Portugal
Jaime Carvalho Esteves and Catarina Gonçalves
PwC
Portugal
Jaime Carvalho Esteves and Catarina Gonçalves of PwC discuss Portugal's growing network of tax treaties as the country seeks to become a hub for investment in emerging economies.
Portuguese tax policy framework for the following years is highly pre-set by the guidelines set out under the Memorandum of Understanding signed between Portugal, the European Central Bank and the IMF.
The Portuguese government is highly committed to control the public deficit, but more importantly than the short term proceeds resulting from increases in tax rates, it is putting in place measures that will have an impact in the economy for the medium and short term by creating incentives to exports, attracting foreign direct investment (FDI) and promoting Portugal as a hub for investment in emerging countries.
New tax measures
Significant changes are expected to come to force during between financial years 2012-2014. On the revenue side, the focus is on increasing the share of consumption taxes and reducing tax privileges.
Tax rates were increased during financial year 2011 and will not be reduced. It is likely that VAT may increase to compensate reductions in the social security charges aimed at promoting employment.
On the corporate side, some tax benefits will be abolished and limitations to the deductions of losses will be imposed. However, reduced rates will apply to companies that are mainly export-orientated and tax benefits for technological R&D will be revamped and easier to utilise.
Energy taxation will be revised, in line with the EU Energy Directive. Excise duties on electricity will be imposed and VAT rates increased on both gas and electricity.
Taxation of real estate is expected to face several changes: reduction of personal income tax deductions and ownership tax exemptions related to real estate and increase of real estate transfer tax. Changes are aiming to revive real estate rental market and foster labour mobility.
A significant number of measures are already being put in place to increase the fight against fraud and tax evasion. Tax agencies will be merged, staff within the tax administration will be relocated to increase the number of employees devoted to auditing and auditing powers of the central tax administration will be strengthened.
In recognition of the important role an efficient and trustworthy judicial system has to the attraction of FDI, specific departments will be created in tax tribunals to handle large cases and will be assisted by independent tax specialists. Special agents to deal with relevant FDI are also expected to be appointed.
In addition, the new tax arbitration law is coming into play. The tax arbitration tribunals will be able to decide in tax conflicts related to the legality of tax assessment acts, including the ones concerning self assessment, withholding tax, payments on account, determination of the taxable income if not giving rise to settlement, rejection of administrative requests or appeals, determination of real estate and other property values. Decisions should be taken in six months, with the possibility of only one extension, which shall not exceed six months.
Portugal as a hub between Europe and emerging countries
Portugal has historically played an important role as a mediator to relationships between Europe and Africa, Asia and South America. As back in the 1600s , Portugal should claim for itself the role of hub between continents as countries such as Angola, China, India and Brazil are been increasingly important in the 21st century economy.
Treaty network
Portugal recognizes that inbound and outbound investments require an extensive treaty network and it has therefore lately signed several new agreements and is continuously promoting negotiations with many other jurisdictions.
There are 62 double tax treaties (DTT) signed, of which 53 are already in force. Treaties have recently been signed with Hong-Kong, the United Arab Emirates, Qatar and Japan, and negotiations are being held with countries such as Saudi Arabia, Bahrain, Cyprus and Malawi.
Portugal is the only country with which Cape Verde has signed a DTT, one of the two with which Mozambique has a DTT and one of the few with which Angola is negotiating. The Portugal/China treaty sets out that capital gains arising from the sale of shares may only be taxed in the residence country, which is unusual in most DTTs celebrated by China, making Portugal a very attractive holding location for investments into the emerging dragon.
The DTT with Mozambique, Cape Verde, China and South Korea (among others) provide for a tax sparing clause, whereby Portugal grants its residents relief with respect to source taxes that have actually not been paid for, as a result of exemption provided by the source countries to promote FDI.
After a global effort, numerous tax information exchange agreements (TIEAs) have been concluded which, once in force, will remove the jurisdictions from the Portuguese blacklist and hence entities resident in those specific jurisdictions (for example the Cayman Islands, Gibraltar, Isle of Man, BVI) will no longer be subject to severe anti-avoidance measures as the non applicability of the domestic exemption for the sale of capital gains.
With the aim of creating favourable conditions for the promotion and creation of investments, Portugal has concluded approximately 50 Agreements on the Mutual Promotion and Protection of Investment (including with Angola, Venezuela, China, India and East Timor), which are a relevant safety instrument when investing in higher risk jurisdictions.
Understating how mobility is important in the current work environment, new social security bilateral agreements are being signed (for example with . Moldova) adding up to the existing ones (including with the US, Canada, UK, Australia, Cape Verde and Brazil) providing safety and certainty about social security contributions and benefits to secondees. In addition to these, a multi-lateral convention has been signed between Latin American countries, Portugal and Spain, which is expected to come into force in the next couple of years.
Madeira International Business Centre
Enjoying political and social stability, and offering a number of tax and financial benefits, Madeira presents an attractive and competitive environment for foreign investment and has been considered an important gateway to international markets. Madeira success is based on its preferential, but fully regulated regime, which is completely transparent and fully integrated in the Portuguese and EU tax and legal systems.
It comprises three main areas of activity: the Industrial Free Trade Zone, the International Shipping Register of Madeira and the International Services. The MIBC can accommodate both operating and holding companies.
The MIBC was authorized by the European Commission and provides for a number of tax incentives granted mainly in the form of a reduced corporate taxation (4% in 2012 and 5% between 2013 and 2020) and these are guaranteed until the end of 2020, subject to the fulfilment of some substance requirements.
Payments to non residents regarding interest, royalties and services, as well as dividend distributions to non resident shareholders benefit from a withholding exemption.
Madeira companies may benefit from the general Portuguese tax provisions, which implies that the participation exemption set out bellow may apply both for dividends received from EU/European Economic Area (EEA) source and from Portuguese speaking countries and East-Timor.
Additionally, MIBC licensed companies have full access to most of the DTTs signed by Portugal, as well as EU law.
Participation exemption (Parent-Subsidiary Directive)
The Portuguese participation exemption follows generally the EU Parent-Subsidiary Directive – dividends received by Portuguese companies from EU and EEA subsidiaries will not be taxable if a participation of at least 10% is held for a period of one year.
However, as of January 1 2010, a new requirement has been added to the above, which determines that the participation exemption can only be claimed for dividends that have been subject to effective taxation in the hands of the distributing company.
If interpreted as meaning more than just "subject to tax", this new requirement should be considered as contrary to the EU Law, as the Directive does not allow EU states to impose any other condition in addition to the ones set out in the Directive itself for the exemption. Therefore, this new requirement may also be challenged not only in cases where a Portuguese company receives dividends from its EU or EEA subsidiary, but also when the dividends are paid by a Portuguese subsidiary.
Given the close relationship between Portugal and Africa, Portugal provides for a very attractive tax regime on dividends received from Portuguese subsidiaries in Portuguese-speaking African countries (which comprise Angola, Cape Verde, Guinea Bissau, Mozambique and São Tomé and Príncipe) and East Timor. The participation exemption will apply if the Portuguese company holds at least 25% of capital of the subsidiary, for not less than two years, and the distributed profits arise from profits taxed in the hand of the subsidiary at a rate of at least 10% and the underlying profits are not deemed as passive income.
Holding regime
Under the rules of the special regime applicable to Portuguese pure holding companies (including IBCM licensed companies), capital gains, irrespectively of their origin, should be tax exempt provided the shares being sold have been held for at least one year (three years are required in some cases). An adequate planning should allow for the correct allocation of interest and transaction costs assuring they are, at least partially, deductible.
Goal of friendly system
A critical goal of the country for the future is to boost competitiveness and restore the country's credibility so that the financing restraints disappear. The government has understood that the long term recovery will depend on the promotion of investment, including FDI, and of exports and attraction of high value activities. Despite of the potentially discouraging atmosphere, there is a strong commitment to put in place measures to rapidly achieve this goal.
Accordingly, restoring fiscal credibility by increasing tax revenues and other public income and reducing public spending is a short-term objective. However, the endgame is to transform Portugal in a very dynamic and competitive economy with a business friendly tax system.
Jaime Esteves (jaime.esteves@pt.pwc.com)
Catarina Gonçalves (catarina.goncalves@pt.pwc.com)