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Portuguese rules regarding transfer prices are in line with OECD recommendations and thus within the standard for developed countries.

The Legal Persons Income Tax Code (CIRC) clearly states that for commercial operations, including operations or a series of operations regarding goods, rights or services and financial operations performed between a taxpayer and any other entity, whether or not they are subject to corporate income tax, with which there are special relationships, terms or conditions that are substantially identical to those that would normally be contracted, accepted and practiced between independent entities concerning comparable operations must be employed.

This principle is applicable to:

  • Related-party transactions performed between the corporate income taxpayer or personal income taxpayer and a non-resident entity;
  • Operations performed between a non-resident entity and its stable establishment, including those performed between a stable establishment located in Portugal and other stable establishments of the same entity located outside Portugal;
  • Operations between a resident entity and their stable establishments located outside Portugal or between the stable establishments located outside Portugal;
  • Related-party operations performed between entities residing in Portugal and corporate income taxpayers or personal income taxpayers.

 

Special relationships are considered to exist between two entities in situations where one has the power to directly or indirectly exercise significant influence over the management decisions of the other, which is verified namely between:

  1. An entity and the holders of the respective capital or their spouses, ascendants or descendents that directly or indirectly hold a stake of no less than 20% of the capital or voting rights;
  2. Entities in which the same holders of capital, respective spouses, ascendants or descendants directly or indirectly hold a stake of no less than 20% of the capital or voting rights;
  3. An entity and the members of their governing bodies or any administrative bodies, boards of directors, management or auditing bodies and respective spouse, ascendants and descendants;
  4. Entities in which most of the members of the governing bodies or members of any administrative bodies, boards of directors, management or auditing bodies, whether they are the same persons or different persons, are linked to each other by marriage, legally recognized cohabitation or line of descent;
  5. Entities linked by subordination or same level group contract or any other contract of an equivalent level;
  6. Companies that are in a dominating relationship in accordance with applicable legislation;
  7. Entities whose legal relationship allows, as per their terms and conditions, that one affects the decisions of the other in accordance with the facts or circumstances that are foreign to the actual commercial or professional relationship;
  8. A resident or non-resident entity with a stable establishment located in Portugal and an entity subject to a clearly more favourable tax regime residing in a country, territory or region on the list approved by Ministry of Finance Order in Council.

As such, companies must adopt, in order to determine the terms and conditions that would normally be agreed, accepted or practiced between independent entities, the method or methods that are likely to ensure the highest level of comparability between operations or series of operations that they perform and other substantially identical ones under normal market conditions or situations free of special relationships.

 

The following methods shall be used:

  • The comparative market price method, the resale-minus method or the cost-plus method;
  • The profit split method, the net operating margin method or any other method when the methods mentioned in the previous paragraph cannot be applied, or if they can be applied, do not permit the most reliable measurement of the terms and conditions that independent entities would normally agree to, accept or practice.

Companies are obliged to maintain a tax documentation file for each taxation period in good order for a period of 12 years at an establishment or installation located in Portugal.

This file must contain the company’s organized documentation related to its transfer price polices, including the directives or instructions pertaining to its application, contracts and other legal acts formed with entities with whom the company has a special relationship, indicating the modifications that have occurred and information regarding respective compliance, documentation and information related to such entities and the companies and goods or services that are used as comparatives, functional and financial analyses and sector data, as well as information taken into consideration to determine the terms and conditions normally agreed, accepted or practiced between independent entities and used to select the method or methods used.

Similarly, companies are obliged to indicate the existence or inexistence of operations, for the respective taxation period, with entities with whom they have special relationships in their annual accounting and tax information declaration.

Taxpayers may ask the Tax Authorities for a ruling to establish a prior method or methods of determining the terms and conditions that would normally be agreed, accepted or practiced between independent entities with respect to commercial and financial operations, including intragroup services and cost sharing agreements made with entities with whom they have special relationships or involving operations performed between the head office and the stable establishments. Such a ruling can be bilateral or multilateral in the case of operations with entities residing in a country with whom Portugal has signed an agreement to avoid double taxation. The taxpayer must request that the ruling be submitted to the respective applicable authorities within the scope of the amicable procedure instituted for such purposes.

The Tax Authorities may undertake the necessary corrections to determine taxable profit as a result of special relationships with another corporate income taxpayer or personal income taxpayer, which implies that when determining the taxable profit of the personal income taxpayer the appropriate adjustments must be made to reflect the corrections made when determining the corporate income taxpayer.

The Tax Authorities can also undertake the correlative adjustment referred to in the previous paragraph when it is the result of international conventions signed by Portugal, as per the terms and conditions stipulated therein.

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