Tax Guide 2021 | CIT

Taxable income

The taxable income of entities that carry out commercial, industrial or agricultural activities as their main activity is computed as follows:

Depreciation and amortization

^{(1) The cost of acquisitions of intangibles from entities subject to a more favourable tax regime, as per the list published is disallowed as tax deductible cost.
(2) The cost of acquisitions of intangibles from related parties for transfer pricing purposes is disallowed as a tax deductible cost.}

Tax deductible impairment losses

The following impairment losses are allowed as tax deductible costs:

a) those related to bad debts, duly accounted for as such, whenever the risk of non-recovery is duly justified, i.e in case of:

• company insolvency and recovery proceeding or enforcement procedure;
• debts claimed in a court or arbitration court;
• overdue debt.

b) those related to outstanding receipts that are accepted by insurance companies;

c) those recognized by entities subject to the supervision of the Bank of Portugal, including branches in Portugal of credit institutions, and other financial institutions resident in another member State of the European Union or in the European Economic Area as for specific credit risk, securities and other instruments;

d) those related to exceptional devaluation of tangible fixed assets, intangible assets, biological and non-consumable assets and investment property;

e) those related to inventories when the respective net realisable value allows proper and independent valuation.

Tax deductible provisions

The following provisions are allowed as tax deductible costs:

a) Those related to contingencies and liabilities derived from undergoing lawsuits for facts that would determine the respective consideration as costs of the relevant tax period;

b) Those related to contingencies resulting from after-sales services and guarantees foreseen in contracts for the sale of goods or rendering of services;

c) Those related to mandatory technical provisions as imposed by the Portuguese Insurance Institute, made by insurance companies that are subject to supervision as well as by any branch in Portugal of insurance companies established in another member State of the European Union;

d) Those related to costs of repairing of environmental damages, whenever required by law.

Tax capital gains and capital losses

Tax capital gains and capital losses are computed as follows:

Tax capital gains/Tax capital losses = Sales proceeds – (Acquisition Value - Accumulated depreciation/amortisation - Impairment Losses) x inflation index

Shareholdings

Capital gains stemming from the disposal of shareholdings are not subject to taxation if among other requirements, the shares have been held, uninterruptedly, for a period of not less than 12 months, and the taxpayer holds directly, or directly and indirectly, at least 10% of the share capital or of the voting rights.

Capital gains stemming from the disposal of shareholdings acquired before January 1st 1989 are not subject to taxation.

Reinvestment relief 

It allows for a 50% relief from taxation relating to the positive difference between the capital gains and capital losses origination from a transfer for consideration of certain assets, provided that the sales proceeds are reinvested in the previous tax year, in the tax year in which the transfer occurs or in the two following tax years.

In case of partial reinvestment, a partial relief (proportional to the investment made) will apply.

In case the reinvestment is not fully accomplished during the reinvestment period, the difference (or the proportional difference) will be considered as taxable income in the second tax year following the disposal, raised by 15%.

 

Participation exemption on dividends received

Requirements

Entity that receives profits

• A CIT taxpayer, resident in Portugal for tax purposes, that is not tax transparent, or
• A permanent establishment in Portugal of:
  • an entity resident in a EU member state that meets the requirements foreseen in Article 2 of Council Directive 2011/96/EU, of 30 November;
  • an entity resident in a EEA member state, bound to administrative cooperation on tax matters in the same terms as those equivalent to the EU’s, provided that such entity meets the requirements foreseen in Article 2 of Council Directive 2011/96/EU, of 30 November;
  • an entity resident in a state which is not listed as tax haven, with which Portugal has concluded a convention for the elimination of double taxation, currently in force, foreseeing exchange of information, provided that such entity is subject and not exempt from a tax similar to CIT.

Entity that distributes profits:

• It is subject to CIT, or to a tax mentioned in Article 2 of Council Directive 2011/96/EU, of November 30th, or to a tax similar to CIT to which the applicable legal rate is not lower than 60% of the CIT standard rate (21%) – the latter requirement is not relevant in case the entity is not covered by CFC rules;
• Is not resident in a tax haven. 

The participation exemption regime does not apply in the following circumstances:

• The profits distributed correspond to amounts that are tax deductible at the level of the distributing company;
• There is an arrangement, or a series of arrangements that are not carried out based on valid economic reasons and lack economic substance;
• Lack of compliance with the obligations foreseen in the Central Register of Beneficial Owner (“RCBE - Registo Central do Beneficiário Efetivo”), or where beneficial owner, as stated in the statement filed, is resident in a tax haven (except, in the latter case, if the beneficiary entity is not part of an arrangement or series of arrangements that are not based on valid economic reasons and lack economic substance).

Tax losses

Taxable losses generated in 2020 can be carried forward for 12 years. This period applies to large companies, as well as to small and medium sized companies.

The same 12 year period applies in case of taxable  losses generated in 2021.

The deduction of taxable losses is capped at 70% of the taxable profit assessed in the tax year in which the taxable losses are used. It is possible to deduct first the taxable losses which carry forward period ends first.

Said cap is increased to 80% in respect of taxable losses assessed in the tax years 2020 and 2021.

The tax years 2020 and 2021 are disregarded for the purposes of computation of the carry forward period of existing taxable losses with reference to the first day of the 2020 tax year.

Transfer pricing

Concept

Transactions between associated enterprises, whether or not subject to CIT, should be subject to terms and conditions identical to those which would normally be accepted and agreed upon between independent entities in comparable transactions (arm’s length principle).

These transactions can be of the following the nature:

• commercial transactions, including any transaction or series of transactions regarding assets or intangibles, rights or services, even if carried out within any agreement, namely a cost sharing agreement or intragroup services;
• financial transactions;
• business restructuring operations, that imply changes in existing business models, termination or significant changes to existing agreements, specially, in case they imply the transfer of assets, intangibles, rights on intangibles or compensation for damages or loss, of future revenue.

When determining the terms and conditions in transactions with associated enterprises, the taxpayer shall adopt one of the following transfer pricing methods:

• Comparable uncontrolled price, resale minus, cost plus, transactional profit split method, transactional net margin method;

• Other method, technical or economic acceptable asset assessment model, whenever the above methods cannot be used given the unique or extraordinary character of the transactions, or the lack or little information and reliable comparable data.

Lack of compliance with transfer pricing rules allows for the tax authorities to make adjustments to the taxable profit, for the amounts corresponding to the amounts that would be obtained in case of transactions between independent entities, in normal market conditions.

Following the 2021 State Budget Law, the arm’s length principle should be considered for the purposes of assessing capital gains or capital losses in transactions taking place between an individual subject to Personal Income Tax and a related entity.

Transfer Pricing Documentation

Companies with net sales and other income of € 3,000,000 or more (with reference to the previous tax year) should prepare, on a contemporaneous basis, transfer pricing documentation. Documentation should be completed by the 15th day of the 7th month upon the end of the tax year concerned.

Large taxpayers as well as taxpayers under the special tax regime of group taxation are required to deliver the transfer pricing documentation prepared within the above mentioned deadline.

Other taxpayers are only required to deliver the transfer pricing documentation upon request of the tax authorities.

Transfer pricing documentation should be prepared in Portuguese. However, the tax authorities may waive the need to translate documents that are not in Portuguese, if the relevant content is clear.

Failure to deliver transfer pricing documentation when requested is subject to penalties.
 

Company Simplified Information/Annual statement

Transfer pricing information should be reported in the Company Simplified Information/Annual Statement, as follows:

• Identification of the associated enterprises and nature of their relationship; 

• Annual amounts and nature of the transactions;

• Transfer pricing methods used and any respective changes;

• Value of any adjustments to the taxable profit resulting from non-compliance with the ‘arm's length’ principle when determining the terms and conditions of transactions;

A statement, made by the taxpayer, of whether any transfer pricing documentation was prepared or updated.

In respect of the 2020 tax year, for compliance with the tax obligations in 2021, the current standard forms of the Company’s Simplified Information / Annual Statement are still valid.

Country-by-Country Reporting (CbCR)

Form 55 – Country-by-Country Reporting

Where turnover in the preceding tax year is equal to, or higher than, € 750,000,000, the ultimate parent entity of a multinational group of companies, is required to file the Country.by-Country Reporting form (concerning each tax year) The CbCR includes financial and tax information, by country or jurisdiction,concerning each  entity part of that group.

Notwithstanding, an entity resident in Portugal for tax purposes which is not the ultimate parent of the group (substitute ultimate parent entity) may be liable to fulfill this obligation in the following circumstances:

• In case it is directly or indirectly owned by a non-resident entity which is not subject to the CbCR obligation;
• Although there is an international agreement between Portugal and the jurisdiction of which the ultimate parent company is a resident, there is not a qualified agreement in force between the relevant authorities to be complied with within the deadline foreseen for the submission of the CbCR form; or
• There is a systemic failure in the jurisdiction of tax residency of the ultimate parent entity designated to the tax authorities as reporting entity.

The CbCR obligation must be fulfilled by filing the Form 55 until the end of a 12th month period after the closing of the tax year of the group.
 

Form 54 - Communication of the reporting entity of the group

Each entity, resident or with a permanent establishment in Portuguese territory, that is part of a multinational group of companies subject to the CbCR obligation, must communicate to the Portuguese Tax Authorities the reporting entity of the group, the respective tax jurisdiction, its tax identification number and address, by filing, electronically, the Form 54.

Form 54 must be submitted by the last day of May or, in case of taxpayers that adopt a tax  year different from calendar year, by the last day of the 5th month after the end of that tax year (regardless of being or not a working day).

Advance pricing agreements

It is possible to conclude unilateral, bilateral or multilateral advance pricing agreements with the tax authorities, aiming at establishing the terms and conditions of commercial and financial transactions with associated enterprises. These may be valid for a maximum of four years.

The conclusion of an advance pricing agreement implies the payment of a fee to Portuguese Tax Authorities, calculated according to the taxpayer turnover.

 

Controlled Foreign Companies (CFC)

Profits or income obtained by non-resident entities that are subject to a clearly more favorable tax regime are imputed to the Portuguese resident taxpayers subject to CIT that hold either directly or indirectly, even if through a representative, fiduciary or intermediary, at least 25% of their share capital, voting rights or attribution rights over the income or the assets of those non-resident entities.

An entity is considered as being subject to a clearly more favorable tax regime when:

• it is resident in a tax haven;
• the tax on profits effectively paid is less than 50% of the tax that would be due in accordance with the CIT Code.

Upon the distribution of profits or income by a CFC entity to a Portuguese resident taxpayer, the amount that the Portuguese entity proves to have already been imputed in previous tax years, is deductible to the taxable income of the year in which the distribution takes place, up to the amount of the taxable income assessed.

CFC rules do not apply to non-resident entities provided that the sum of the respective income that derives of one or more of the following categories of income does not exceed 25% of their total income:

• Royalties or other income from intellectual property, image rights or similar rights;
• Dividends and income from the sale of shareholdings;
• Income from financial leasing;
• Income from transactions arising from activities that are specific of the banking sector, even if not carried out by credit institutions, as well as from insurance and other financial activities, carried out with associated enterprises as per transfer pricing rules;
• Interest and other investment income.

CFC does not apply in case the non-resident entity is resident or established in another EU member state, or in a EEA member state bound by administrative cooperation on tax matters, and the Portuguese taxpayer proves that the incorporation and existence of the foreign entity relies on valid economic reasons, and, finnaly, that such entity carries out an agricultural, commercial, industrial activity or renders services, using staff, equipment, assets and facilities.

Limitation on the tax deductibility of net financing expenses

Regime

Net financing expenses are allowed as tax deductible expenses, but they are capped at whichever is higher:

•  € 1,000,000; or
• 30% of earnings before depreciations, net financing expenses and taxes (EBITDA).

Any exceeding net financing expenses in a given tax year are deductible in the following 5 tax years, after deducting the net financing expenses of that same tax year, with the above-mentioned caps.

In case the net financing expenses do not exceed 30% of earnings before depreciations, net financing expenses and taxes, the remaining amount is added to the maximum deductible amount (30% of the EBITDA), up to the following 5 tax years.
 

Definition of financing expenses

Financing expenses include:

• Interest on bank overdrafts, short-term and long-term loans or any other amounts due or allocated to debt financing;
• Interest from bonds (convertible bonds, subordinated bonds, zero-coupon bonds and other similar products);
• Amortization of discounts or premiums related to loans;
• Amortization of ancillary costs incurred in connection with loans obtained;
• Financial charges related to finance leases, depreciation or amortization of costs incurred with loans that are capitalized in the cost of acquisition of assets;
• Amounts computed based on the return of an investment under the applicable transfer pricing rules;
• Notional interest amount within the context of derivatives or risk hedging instruments related with the granting of loans;
• Guarantee fee on financing agreements;
• Negotiation charges, and similar costs, related to loan granting.

Net financing expenses correspond to the financing expenses that are relevant for the purpose of computation of the taxable profit. This expense value is upon deduction, capped at the respective amount, of the amount of interest and similar income, subject and not exempt from tax.

Tax EBITDA

The relevant earnings prior to depreciation, amortization, net financing expenses and taxes correspond to the taxable profit or taxable loss, non assessable or non exempt, added to the net financing expenses and tax deductible depreciation and amortisation.

Characteristics

The Special Regime of Group Taxation (“RETGS – Regime Especial de Tributação dos Grupos de Sociedades”) allows for the global taxation of a group of companies considering the algebraic sum of the respective positive and negative results.

Taxable profit of the group = Σ individual taxable profit + Σ individual taxable losses
 

Requirements 

• A company (dominant) holds, directly or indirectly, including through a company resident for tax purposes in a European Union or European Economic Area member state (in the latter case if bounded to administrative cooperation in the field of taxation in similar terms as those applicable in the European Union), at least 75% of the share capital of another company(ies) (controlled entities), and such shareholding grants more than 50% of the voting rights;
• All group companies are resident for tax purposes in Portugal and are subject to the CIT general regime at the highest CIT rate;
• The dominant company owns the relevant shareholding for more than 1 year (or from the date of incorporation);
• The dominant company is not controlled by any other company resident in Portugal;
• The dominant company has not waived the application of the regime in the three previous years.

The special regime of group taxation does not apply to companies that:

• have been inactive for more than 1 year or have been dissolved;
• are undergoing a special procedure of recovery or bankruptcy;
• have registered tax losses in the previous three tax years (unless companies have been held by the parent company for more than 2 years);
• are subject to a CIT rate lower than the standard CIT rate and do not waive the application of that lower CIT rate (this option should be maintained for a minimum 3-year period);
• adopt a tax year different to that of the dominant company;
• are not incorporated as limited liability company (“Lda - Sociedade por Quotas”), joint stock company (“SA - Sociedade Anónima”), ordinary limited partnership or publicly owned undertakings.

Tax obligations

The option to be taxed under the regime should be made:

• until the end of the 3^rd month of the tax year in which the regime shall apply;
• by filing an electronic standard form with the tax authorities.

Any change to the group should be reported:

• until the end of the 3^rd month of the tax year in which the new companies is to be included in the group;
• until the end of the 3^rd month of the tax year following the one in which a company (or companies) leaves the group as a result of the disposal of the shareholding or of the non-compliance with other requirements, as well as other changes in the composition of the group namely as a result of a merger or a demerger. If the change is the outcome of the ceasing of activities of a company that is part of the group and such closing does not require registration at the Commercial Registry office, such change should be reported to the tax authorities within 30 days from the closing of the activity.

Specificities of the regime

Payments on account

While the regime is in place, payments on account are computed based on the taxable profit of the group, deducted from the withholding tax incurred. Payment is made by the dominant company.
 

Additional payment on account 

While the regime is in place, the additional payments on account are computed individually, per each company that is part of the group. Payment is made by the dominant company.
 

Special payment on account

While the regime is in place, the special payment on account is computed individually per each company that is part of the group. Payment is made by the dominant company.
 

Municipal Surtax 

It is levied on the individual taxable profit of each entity that is part of the group.
 

Tax losses

Taxable losses generated individually by a company that is part of a group are deductible to the sum of the taxable profits obtained by the remainder companies that are part of the group, realised in the same tax year. Generated tax losses which are carried forward while the regime applies, can be offset against the CIT assessed by the group, capped at 70%.
 

Limitation on the tax deductibility of net financing expenses 

As a general rule, the tax deductibility of net financing expenses is capped at the higher of € 1 million or 30% of the tax EBITDA. This rule applies individually to each company that is part of a group taxed under the special regime of group taxation, unless if there is an option to apply it to the whole group. In that case, the EBITDA tax to consider corresponds to the sum of all companies that are part of the group (this option should be maintained for a minimum 3-year period).
 

Autonomous taxation 

Aggravated autonomous taxation rates apply in case the group has assessed taxable losses. However, in case the group assess taxable profit, none of the companies that are part of the grou pis subject to an aggravated autonomous taxation rate, regardless of individually assessing taxable losses.
 

Withholding taxes 

As a rule, all payments made between companies that are part of a group taxed under the special regime of group taxation are not subject to withholding tax.

Resident taxpayers that are not exempt or subject to a special tax regime and engaged primarily in commercial, industrial or agricultural activities may opt for the simplified tax regime, if the following conditions are met:

• The gross annual income obtained in the immediately preceding tax year does not exceed € 200,000;
• The total assets in the immediately preceding tax year do not exceed € 500,000;
• The entities are not legally obliged to have their accounts audited;
• Their share capital is not held in more than 20%, directly or indirectly, by entities that do not fulfill any of the conditions foreseen in the previous paragraphs (except if the shareholders are venture capital companies or venture capital investors);
• The accounting guidelines for micro-entities GAAP as foreseen in Decree-Law nr. 36-A/2011 of the 9th of March are adopted;
• They have not waived to the application of the simplified tax regime in the three previous years, with reference to the data at which the regime starts to apply.

In the simplified tax regime, the taxable income is assessed as follows:

^{_{1) These coefficients as well as the cap mentioned in the following paragraph are reduced by 50% and 25%, respectively, in the first and second years of activity.}}

The option for the simplified tax regime must be formalized in the statement of commencement of activity (or in the statement of changes), to be filed by the end of the 2nd month of the tax year in which the regime should start to apply.

Cit rates

_{^{(1)   Municipal Surtax may also apply.
(2) State Surtax may also apply.
(3) Micro, small or medium-sized enterprises carrying their activity and having their effective management in inland areas (as established by Decree). The rate applicable to the first € 25,000 of taxable income may be reduced to 12.5%.}}

Autonomous taxation 

Certain expenses incurred or borne by entities subject to CIT are subject to autonomous taxation ^(1)(2)(3) at the following rates.

^{_{(1) Autonomous taxation rates are increased by 10% when taxpayers realise tax losses in the tax year to which the above facts concern (this rule does not apply in the first and second years of activity).
(2) Cooperatives, micro, small and medium sized companies are not subject to aggravated autonomous taxation rates in the following situations: i) have assessed taxable profit in one of the previous three tax years and has timely submitted the CIT return and the annual statement concerning the two previous tax years, or ii) the tax years 2020 and 2021 correspond to the first year of activity or to one one of the following tax years.
(3) Autonomous taxation may be waived in in certain situations and / or provided that certain requirements are met.}} 

^{_{*That carry a battery that can be charged using a connection to the power gird, having a minimum electric autonomy of 50 km e official emissions of less than 50gCO2/km.}}

Municipal Surtax

• Municipal Surtax rate to be levied in 2021

State Surtax

Withholding tax rates⁽¹⁾

Residents and nonresidents 

^{_{(1) Under certain conditions, exemption or reduction of the withholding tax rate is possible under domestic law, Conventions for the elimination of Double Taxation or EU Directives.
(2) Payment on account of the final tax due, except in case of investment income paid or made available in accounts opened on the name of one or more owners but on behalf of non-identified third parties.
(3) Flat rate, except in case of rental income.
(4) Exemption available under Decree-Law no. 193/2005, of the 7th November, which provides for the Special Regime of Taxation of Income from Debt Securities.
(5) Withholding tax at a rate of 10% if the beneficiary of the income is held, directly or indirectly, in more than 25% by resident entities or individuals.
(6) Taxation at a rate of 35% if the beneficiary of the income is an entity resident for tax purposes in a jurisdiction subject to a clearly more favorable tax regime.}}  

Waiving of withholding taxes 

Resident Entities

Depending on the nature of the entity, or of compliance with certain conditions, the applicable withholding tax may be waived.

Nonresidents

Depending on the nature of the entity, or of compliance with certain conditions, the applicable withholding tax may be waived.

Namely, the domestic withholding tax can be waived in case of:

• Distributed profits and reserves: ownership of at least 10%, direct, or directly and indirectly, of the sharecapital or of the voting rights, for 1 year (among other requirements);
• Interest and royalties: ownership of at least 25% of the share capital, for 2 years (among other requirements).

Payments on account

Payments on account are due in July, September and the 15th of December of the respective tax year (otherwise in the 7th, 9th and until the 15th day of the 12th month of the tax year adopted, if different from the calendar year).

If the amount of the payments on account exceeds the CIT due, the taxpayer is entitled to a refund corresponding to that difference.

In case the two first completed payments on account are equal or higher than the final CIT due in that tax year, the taxpayer may decide to limit, or not to make the third payment on account.

The 2021 State Budget determines that cooperatives, micro, small and medium sized companies can waive the need to make payments on account in 2021.

Special payment on account 

Special payment on account (“PEC – Pagamento Especial por Conta”) is due in March each year (or in two installments in March and October or in the 3^rd and the 10^th month of the tax year, if different from the calendar year).

PEC = [(1% turnover of previous tax year ⁽¹⁾ - payments on account of previous year) - € 100] x 87.5%

⁽¹⁾ Capped at:

Minimum € 850
Maximum € 850 + 20% of the surplus, capped at € 70,000

The special payment on account is deductible to the CIT assessed in the respective tax year or, in case the CIT assessed is not sufficient, it is deductible in the following six tax years. Any amount that cannot be deducted (within the six-year period) due to insufficiency of tax assessed will only be refunded upon request.

The special payment on account is not owed in the first and second years of activity.

The special payment on account is not due by taxpayers that have filed timely the CIT return and the Company’s Simplified Information/Annual Statement in the previous two tax years.

Following the 2021 State Budget, cooperatives, micro, medium and small sized companies can request in 2021 the full and immediate refund of the special payment on account that was not offset.

Additional payments on account 

Additional payments on account (“PAC - Pagamento Adicional por Conta”) are to be paid in three installments in July, September and until the 15th day of December (or in 7th, 9th and until the 15th day of 12th month of the tax year, if different from the calendar year).

^{_{* 1.8% in the Autonomous Region of Madeira
** 3.2% in the Autonomous Region of Madeira
*** 6% in the Autonomous Region of Madeira}}

In case the amount of additional payments on account exceeds the State Surtax due, the taxpayer is entitled to a refund corresponding to that difference.

Credit for international juridical double taxation

A credit for international juridical taxation is granted, capped at the lower of:

• foreign tax paid; or
• portion of CIT, computed prior to the deduction, corresponding to the income earned abroad and subject to taxation, net of costs and loss incurred directly or indirectly.

In case a convention for the elimination of double taxation applies, said deduction cannot exceed the foreign income paid in accordance with such convention.

The 2021 State Budget Law (2021SB) established the following:

a) 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.

b) Under the extraordinary and transitional regime of job maintenance, access to certain tax benefits and public support measures will depend on job maintenance. This shall apply to entities engaged mainly in agricultural, commercial or industrial activities (micro, small and medium sized companies are excluded) that assess positive net profit in 2020. Among the tax benefits and public support measures covered are credit facilities with state guarantee, the regime of convencional remuneration of share capital (“Remuneração Convencional do Capital Social”), the  tax regime for investment support (“Regime Fiscal de Apoio ao Investimento” or “RFAI”), the SIFIDE II and the extraordinary regime for investment (“Crédito Fiscal Extraordinário ao Investimento II” or “CFEI II”).

Special investment tax credit scheme (“Crédito Fiscal Extraordinário de Investimento” or “CFEI II”)

Under the regime, 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

Contractual tax regime for investment projects

Investment projects may benefit from a CIT credit, ranging from 10% to 25% of the eligible investments, as well as exemptions and reductions from property taxes and exemptions from Stamp Tax. Eligible investments should amount to or exceed € 3,000,000, and should be set up until the 31st December 2021. 

Eligible investment projects should have technical, economic and financial viability and contribute to the creation or maintenance of jobs, as well as meet the following conditions:

• Regarded as relevant for the strategic development of the national economy; or
• Contribute to the reduction of regional asymmetries; or
• Contribute to the fostering of technological innovation and national scientific research, improvement of the environment or to reinforce competitiveness and efficiency of production.

The CIT credit corresponds to 25% of the CIT assessed and up to its full amount.

The tax benefits granted should comply with the maximum limits foreseen for regional state aid in the region of the investment.

Contractual tax benefits cannot be combined with any other tax benefits of the same nature in respect to the same eligible investments. This however does not apply in respect to the benefit of deduction for retained and reinvested profits, provided that the applicable caps are not exceeded.

R&D (SIFIDE II)

SIFIDE II will be in force until 2025, foreseeing a CIT credit for R&D expenses, under the following stated conditions:

• 32.5% of expenses incurred in the tax year;
• 50% of the surplus of expenses incurred in the tax year, with reference to the average of the two previous tax years, capped at € 1,500,000.
• The percentage of 32.5% is increased by 15% in case of micro, small and medium companies that do not benefit from the 50% surplus rate due to not having completed two years of activity.

Eligible expenses that cannot be deducted in the year they are incurred, due to insufficient tax liability, can be carried forward for 8 years. In the tax year 2020 and following tax year, there is a suspension of the computation of the carry forward period. 

Tax Regime to Investment Support (RFAI) 

RFAI applies to relevant investments in fixed assets and intangibles.

A CIT credit is granted according to the eligible region in which investments are made:

The CIT credit is capped at 50% of the CIT assessed in each tax period, except in the tax year of commencement of activity and in the following two tax years (provided that the company does not result from a demerger).

Any unused credit may be carried forward for ten years (provided the mentioned cap is not exceeded). In the tax year 2020 and following tax year, there is a suspension of the computation of the carry forward period.

Additionally, exemptions or reductions from property taxes and exemptions from Stamp Tax may be granted on the acquisition of real estate which qualifies as relevant investment.

The mentioned tax benefits should respect the limits applicable to regional aid in force in the region in which the investment is made. RFAI cannot cumulate with other tax benefits of the same nature in respect to the same eligible investments. This however does not apply in respect to the benefit of deduction for retained and reinvested profits, provided that the applicable caps are not exceeded.

Deduction for retained and reinvested profits (DLRR) 

The deduction for retained and reinvested profits provided for a tax incentive to micro, small and medium-sized companies. It allows a CIT credit of 10% of the retained profits reinvested in eligible investments within 4 years as from the respective realization. The deduction is capped at € 12,000,000 of retained and reinvested profits, and 25% of the CIT assessed.
 

Conventional Remuneration of Share Capital (RCCS)

This tax benefit provides for a deduction to the taxable profit of the amount corresponding to 7% of the contributions, up to € 2 million, upon the incorporation of an entity or of an increase in share capital. It applies both to cash or conversion of credits, and the use of profits generated in the relevant tax year.

The deduction to the taxable profit will be made in the tax period in which the contributions are made as well as in the following 5 tax years.

The limitation on the tax deductibility of net financing expenses of the taxpayers that use this benefit shall corresponds to the highest of either € 1 million and 25% of the EBITDA (30%, as a general rule).
 

Patronage

Donations granted to certain entities engaged mainly in social, cultural, environmental, scientific or technological, sports and educational initiatives are allowed as tax deductible costs of the year, under certain conditions and cap at certain amounts (additional tax deduction are also available).

Madeira International Business Centre (MIBC)

Entities licensed to operate under the MIBC special tax regime (IV MIBC regime), between 1 January 2015 and 31 December 2021, are eligible for the following tax benefits:

• Reduced 5% CIT rate, applicable until 31 December 2027 (on thresholds of taxable income, depending on the number of eligible jobs created);
• Tax exemption on dividends received and capital gains, under the participation exemption regime (at least 10% ownership, held for 1 year);
• Withholding tax exemption on dividend distributions to shareholders (with certain exceptions);
• Withholding tax exemption on interest, service fees and royalties paid to non-resident entities (exceptions apply);
• Exemption from Stamp Tax, property tax, property transfer tax, regional surtax and municipal surtax and other charges (capped at 80% per tax and per act or period).
• The overall benefits granted under the IV MIBC regime cannot exceed the highest of:

(i) 20.1% of the annual gross added value generated in the Autonomous Region of Madeira (ARM);

(ii) 30.1% of the annual staff costs incurred in the ARM;

(iii) 15.1% of the annual turnover generated in the ARM.

Autonomous Region of the Azores 

Entities resident in the Autonomous Region of the Azores benefit from a CIT credit ranging from 20% to 40% of the profits reinvested in certain fixed assets.
 

Tax benefits to companies located in inland regions

Micro, small and medium-sized companies located in inland regions engaged primarily in agricultural, commercial, industrial or service providing activities, are eligible, under certain conditions, for the following tax benefits:

• A rate of 12.5% applicable to the first € 25,000.00 of taxable profit;
• An increase by 20% of the maximum deduction of 10% of retained and reinvested profits, within the scope of the respective benefit, in case of eligible investments made in inland regions.

These benefits cannot cumulate with other benefits of the same nature, and are subject to the de minimis threshold.

Capital gains

Exemption

A CIT exemption applies to capital gains realized by nonresidents on the transfer of:

• shareholdings in Portuguese resident companies;
• other securities issued by Portuguese resident companies;
• autonomous warrants issued by Portuguese resident companies and traded in the stock exchange;
• derivatives traded in the stock exchange;
• participation units in Capital Venture Funds traded in the stock exchange.

The positive balance between the capital gains and the capital losses on the sale of participation units is taxed at 10% when the owner of such income, being a non-resident entity, is not exempt.
 

Exceptions:

The above mentioned exemption does not apply in the following circumstances:

• Entities which are resident in a tax haven;
• Entities which are held in more than 25% by Portuguese resident companies, except if the seller:

(i) is resident, for tax purposes, in a EU or EEA member state (in the latter case bounded to administrative cooperation in tax matters in similar terms as those of the EU), or in a jurisdiction with which Portugal has concluded a convention for the elimination of double taxation, that is in force and encompasses exchange of information;

(ii) is subject, and not exempt from, a tax mentioned in Council Directive 2011/96/UE, of 30 November, or from a tax identical or with a similar nature to CIT (as long as the applicable legal rate is not lower than 12.60%),

(iii) holds a direct, or direct and indirect participation of at least 10% of the share capital or of the voting rights of the distributing entity during the year prior to the transfer;

• Disposal of participations in Portuguese companies whose assets are comprised in more than 50% by immovable property located in Portugal;
• Disposal of participations in non-resident companies, when at any moment during the previous 365 days the value of those participation results directly or indirectly in more than 50% of immovable property or of rights in rem in immovable property located in the Portuguese territory. The exception occurs when immovable property allocated to a specific activity has a commercial, agricultural or industrial nature and it does not consist of purchase and sale of such proprerty.
   

Collective Investment Vehicles (CIV) 

An exemption applies to income realised by non-residents entities, and derived from participation units and shareholdings respectively, in investment funds and investment companies. The same applies to income stemming from participation units in venture capital funds, except if the recipient is resident in a tax haven or is held, directly or indirectly, in more than 25%, by a Portuguese resident entity, in which case withholding tax applies at the rate of 10%. Income from participation units and shareholdings respectively in real estate investment funds and real estate investment companies are subject to withholding tax at the rate of 10%.

Income from participation units and shareholdings in real estate investment funds and real estate investment companies respectively, are subject to withholding tax at the rate of 10%.

Special taxation regime for debt securities issued by non-resident entities

Income from public and non-public debt securities issued by non-resident entities, deemed to be obtained in Portugal under the PIT and CIT Codes, benefits from an exemption of PIT and CIT. This exemption applies when the income is paid by the Portuguese State as a guarantor of obligations taken by companies in which the Portuguese State, along with other EU Member States, is a shareholder.