As a general rule, financial expenses (i.e. interest costs and additional costs) are deductible by Portuguese resident entities provided that these meet the general criteria for deductibility, which is that the expense must be indispensable for the purpose of gaining or producing taxable income or for the maintenance of the source of income. Under the Corporate Income Tax Code (CITC), “financial costs such as loan interest, discounts given, brokers' fees, transfers, differences in exchange rates, costs of credit operations, debt collection and costs of issuing shares, bonds and other securities" are deductible by Portuguese resident entities provided that they meet the mentioned general criteria for deductibility.

However, restrictions may apply under the domestic transfer pricing rules and a new interest barrier regime to financial costs set forth in the CITC.

Generally, the potential restrictions on full deductibility of interest charges are as follows:

• The general expense deductibility rule, whereby the expense must be indispensable for the purpose of gaining or producing taxable income or for the maintenance of its source; the regulations on transactions carried out between related parties (domestic transfer pricing rules); and
• The general rule on SGPSs (Portuguese domestic holding company “sociedade gestora de participações sociais”), already mentioned, which establishes that interest on debt contracted for the acquisition of shares is not deductible; and the interest barrier limit introduced by the Budget Law for 2013 which brought about a new restriction to interest deduction.

In summary, the interest barrier rule limits the deduction of interest to the greater of the following sums: (a) EUR 1 million, or (b) (ultimately) 30% of EBITDA. The non-deductible portion of interest may be carried forward for 5 years. If the interest expense is below 30% of EBITDA, then the available excess borrowing capacity may also be carried forward for 5 years.