2020 State Budget Law

A virtually surplus Budget

The publication of the 2020 State Budget is now a reality – although a “virtual” reality. Its publication occurring right in the middle of the pandemic scenario weakens the State Budget in respect of its practical usefulness.

One can therefore expect on short term an amendment budget. Or even before that, changes in the law that reflect the social, economic and financial impacts that the pandemic is causing and will continue to cause. It is quite unrealistic to think that the announced surplus will be maintained; that unemployment will not increase; that internal consumption can and will support growth.

Because of all this economic uncertainty it is crucial to think seriously on the tax burden since most of both families and companies will outlast in the absence of some relief, namely in what concerns treasury.

In fact, the extraordinary measures implemented by OECD member states aiming at an immediate relief on treasury cannot be withdrawn upon the end of the state of emergency. On the very next day, difficulties will continue to exist, and it will be necessary to extend those measures to a greater number of companies and people that in the meantime will end up being affected by the systemic effect of this pandemic. Challenging times are coming, where the budgetary balance must be the least of the worries, for the time being.

We therefore expect that the actual 2020 State Budget supports companies and families in an effective manner without the pressure of balancing the budget.

We will now focus on the amendments that have just entered into force following the publication of the State Budget, in view of the proposal that we had already commented. Curiously and although there was a record number of proposed amendments, just a few ended up being approved.

In what concerns companies, the main amendments foreseen in the State Budget proposal remained unchanged. Summarising: (i) the extension of R&D credit (“SIFIDE II”) to 2025 and change of the rules regarding eligible contributions to investment funds aiming at investing in R&D companies; (ii) the increase from EUR 10 million to EUR 12.5 million of the eligible amount of the benefit of deduction of retained and reinvestment profits (“DLRR”); (iii) the extension of the patent box regime to author rights related with computer programs; (iv) an autonomous tax rate of 10% on costs incurred with light passenger and goods vehicles, and motorcycles, with an acquisition cost up to EUR 27,500 (formerly, EUR 25,000); (v) in the first and second years of activity, taxpayers will not be liable for the 10% aggravated autonomous tax rate in case of realising losses; (vi) debts will be considered as doubtful if outstanding for more than 12 months (formerly 24 months), for the purpose of recovering VAT; (vii) exemption from stamp tax in case of agreements of centralised treasury management.

In a scenario where tax policy would be used as an instrument to foster investment and relief on the companies’ short-term treasury needs, it would be desirable a reduction of tax rates, State Surtax rates as well as the autonomous tax rates. It would also be important to consider the business sectors subject to special levies, by means of the respective reduction or suspension, at least for a given period. Tax incentives to foster job creation should also be revisited (by recapping the rules in the meantime revoked, although with some amendments); the same is valid for all the incentives to investment; this Budget should not disregard that non-small and medium sized companies have been constantly forgotten – these are the companies that will be able to make an additional effort and maintain jobs. To relief treasury needs, the second instalment of the special payment on account can be waived, in similar terms as those foreseen for the third instalment; increase the speed in processing VAT refunds; and an increase of the period to carry forward tax losses.

Special attention should be given to tourism, the sector which has been more affected, and continue to be affected upon the end of the emergency state.

In what concerns the tax burden on families, the major change in view of the proposal relates to the introduction of a rate of 10% on the net income from foreign-sourced pensions obtained by Non Habitual Residents (the former exemption is revoked).

Besides the above, the update of 0.3% of the tax brackets and the support to birth rate are maintained. In what concerns the simplified regime a highlight for the aggravated taxation of activities related with local lodging.

For families, an actual update of tax brackets is required, which would allow neutralising the effect of the inflation index, not only in the current year, but also in prior years where that neutralisation did not occur; also required are the increase of the tax credits related with family support and a deferral of the deadlines for the payment of taxes.

The tax “siege” to the real estate sector should also end. The combination of the crisis resulting from the pandemic and the aggravated taxation of Non Habitual Residents brought by this budget will surely lead to a crisis much worse than in 2010.

Lastly, attention should also be given to a review of the internal rules concerning tax residence, permanent establishment and other concepts. It should be assured that the tax regime applicable to people forced to travel during this period does not change. If that is not the case, increased situations of double residence will arise, which will obviously lead to increased situations of double taxation, undesirable in any scenario, and even more in the current one.

While it is certain that we will need to cope with the contraction of the economy, and subsequent increase of public (social) expense and reduction of tax revenues, it is a major challenge not to choose the easiest path by increasing taxation where possible. 

^{Rosa Branca Areias, PwC Tax Lead Partner}