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5 January 2021

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Portugal State Budget Law for 2021 Published

Portugal published the State Budget Law for 2021 (Law No. 75-B/2020) in the Official Gazette on 31 December 2020. Several of the tax measures concern permanent establishments (PEs), including the following:

  • The extension of the rules on the attribution of profits to a PE to provide that income derived by a non-resident from the sale of goods or activities carried out that are identical or similar to those sold/carried out by a PE in Portugal should be included in the calculation of the profit attributable to the PE (force of attraction rule);
  • The inclusion of ships used in the prospecting or exploitation of natural resources in the concept of a PE (currently limited to drilling boats used for PE purposes);
  • The reduction of the time period that activities exercised through facilities, platforms, or ships used in the prospecting or exploitation of natural resources constitutes a PE, from 6 months to 90 days;
  • The inclusion of a service PE rule providing that a PE is constituted when an enterprise furnishes services in Portugal for a period or periods aggregating more than 183 days within any 12-month period;
  • The inclusion of new dependent agent PE rules, providing that a PE is constituted where a person, other than an independent agent, acts on behalf of a non-resident enterprise, where:
    • the person has, and habitually exercises, powers of intermediation and conclusion of binding contracts, in the context of the enterprise's activities, including contracts:
      • in the name of (on behalf of) the enterprise;
      • for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or
      • for the provision of services by that enterprise;
    • the person usually plays a decisive role in the conclusion by the enterprise of contracts referred to above in a routine manner and without substantial changes; or
    • the person maintains a stock of goods in Portugal for their delivery on behalf of the enterprise, even though the person does not usually conclude contracts in relation to those goods nor has any intervention in the conclusion of such contracts;
  • The amendment of the list of preparatory or auxiliary activities that do not result in a PE, with the removal of "delivery" activities in relation to installations used solely for storing or displaying goods and the maintenance of a stock of goods solely for storage or display;
  • The inclusion of the rule that the exemption for preparatory or auxiliary activities does not apply in relation to installations for storing goods or for the maintenance of a stock of goods if an enterprise, or a closely related enterprise (50% control or common control), exercises a complementary activity that forms a coherent set of businesses activities in the same place or other places in Portugal, where:
    • the installation or warehouse constitutes a PE of that enterprise or other closely related enterprise; or
    • the whole activity resulting from the combination of activities carried out by two or more closely related enterprises in the same place, or by the same enterprise or closely related enterprises in different places in Portugal, is not preparatory or auxiliary in nature;
  • The inclusion of a new provision regarding tax representatives, which requires an entity to appoint a natural or legal person resident in Portugal as a tax representative in cases where the entity obtains income from Portugal but does not have its headquarters or place of effective management in Portugal or a PE in Portugal.

Some of the other important measures of the draft law include:

  • An exemption from autonomous taxation on certain expenses for qualifying enterprises that incur a loss in 2020 and 2021, including micro, small, and medium-sized enterprises (MSMEs) that have generated profit in at least one of the previous three tax years and have timely filed their returns for the previous two tax years;
  • The 6% reduced VAT rate introduced on supplies of protective masks and skin disinfectant gels (sanitizer) in response to COVID-19 is made permanent and the VAT exemption for intra-Community supplies of goods necessary to combat the effects of the COVID-19 outbreak by the State and other public bodies or by non-profit organizations is extended to 30 April 2021;
  • The scope of the municipal real estate transfer tax is extended to provide that the tax applies on the acquisition of shares in joint-stock companies when:
    • more than 50% of the company's asset value is derived directly or indirectly from real estate property situated in Portugal, taking into account the balance sheet value or, if higher, the tax equity value;
    • such property is not directly related to agricultural, industrial, or commercial activity (excluding the trading of real estate); and
    • as a result of the acquisition, any of the shareholders become the owner of at least 75% of the company's share capital or the number of shareholders is reduced to two married people or the equivalent (an exemption is provided for shares traded on a regulated market);
  • Legislative authorization is provided for the introduction of a tax benefits scheme corresponding to a tax credit of 20% of the costs incurred for the creation of jobs in inland regions that exceed the national minimum wage, capped at the tax due in the tax year concerned (requires EU approval);
  • A 110% deduction is introduced for expenses incurred for external promotions by MSMEs in 2021 and 2022, including expenses related to:
    • participation in trade fairs and exhibitions abroad;
    • specialized consulting services for marketing campaigns in foreign markets, technical assistance and studies of foreign markets, certifications for foreign markets, etc.; and
    • other investment expenditure for the promotion of internationalization;
  • New rules are introduced requiring large companies (not qualifying as an MSME) to maintain employment levels in 2021 in order to claim certain public support and tax incentives if the company recorded a net positive result for the 2020 calendar year (or accounting period starting after 1 January 2020 if not following the calendar year), meaning the average number of employees in 2021 must be at least equal to the employee level as on 1 October 2020 - this applies in relation to:
    • credit lines with state guarantees;
    • the notional interest deduction;
    • the investment support regime (RFAI);
    • the R&D incentive (SIFIDE II); and
    • the extraordinary 20% tax credit for investments (CFEI II) introduced by Law No. 27-A/2020;
  • Special payment regimes are introduced for 2021, including:
    • a special regime for the payment of outstanding corporate tax and VAT in installments in 2021 for qualifying MSMEs without the requirement of a guarantee and with a 50% reduction in the collection of compensatory interest or any other charges or charges during the period of the installment plan, which must be paid by 31 December 2021;
    • a general option to request payments in installments of debts to the tax and customs authority in 2021 with some relaxed conditions; and
    • a general option to request payments in installments of social security debts in 2021 with some relaxed conditions.

This law entered into force on 1 January 2021.

In addition to the State Budget Law, Portugal has also published Regional Legislative Decree no. 18/2020/M, which approves the Budget of the Autonomous Region of Madeira for 2021. One of the key measures for Madeira is a reduction in the corporate income tax rate from 20% to 14.7% with effect from 1 January 2021. For SMEs directly and principally carrying out an economic activity of an agricultural, commercial, or industrial nature, a reduced rate of 11.9% is provided on the first EUR 25,000 of taxable income.

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