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16 May 2019

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Portugal Publishes Law to Comply with ATAD

Portugal published Law No. 32/2019 in the 3 May 2019 edition of the Official Gazette. The law includes measures to comply with the EU Anti-Tax Avoidance Directive (ATAD), except for the hybrid mismatch rules. Given that several of Portugal's anti-avoidance rules were already generally in line with ATAD, the draft law does not include major changes but does include amendments to bring the rules further in line. This includes:

  • The 30% of EBITDA interest deduction limitation rules, which are amended with expanded definitions of financing expenses and net financing;
  • The rules regarding the deferral and payment of exit tax, which are amended with the repeal of the option to pay tax after gains are (deemed) realized and the related provisions, while the options for immediate payment or payment over five years are maintained where residence is transferred to an EU Member State or an EEA State with an agreement on mutual assistance;
  • The rules regarding the exclusion of profits of a PE, which are amended to include the condition that the PE is subject to tax on its profits that is at least 50% of the tax that would be paid in Portugal.

One area where greater changes are made is to Portugal's general anti-abuse rule (GAAR), which is amended to provide that:

  • If an arrangement or a series of arrangements, with the principal purpose or one of the principal purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, is carried out with an abuse of legal forms or is not considered genuine, taking into account all relevant facts and circumstances, then the arrangement(s) will be disregarded for tax purposes and taxed according to the norms applicable to the business or acts that correspond to the economic substance or reality that do not produce the desired tax advantages;
  • If such arrangements or series of arrangements have resulted in the non-application of withholding tax or a reduction in withholding tax, it will be considered that the tax advantage is produced at the level of the recipient of the income, although the person responsible for withholding may be held liable if the person has or should have knowledge of the arrangement(s); and
  • If the GAAR is applied, the compensatory interest due will be increased by 15%.

Another area where greater changes are made is to Portugal's controlled foreign companies (CFCs) rules, which includes:

  • A change in the ownership conditions to include that in determining if the 25% ownership condition is met, the shares/rights owned by related parties of a taxpayer are considered;
  • The repeal of the provision that the ownership condition is 10% if at least 50% of a CFC is held by Portuguese residents;
  • The amendment of the favorable tax regime conditions to provide that the CFC rules apply if the foreign company:
    • Is established in a territory included in a government-issued list (blacklist); or
    • The tax paid on profits is less than 50% of the tax that would be paid in Portugal;
  • The adjustment of rules on the imputation of CFC income in line with ATAD; and
  • The removal of the exemptions where the CFC is engaged in certain activities not carried out in relation to the Portuguese market, which are replaced with exemptions where:
    • The CFC is established in an EU or EEA member state and carries on substantive activity in the agricultural, commercial, industrial, or service sectors supported by personnel, equipment, assets, and facilities; or
    • The CFC's specified passive income does not exceed 25% of total income, including:
      • Royalty income and other income derived from intellectual property rights, image rights, or similar rights;
      • Dividend income and income from the sale of capital shares;
      • Income from financial leasing;
      • Income arising from operations specific to banking activities (even if not exercised by credit institutions), and insurance or other financial activities with related parties;
      • Income from an enterprise that earns income from goods and services purchased and sold to related parties with little or no economic value added; and
      • Interest income or other income from capital.

The Law entered into force on 4 May 2019.

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