Supplementary Budget 2020
Supplementary Budget 2020 – Temporary and remedial adjustments
As is, the Supplementary 2020 State Budget (SB2020) is somewhat conservative with its fiscal policies especially considering what would be desirable facing the present social, economic and financial hardships adjacent to the current pandemic and any future implications it may bring.
The Bank of Portugal’s forecast, as published in June’s Economic Journal, anticipated a reduction of 9.5% in this year’s GDP (the December forecasts expected a 1,7% growth in 2019). This decline can obviously be explained by the widespread economic hault which was felt in the past months, and which will drive the unemployment rate to an estimated 10%. This significant economic hardship anticipates the need for additional tax measures, even beyond those stated in the supplementary state budget. The European agreement to address the economic crisis positively reinforces this trend.
The SB2020 establishes a very much desirable extraordinary measure to take effect in the current year in relation to Personal Income Tax (PIT): the limitation of the payments on account to be made by taxable persons who fall under Category B (Business and Professional Earnings). Furthermore, note that the State Secretary for Tax Affairs extended from the 20th July to the 31st August, the deadline to complete the first payment, therefore aligning it with the deadline extension previously granted to the payments on account of Corporate Income Tax (CIT). However, no alterations have been introduced to PIT tax brackets in order to correct inflation, (even though the 2021 and 2022 predictions show inflation is to remain low) or to the increase the family deductions.
Regarding CIT measures, also applicable to non-SMEs, the following initiatives should be highlighted: (i) the increase of the carry forward period to 12 years for tax losses incurred in 2020 and 2021, along with the increase from 70 to 80% on the limit for tax loss deductions in relation to losses incurred in the same time period; (ii) the waive of the need to make the third payment on account is now extended to the first two payments; this is a highly desirable measure, and will apply to 100% of the amount of the two first payments on account due in 2020; this measure is applicable to SMEs, cooperatives and taxable persons in the hospitality, food and other similar sectors with no added requirement for lower billings; (iii) the establishment of a new Special Investment Tax Scheme (CFEI II) which allows for a 20% CIT deduction in expenses incurred in investments on assets between 1st July 2020 and 30th June 2021, in a value of up to EUR 5 million.
The SB2020 is clearly scarce in tax measures for non-SMEs. In the upcoming foreseeable situation where unemployment rate can hit the 10% mark, it would be desirable and appropriate to include long-term job creation tax incentives, particularly when considering that non-SMEs have been under an enormous burden to maintain its workforce during the pandemic.
The SB2020 draws on the OECD, FMI and EU’s guidance and establishes a series of tax measures applicable specifically to SMEs, such as: (i) the overlook of 2020 tax loss deduction limits for a merged enterprise, therefore providing an incentive for SME mergers under the special regime of tax neutrality; (ii) the creation of a special regime of transfer of tax losses acquirers of undertakings in difficulty.
Aside from the measures established in the SB2020, other statutory measures have been implemented as a way to boost SMEs liquidity. These measures include: (i) temporary halting of payment on accounts and special payment on account although this measure and the current SB2020 measures apparently overlap; (ii) early return of the full amount of non-deducted special payments on account; (iii) the refund of withholding taxes, payment on accounts or excessive VAT payments within a maximum of 15 days.
There are no nominal tax or autonomous tax reduction provisions in the SB2020. These types of provisions would be crucial to encourage investment and provide short-term liquidity to companies and enterprises. The Economic and Social Stabilization Programme (PEES) called for the overlooking of the aggravated autonomous tax to be applied on tax losses, but this measure was not included in the supplementary state budget.
The SB2020 does not reduce or suspend special contributions, but rather adds an additional solidarity levy over the banking sector with no end date in sight. This added tax was a means to finance the extra burden being put on the Social Security mechanism. It’s worth mentioning that the SB2020 does not include any tax measures regarding the tourism or real estate sectors, two of the most severely impacted fields during this pandemic.
There are no current changes made by the SB2020 to the concepts of tax residency, permanent establishment or any other notions relevant to the mitigation of double taxation. However, alterations on these matters are to be expected as the OECD guidelines and the recently approved European Commission tax package to ensure that European Union tax policy supports Europe's economic recovery and long-term growth all include changes in these regards.
Due to a real possibility of a worsening economic situation and its consequent impact on State accounts, it is more likely than not that the Government will once again alter the State Budget. Perhaps then, as well as upon the formal confirmation of the European Union’s support, which will only arrive in 2021, the Government will feel more confident when it comes time to make new alterations. This would be important as to ensure the Government includes bolder proposals which can contribute to the much ambitioned tax relief which in turn, could significantly loosen the economy.
Rosa Branca Areias, PwC Tax Lead Partner
Supplementary Budget 2020: Tax Measures
(Law 27-A/2020, dated 24 July)
CIT - Incentives
(i) Special investment tax credit scheme (“Crédito Fiscal Extraordinário de Investimento” or “CFEI II”) Any taxpayer who incurs investment expenses between the 1st of July 2020 and the 30th June 2021 (or if the entity’s taxable period starts July 1st, during the 12 following months) , through the acquisition of tangible fixed assets, non consumable biological assets and intangible assets, benefits from a 20% CIT deduction on investment expenses, up to a limit of 5 million Euros. The deduction is capped at 70% of the tax assessed. In case the entity is part of a group taxed under the Special Regime for Group Taxation (“Regime Especial de Tributação de Grupos de Sociedades” or “RETGS”), the deduction is made on the overall group income, although the individual limits still apply with reference to the tax assessed by the entity that makes the investment. In case the tax assessed is insufficient, the benefit may be carried forward for a period of 5 years. The expenses used to obtain this benefit cannot be used to obtain any other similar tax benefits. The taxpayer must not terminate or make redundant any employees for a period of 3 years. |
(ii) Incentives to SME restructuring in 2020 under the tax neutrality regime The following regime was introduced: a) The disregard, in the first three tax years, of deduction limits on tax losses of the incorporated companies, which have been transmitted in a merger as long as the following conditions are met:
b) The disregard of the state surtax in the first 3 tax years and at least for 3 years; c) If there is profit distribution before the prescribed three-year period, the following amount is added to the CIT calculation, in relation to the tax year in which the distribution occurs: the difference between the deducted tax losses and those which would have been deducted but for the current regime, plus 25%. If applicable, the amount of state surtax which was not paid, plus 15%. |
CIT - Tax losses
(i) Tax losses generated in 2020 and 2021 The following changes have been introduced: a) The deadline for reporting tax losses generated by large companies in 2020 and 2021 is extended to 12 tax years (currently the deadline for reporting is 5 tax years). Reporting deadlines for Small and Medium-Sized Enterprises (SME) are kept at 12 tax years; b) Increase the tax loss deduction limit from 70% to 80%, when the difference stems from tax losses incurred in 2020 and 2021; c) Disregarding the 2020 and 2021 tax years when calculating the deadlines for tax loss reporting for the 2020 tax year. |
(ii) Special Regime for tax loss transmission applicable to acquirers of companies in difficulty A special regime was created allowing for the transmission of SME generated tax losses and corresponding deduction by the acquiring company, in case the SME is acquired by the 31st December 2020. For the purpose of this benefit, only SM which became classified as ‘companies in difficulty’ in 2020 (in relation to the situation in 2019’s tax year) are relevant. The acquiring company will perform the deduction of tax losses incurred by the acquired company in a matter which is proportional to its share capital of the purchased company, up to 50% of its taxable profit. The deduction is conditioned by a series of requirements, including:
|
CIT - Payments on account
|
(ii) Early refund of special payments on account Cooperatives, micro, small and medium companies can request in 2020 the full refund of the amount of special payments on account (“Pagamento Especial por Conta” or “PEC”) that until 2019 was not yet deducted (meaning that the refund is not condition to wait for the sixth tax year following the year in which the PEC was paid). |
Offshores
Offshores excluded from public support funds
The following entities are excluded from public support measures created within the context of the extraordinary and temporary COVID.19 pandemic measures:
Entities with head office or place of effective management in countries, territories or regions with a more favourable tax regime, included in the list approved by Decree 150/2004, of 13 February 2004;
Companies under the domain (within the meaning of Article 486 of the Company’s Code) of entities (including all sort of fiduciary structures) with head office or place of effective management in countries, territories or regions with a more favourable tax regime, included in the list approved by Decree 150/2004, of 13 February 2004; the same applies in case the respective beneficial owners is domiciled in such countries, territories or regions.
Personal Income Tax
Extraordinary limitation on 2020 payments on account
Taxpayers under Category B (self-employment income) who must make a payment on account in 2020, but do not make the first and second payments on account, may rectify the full amount owed up to the deadline for the third payment on account (20th December 2020). Such rectification will occur free of charge.
Banking Sector
A Solidarity Surcharge was introduced. It is due by credit institutions and branches in Portugal of credit institutions whose head office and place of effective management are not located in the Portuguese territory.
The Solidarity Surcharge shall be levied on:
a) The amount of the liabilities, net from the liability items included in capital and the deposits covered by the Deposit Guarantee Fund and the Mutual Agricultural Credit Guarantee Fund, where applicable;
b) The notional amount of the financial derivatives accounted for in the off-balance sheet.
The applicable rates vary depending on the taxable base:
The liabilities (including the liability items that are included in capital), are subject to a rate of 0.02%;
The notional value of off-balance sheet derivative financial instruments is subject to a rate of 0.00005%.
The Solidarity Surcharge shall be self-assessed until the last day of June of the year following which the accounts refer to and must be paid within that period.
A transitional regime in force during the years 2020 and 2021 shall apply, as follows:
a) The taxable base shall be computed with reference to the six-month average of the final balances for each month. For the Solidarity Surcharge due in 2020, the taxable base shall be computed with reference to the accounts of the first semester of 2020. For the Solidarity Surcharge due in 2021, the taxable base shall be computed with reference to the accounts of the second semester of 2020;
b) In case there are no approved accounts for the first and second semesters of 2020, the taxable base shall be computed with reference to the six-month average of the final balances of each month. For the Solidarity Surcharge due in 2020, the taxable base shall be computed with reference to the accounts of the first semester of 2020. For the Solidarity Surcharge due in 2021, the taxable base shall be computed with reference to the accounts of the second semester of 2020;
c) The Solidarity Surcharge due in 2020 and 2021 should be assessed and paid until 15 December 2020 and 2021, respectively.
Instalment plans
Amendments to existing instalment plans under the new regime foreseen in the 2020 Supplementary Budget do not require additional guarantees. Existing guarantees are maintained, which will be progressively reduced as prescribed in the Tax Procedures Code (‘Código de Procedimento e de Processo Tributário’).
The exceptional regime is applicable to tax and Social Security debts incurred during the period between the 9th March and the 30th June 2020.
“Due to a real possibility of a worsening economic situation and its consequent impact on State accounts, it is more likely than not that the Government will once again alter the State Budget.”
Contact us
Tax Partner – Corporate & International Tax, PwC Portugal
Tel: +351 213 599 618
