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Budget Bill for 2007 – tax incentives: details — Orbitax Tax News & Alerts

The government Budget Bill for 2007 was presented to parliament on 16 October 2006. The Bill includes a number of tax amendments to the tax incentive statute (EBF), which will generally apply from 1 January 2007. The most significant amendments in the Bill are summarized below.

(a) Time limit for tax benefits. The Budget Bill establishes a general 5-year period to benefit for the provisions included in Part II and III of the tax incentive statute. The 5-year period does not apply to several incentives, such as the regimes for pension funds, investment funds and venture capital funds.

(b) Extension of the participation exemption. The participation exemption for corporate income tax (IRC) purposes will be extended to profit distributions derived from companies resident in African countries with Portuguese as their official language (i.e. Angola, Cape Verde, Guinea Bissau, Mozambique and São Tomé and Príncipe). Accordingly, the participation regime will be available provided:

-   the recipient entity is subject and not exempt from IRC, and the paying entity is subject and not exempt from a tax analogous to IRC;
-   the recipient entity has a minimum direct holding of 25% of the capital of such a subsidiary for at least 2 years; and
-   the profits distributed are related to profits of the subsidiary which have been taxed at a rate not less than 10% and which do not derive from passive activities, namely (i) royalties; (ii) capital gains; (iii) other income related to securities; (iv) immovable property income derived from property situated outside the country of residence of the subsidiary; or (iv) banking and insurance income from operations not directed to that particular market.

(c) Deductibility of contributions to pension funds. Contributions to pension funds and other social security complementary regimes which guarantee a pension upon retirement, disability or death will be deductible for individual income tax purposes, provided that: (i) when paid and supported by third parties, they have been included in the taxable income of the taxpayer; or (ii) when paid and supported by the taxpayer, they do not constitute business income expenses (Category B income).

(d) Venture Capital Funds. Income from venture capital funds will be subject to 10% withholding tax. However, the Budget Bill establishes an exemption from withholding tax on income derived by a tax-exempt entity or a non-resident entity without a permanent establishment in Portugal. The exemption is however not available if the recipient is an entity resident of a listed tax haven or a non-resident entity that is held by more than 25%, directly or indirectly, by a resident entity.

(e) Forestry investment funds. Subject to certain conditions, forestry investment funds (i.e. funds where at least 75% of assets are allocated to exploit forest resources) will benefit at the fund level of a corporate income tax exemption. The tax regime applicable to the unit holders follows the venture capital funds regime described above.

(f) Employment creation incentive. The scope of the employment creation incentive is extended to include, in addition to individuals less than 30 years old, long-term unemployed individuals (i.e. registered unemployed for more than 12 months). The incentive will be only available once per employee, irrespective of the employer.

(g) Corporate reorganizations. The tax benefits for reorganizations, established under Decree-Law 404/90, will be transposed to the tax incentive statute. The scope of the regime will be extended to cover corporate reorganizations (e.g. mergers, divisions or cooperation agreements) involving companies with head office, effective management or domicile in Portugal or in any other EU Member State or in a country with which there is a tax treaty concluded with Portugal. Companies resident of a listed tax haven are, however, excluded.

(h) Mortgage-backed bonds. The Budget Bill extends the VAT and Stamp Duty exemption applicable in securitization transactions to mortgage-backed bonds, namely with respect to credit servicing and assignment of credits.

(i) Tax benefits for patronage. The tax benefits established under the Patronage Statute will be transposed to the tax incentives statute.