the maturity of the whole tax due;
If, after electing option 2 or 3, the taxpayer decides to subsequently transfer its residence to a non-EU or non-EEA Member State, it must pay the total amount of tax still due.
The change of residence results in the termination of activity for CIT purposes and in the assessment of gains and losses determined by the difference between the market value and the tax value of the assets and liabilities. All assets and liabilities comprise fixed tangible assets, intangible assets, non-consumable biological assets, investment properties, financial instruments except those recognized at their fair value, and all other assets owned by the company and part of its inventory.
The gains obtained under these exit tax rules should be determined in accordance to the ones established in case of onerous transfer of assets, i.e., the coefficient of currency devaluation should be considered, as well as any amortizations or depreciations.
Normally, the transfer of residence should not trigger the taxation of the respective shareholders.