Tax Guide 2023 – CIT

ᐅ Last reviewed 17 October 2023

Scope

Taxpayers and taxable income

Depreciation and amortisation

^{(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 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.

Participation exemption on profits and reserves received

Profits and reserves distributed to CIT taxpayers with head office or place of effective management in the Portuguese territory may be disregarded for the purposes of the computation of the taxable profit, provided the cumulative requirements below apply.

_Requirements

Entity that receives / to whom there is an allocation of profits and reserves

• A CIT taxpayer, resident in Portugal for tax purposes, that is not tax transparent.

• 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 a country, territory or region that provides a favorable tax regime under Portuguese tax law., 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.

• Direct, or direct and indirect, shareholding of not less than 10% of the share capital or of the voting rights of the entity that distributes profits and reserves; such shareholding being held consecutively in the year prior to the distribution or maintained for the necessary period of time if held for less time. 

Entity that distributes profits or reserves

• 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 country, territory or region that provides a favorable tax regime under Portuguese tax law.

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 a country, territory or region that provide a favorable tax regime under Portuguese tax law (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).

Adjustments to the taxable income
_{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, such as granting or obtaining credit of any nature, derivative financial instruments, provision of guarantees, centralized treasury agreements and transactions involving equity shares;

• 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.

In addition, the arm’s length should be considered for the purposes of assessing capital gains or capital losses in transactions taken place between individuals subject to Personal Income Tax and an entity with whom special relations exist. 

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.

Portuguese transfer pricing legislation was recently amended following Decree 268/2021, of 26 November, revokes Decree 1446-C/2001, of 21 December. The Decree entered into force on 27 November 2021 but concerning the requirements for the preparation of transfer pricing documentation it applies to tax years starting on or after 1 January 2021. 

There are several relevant amendments, of which we highlight:

• Transactions involving intangibles – it is mandatory to disclose intangibles related with associated transactions, as well as respective economically relevant risks, inherent terms, functional analysis and assessment of the cohesion between the terms agreed and the behaviour of the entities involved; need to check that the entity that incurs the economically relevant risks  has control and is financially able to assume the risk related with developments, improvements, maintenance, protection and exploitation of the intangible;

• Restructuring operations – it is explicitly mandatory that restructuring operations are at arm’s length; this includes assessing the need for a compensation to the entity being restructured, underlying reason, expected benefits and actual and existing options for the entities involved;

• Corresponding adjustment – detailed and accurate description of the mechanism to solve tax litigation and elimination of double taxation including available procedures;

• Explicit mention that the Portuguese Authority uses as reference the amount corresponding to the median of the benchmark of results of the economic analysis performed, in case of proposing positive transfer pricing adjustments to the taxable income; and

• New details annexes to be part of Master File and Local File (annex I and II), in cost contribution agreements (annex III) and intragroup services (annex IV).

Transfer Pricing documentation
Taxpayers with total revenues above € 10,000,000 (formerly € 3,000,000) with reference to the tax year to which the obligation concerns, are required to prepare and organize the transfer pricing documentation file. 

Taxpayers with total revenues exceeding € 10,000,000 are not required to prepare transfer pricing documentation in respect of transactions with related parties whose amount in the year concerned does not exceed, per entity, € 100,000, and € 500,000 in total, considering the respective market value.

The above-mentioned exemptions are not applicable if transactions are carried out with taxpayers subject to a more favorable tax regime, as provided in paragraphs 1 or 5 of Article 63-D of the General Tax Law.

The structure of transfer pricing documentation has been revised. It now specifically considers a double structure: Master File (“Dossier Principal”) and Local File (“Dossier Específico”).

Small and medium sized companies (as per Decree-Law 372/2007, of 6 November) can prepare a simplified file (“Dossier Simplificado”).

Transfer pricing documentation shall be prepared in Portuguese language. If documents are not in Portuguese, there is no need for translation if the Portuguese Tax Authorities are able to understand the contents.

Failure to present transfer pricing documentation is subject to penalties.

Taxpayers monitored by the Large Taxpayers Unit and required to prepare and organize the transfer pricing documentation must submit their transfer pricing documentation to Portuguese Tax Authorities by the 15th day of the 7th month after the taxpayer’s fiscal year-end (regardless of being or not a working day).

For other taxpayers, the delivery of the transfer pricing documentation is only mandatory upon a specific request of Portuguese Tax Authorities. 

_{Company Simplified Information (IES) / Annual statement}

Transfer pricing information should be reported in Annex H of 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.

_{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.

In November 2021, a Decree was published that amended the rules applicable to Advance Pricing Agreements (Decree 267/2021, of 26 de November). The main amendment concerns the possibility that the effects of the agreement between the taxpayer and the Portuguese Authority can retroact to the previous 2 tax years, being valid for a maximum of 4 years.

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 non deducted 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 the tax EBITDA, the remaining amount is added to the maximum deductible amount up to the fifth following tax year.

The possibility of maintaining the credit (non used deduction)and carry forward of the net financial costs that were not deducted in previous tax years is allowed even in case of a change of ownership of more than 50% of the share capital or of the voting rights. Namely, if it is concluded that the operation does not have tax evasion as its main or one of its main purposes. Namely this happens if the operation was carried out under valid economic reasons.

_{Definition of financing costs}

Financing costs 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).

• Amortisation of discounts or premiums related to loans.

• Amortisation of ancillary costs incurred in connection with loans obtained.
• Financial charges related to finance leases.

• Depreciation or amortisation 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.

• Fix gains and losses related with funds borrowed and instruments associated with the borrowing of funds.

• Guarantee fee on financing agreements.

• Negotiation charges, and similar costs, related to loan granting.

Net financing costs correspond to the financing expenses - interest and similar income, subject and not exempt from tax -, capped at the respective amount, that are relevant for the purpose of computation of the taxable profit.

_{Tax EBITDA}

The relevant earnings prior to depreciation, amortisation, net financing costs and taxes correspond to the taxable profit or taxable loss, subject and not exempt, increased by the net financing costs and tax deductible depreciation and amortisation.

Special Regime of Group Taxation
_{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 tax 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 with reference to the date in which the regime starts to apply (or from the date of incorporation);

• The dominant company is not controlled by any other company resident in the Portuguese territory;

• 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;

• assess  tax losses in the previous three tax years (unless companies have been held by the dominant 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 3rd 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 3rd month of the tax year in which the new companies is to be included in the group;

• until the end of the 3rd 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 (except in the first year of application of the regime), deducted from the withholding taxes 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.

Municipal Surtax
It is levied on the individual taxable profit of each entity that is part of the group, before the deduction of tax losses.

Tax losses
Taxable losses generated individually by a company that is part of a group are fully deductible to the sum of the taxable profits obtained by the remainder companies that are part of the group, assessed in the same tax year. 

_{Limitation on the tax deductibility of net financing costs}

As a general rule, the tax deductibility of net financing costs is capped at the higher of EUR 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 there is an option to apply it to the whole group. In that case, the tax EBITDA 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. 

_{Withholding taxes}

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

CIT Rates

^{(1) Municipal Surtax may also apply.
(2) State Surtax may also apply.
(3) Micro, small or medium sized or small-medium capitalization companies (Small Mid Cap) carrying their activity and having their effective management in inland territories (to be established by Decree) may apply a reduced rate of 12.5% on the first € 50.000 of taxable income. 
(4) Micro, small or medium-sized companies or small-medium capitalization companies (Small Mid Cap) carrying their activity and having their effective management in inland areas or in the Autonomous Region of Madeira  (as established by Decree). The rate applicable to the first € 50,000 of taxable income may be reduced to 12.5% and 8.75%, respectively.
(5) Micro, small or medium-sized companies carrying their activity and having their effective management in the Autonomous Region of the Azores (as established by Decree). The rate applicable to the first € 50,000 of taxable income may be reduced to 8.75%.}

Municipal Surtax

Municipal Surtax rate to be levied in 2023
 

State surtax / Regional Surtax

Payments on account

Payments on account are due in July, September and the 15th of December of the respective tax year or Year N (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.

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.

Tax benefits to nonresidents
_{Capital gains}

Exemption

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

• shareholdings in resident companies;

• other securities issued by resident companies;

• autonomous warrants issued by 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 country, territory or region that provides for a favorable tax regime under Portuguese tax law;

• 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;

(iv) is not part of a construction or series of artificial constructions which main or one of the main purposes is obtaining a tax advantage.

• 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 property.

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.

^{_{© 2023 PwC. This communication is of an informative nature and intended for general purposes only. It does not address any particular person or entity nor does it relate to any specific situation or circumstance. PricewaterhouseCoopers Tax Services TLS, Lda. We will not accept any responsibility arising from reliance on information hereby transmitted, which is not intended to be a substitute for specific professional business advice.}}