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Portugal

19 February 2006

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The proposals included in the Budget Bill for 2006 have been approved by the parliament, subject to certain minor changes, and enacted as the Budget for 2006 by Law 60-A/05, published in the Official Gazette of 30 December 2005.

Corporate income tax (IRC)

(a) Deductible expenses. Expenses relating to documents (e.g. invoices) issued by taxpayers whose activities are declared to have ceased ex officio do not qualify as deductible expenses.

(b) Simplified scheme of taxation. Small enterprises may be subject to the simplified scheme of taxation. The taxable income determined on the basis of the simplified scheme is subject to a minimum amount of EUR 5,402 (EUR 6,250 in 2005).

(c) Thin capitalization. In order to comply with the decision of the European Court of Justice in the Lankhorst-Hohorst Case C-324/00, thin capitalization rules do not apply to EU resident entities. In addition, the possibility to apply a different debt-to-equity ratio, based on fair market conditions, is no longer available in cases where the borrower is resident in a listed tax haven jurisdiction for Portuguese purposes.

(d) Transfer pricing related-party test. The related-party test for transfer pricing purposes has been extended, so as to apply to transactions between a non-resident entity with a permanent establishment (PE) in Portugal and an entity that is a resident of a listed tax haven for Portuguese purposes.

(e) Limitation on the deduction of net losses extended to supplementary capital contributions. The 50% limitation on the deduction of net losses incurred on the sale of shares or other corporate rights has been extended to decreases in net worth or other negative equity variations associated with shares or other items of a company's equity, i.e. supplementary capital contributions.

(f) Exit tax upon the transfer of the seat or place of effective management. The transfer of the seat or place of effective management of a Portuguese company (including a European Company), without being liquidated, gives rise to a taxable capital gain or loss equal to the difference between the market value of the assets and their net book value, unless the assets and liabilities remain in Portugal as part of the property of a Portuguese PE. The same treatment applies if a PE ceases its activities in Portugal or transfers its Portuguese-situs assets abroad. In addition, the shareholders of a Portuguese company that transfers its seat or place of effective management abroad are subject to tax on the difference between the company's net assets (valued at the time of the transfer at market prices) and the acquisition cost of the participation.

(g) PE losses prior to the transfer of the seat or place of effective management of a Portuguese company. Upon request to the tax authorities, losses relating to taxable periods prior to the transfer of the seat or place of effective management of the company may be deductible at the level of the surviving PE, provided that the losses relate to assets connected to such PE.

(h) Minimum IRC liability (ceiling on the use of tax incentives). For the purposes of determining the minimum IRC liability, which corresponds to 60% of the IRC that a company would pay in the absence of certain listed tax incentives, the tax credit for R&D related investments is considered excluded from the list of tax incentives.

(i) Special prepayment. The maximum limit of the special prepayment is increased from EUR 40,000 to EUR 70,000. Special prepayment is calculated as 1% of the preceding year's turnover with a minimum of EUR 1,250. In case such amount exceeds EUR 1,250, the special prepayment equals EUR 1,250 plus 20% of the exceeding part, up to a limit of EUR 70,000.

(j) Official assessment upon failure to submit tax return. In case a tax return (Form 22) is not filed, tax authorities are authorized to issue an official assessment corresponding to the taxable base of the previous taxable year, with a minimum amount of EUR 5,402 (which is also the limit applicable to the simplified scheme of taxation).

(k) Merger Directive. The Budget Law provides for the implementation of the latest amendment to the EC Merger Directive (Council Directive 2005/19/EC of 17 January 2005.

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