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26 September 2019

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Portugal Publishes Tax Code Amendments Including Transfer Pricing and Other Changes

Portugal has published Law No. 119 of 18 September 2019 in the Official Gazette, which provides amendments to several tax codes. This includes the following changes regarding transfer pricing:

  • The scope of transactions subject to the transfer pricing rules is amended to include commercial transactions, including any transaction or series of transactions involving tangible or intangible assets, rights, or services, even if carried out under any agreement, including cost-sharing and intra-group provisions of services, as well as financial and corporate restructuring or reorganization transactions involving changes in business structures, the termination or substantial renegotiation of existing contracts, and especially cases involving the transfer of tangible and intangible assets, rights to intangibles, or compensation for damages or lost profits;
  • The hierarchy of applicable transfer pricing methods is removed, and it is provided that taxpayers may use any of the five standard OECD methods or other generally accepted economic methods, techniques, valuation models in cases where the standard OECD methods cannot be reliably applied, and in particular where transactions concern real estate rights, unlisted shares, credit rights, and intangibles;
  • The controlled transactions information required to be reported with the annual return is expanded to include:
    • The identities of the entities concerned;
    • The type and amount of controlled transactions with each entity;
    • The transfer pricing methods used and changes to the adopted methods;
    • The value of transfer pricing adjustments to comply with the arm's length principle in determining taxable profit; and
    • A declaration that transfer pricing documentation was prepared at the time the transactions took place and has been maintained;
  • The requirement to submit transfer pricing documentation with the annual return is introduced for taxpayers with Major Taxpayer status;
  • The maximum period of validity for an advance pricing agreement (APA) is extended from three years to four years; and
  • The fine for failing timely submit CbC reports is extended so that it also applies for failing to timely submit CbC notifications on reporting entities - the fine is EUR 500 to EUR 10,000, plus 5% for each day of delay in fulfilling the obligations.

Some of the other amendments provided for by Law No. 119 include:

  • The introduction of new rules to provide for the inclusion of income from a reduction of outstanding principal on subordinated bonds and other subordinated securities in corporate income tax base calculations if the instruments do not confer dividend or voting rights and are not convertible into shares, and to provide that negative net equity variations related to the distribution of income from such bond and securities are deductible subject to the same conditions;
  • The introduction of a new form to be used in verifying the eligibility of a non-resident for a reduced withholding tax rate or exemption under a tax treaty, other international agreement, or domestic law, which must be submitted together with the residence certification issued by the competent authorities of the non-residents State of residence;
  • The addition of a new Article 143 (Volume of Business) in the Corporate Tax Code that provides a definition of turnover for the purpose of the Code and other legislation relating to any other taxes that directly or indirectly affect profits, including that turnover corresponds to the value of sales and services rendered, subject to the following:
    • Turnover also includes rents on investment properties as defined in the specifically applicable accounting standards, even if they are recognized as tangible fixed assets, when obtained as part of an activity that integrates the corporate object of the taxable person; and
    • In the case of banks, insurance companies, and other financial sector entities, turnover includes interest and similar income and commissions, or gross premiums issued and commissions from insurance contracts and operations considered as investment contracts or service contracts, depending on the nature of the activity performed by the taxable person;
  • The amendment of the Value Added Tax Code with respect to VAT payment deadlines, which includes that taxable persons are required to remit the amount of tax due:
    • by the 15th day of the 2nd month following the month to which the transactions relate, in the case of taxable persons with turnover of EUR 650,000 or more in the previous year;
    • by the 20th day of the 2nd month following the quarter of the calendar year to which the transactions relate, in the case of taxable persons with turnover less than EUR 650,000 in the previous year.

Note - The VAT payment deadline changes essentially provide a five-day extension for the payment of VAT after the declaration (return) deadlines. The declaration deadlines are not changed, which are the 10th day of the 2nd month following the month and the 15th day of the 2nd month following the quarter, depending on the taxable person's turnover.

The measures of Law No. 119 generally enter into force on 1 October 2019.

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