The Tax Benefits For Foreign & International Investors From The Newly Approved Portuguese Corporate Income TAX Reform
By Jorge Veiga França
Posted: 24th March 2014 09:27This article is mainlyfocused on the recent Portuguese Corporate Income Tax Reform that entered into force last January 16, 2014, with the enactment and issuing in the Official Gazette of Law nº 2/2014.
Special emphasis is made to the benefits resulting there from to foreign or international investors that decide to invest in the Portuguese territory or through it, namely within the ambit of the International Business Centre (IBC) of Madeira.
They now face astonishing changes that entitle them to, through Portugal and namely the IBC of Madeira, even better (re)structure their international investments and established businesses. That will certainly catapult the country to the forefront of the thriving business friendly jurisdictions that not only attract international investment and holdings but also a large range of activities such as international trade and intellectual property, amongst others.
Portugal is aiming at becoming the newest stepping stone, namely into Africa and the Americas, and one can see it coming.
With such an attractive tax reform, Portugal is now ready and willing to compete in the international arena for the attraction of foreign capitals into its own economy as well. Funds that the country surely needs and is so eager to attract and fix inside its boarders, thus contributing to and helping its own development and consolidated economic growth.
Before going straight into exposing the referred corporate tax improvements in Portugal, allow me to mention a new legal measure, enacted by end of December, 2013 amended the Portuguese State Budget Law for that same year in respect of the special tax regime applicable within the ambit of Madeira’s IBC, improving it.
This amendment increased by over 30%, the ceilings of the Madeira IBC companies’ taxable income, to which the reduced corporate income tax (CIT) rate of 5% applies, according to the number of jobs created by the aforesaid companies. Again a great change and good news for investors using Madeira’s IBC for their international business!
Back to the corporate income tax reform that took place in Portugal as a whole, the changes having a greater impact on the attraction and fixing of foreign investment into Portugal may beabridgedas follows:
- A very attractive new participation exemption regime: A minimum participation of 5% held for a minimum period of two years, grants Portuguese, thus also Madeira IBC, companies a participation exemption worldwide in respect of dividends and capital gains received; a benefit up to now only granted to PALOP countries (Portuguese speaking African countries such as Angola and Mozambique) and to those of the EU and EEA (Iceland, Norway and Liechtenstein) area! Condition sine qua non: the paying subsidiary not to be located in one of the countries being part of the Portuguese black-list.
- The extension under same conditions of the referred exemption to dividends and reserves distributed by Portuguese subsidiaries (subject and not exempt from CIT), therefore also including Madeira IBC ones, to mother companies located/resident in countries having double tax treaties in force with Portugal that claim the mutual exchange of information.
- The reduction in 2014 of the General CIT rate applicable in Portugal, from 25% down to 23%, and the application of a further reduced CIT rate of 17% to small and medium sized companies with a taxable income up to Euros 15 k .
- The extension of the deadline for taking in tax losses, from 5 years up to 12.
- The option of exempting from CIT income (profits and losses generated as from 2014 on) received from foreign Permanent Establishments (PEs) as long as such PEs are subject to a CIT equivalent tax, whose rate may not be lower than 60% of the above referred Portuguese CIT rate, i.e., 13.8%; Condition sine qua non again being that such PE may not be located/established in one of the Portuguese black-listed (tax-haven) jurisdictions.
- The Group companies’ tax regime is now applicable to participations of at least 75%, as opposed to the formerly required 90%.
- A brand new “Patent Box” regime, i.e., the temporary disposal and or use of patents, industrial designs, patterns/models, as well as of other industrial property rights subject to registration in Portugal, grants access to a CIT 50% exemption of the income resultingtherefrom, as long as it derives from R&D activities performed by the Portuguese and may not be conceded to a company domiciled in one of the aforesaid tax havens. This means that within the scope of Madeira’s IBCfavourabletax regime, such an IP is taxed at the rate of 2.5%!
- Changeof theCFC (controlled foreign company) rules. Now it is enough to check whether the CIT rates of companies are higher or equal to 60% of the current Portuguese CIT, at present of 23%.
- Change of the depreciation/amortization existing regime, thus becoming more appealing.
- Change of the tax neutrality regime, now clearer and with a broader application.
- The outcome of the company’s liquidation is now qualified as capital gain or loss, thus, another improvement.
- There has been an increase on the percentage of the participation held for the purpose of application of the transfer pricing rules, from 10% up to 20%.
- There is now the possibility of deferring the applicable exit tax whenever the companies move into another EU or EEA state.
- Change of the regime of deductibility of the net financing costs that can now be deducted up to the highest threshold of either € 1M or 30% of EBITDA, with still the possibility of entitling the remaining non deducted financing costs to deduction over the following five years, as long as there is room for that under the said thresholds for each such year. Furthermore, the rate of 30% of the EBITDA threshold will only come into force in 2017, as under the provisions of the National Budget Law for 2013, for the current year such rate is of 60%, which will then become of 50% in 2015 and of 40% in 2016, before finally being fixed at 30% in 2017.
- The requirements of application of the benefits resulting from the Double Tax Treaties in force with Portugal have now been simplified, as well as those applying to the participation exemption regime under the EU parent/subsidiaries directive and also to the interests and royalties under the corresponding EU directive.
- There are now benefits to the re-investment of profits and reserves up to € 5M.
Is it then wrong to believe on the great opportunities now open to Portugal as a new hub for international investors and business?