Special regime for group taxation
Taxation under the special tax regime for groups of companies is available, upon the filing of a special form with the PTA, to companies with head office and effective management in Portugal.
The group taxation regime may apply, provided one of the companies directly or indirectly holds at least 75% of the statutory capital of the others and more than 50% of the voting rights.
Tax grouping generally enables the group companies to offset losses incurred by one company against profits of another company.
Tax losses obtained prior to the beginning of the tax grouping can be carried forward and offset only up to the particular company's taxable income (for the carryforward of tax losses regime, see Net operating losses in the Deductions section).
To be taxed under this regime, the group companies must meet the following conditions:
- Must be tax resident in Portugal (even if held through an EU group company; this rule also applies to an EEA group company provided that that jurisdiction is bounded to administrative cooperation in the field of taxation in similar terms as those applicable in the European Union).
- Must be subject to the normal regime of taxation at the highest corporate tax rate.
- Must maintain a minimum holding participation of 75%.
- All companies must be held by the parent company for more than one year (excluding newly incorporated companies).
- Cannot be dormant for more than one year.
- Cannot be dissolved or insolvent.
- Cannot have tax losses in the three years prior to the regime application, unless the companies have been held by the parent company for more than two years.
- Cannot have a tax period different from that of the parent company.
Additionally, the parent company:
- should not be controlled by any other Portuguese-resident company that fulfils the requirements to be the parent company and
- should not have opted out from this regime in the three previous years.
When the regime comes to an end or when one company ceases to qualify for this regime, the tax losses obtained during the regime cannot be carried forward and deducted against future individual taxable income of the companies. The parent company is responsible for demonstrating that the requirements for the application of the group taxation regime are met.
It is possible to apply the group taxation regime if the dominant company has its registered head office or place of effective management in an EU or EEA country (in the latter case, provided there is administrative cooperation on tax matters similar to the one in place with the European Union). In addition, among others, the following requirements must be met:
- The dominant company owns the dominated companies for more than one year with reference to the date at which the regime starts to apply.
- The dominant company is not directly or indirectly 75% held by a Portuguese dominant company.
- The dominant company is subject to and not exempt from a tax as per Article 2 of Council Directive 2011/96.
- The dominant company is incorporated as a limited liability company.
The PTA is entitled to adjust taxable income if the taxpayer and another individual or entity, due to their special relationship, have established particular conditions that diverge from the conditions normally agreed upon between independent entities and distort the results that would arise if those relations were at arm's length. Portugal's transfer pricing legislation broadly follows the OECD guidelines.
Taxpayers with total revenues above EUR 10 million (formerly EUR 3 million) with reference to the tax year to which the obligation concerns are required to prepare and organise the transfer pricing documentation file by the 15th day of the 7th month after the taxpayer’s fiscal year-end.
However, taxpayers with total revenues exceeding EUR 10 million are not required to prepare transfer pricing documentation in respect of transactions with related parties whose amount in the year concerned does not exceed EUR 100,000 per entity and EUR 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 favourable 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 2007) 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 PTA is able to understand the contents.
Penalties arise from non-compliance with this obligation.
Taxpayers that are monitored by the Large Taxpayers Unit are required to submit the transfer pricing documentation to the PTA by the 15th day of the 7th month following the end of the tax year to which the transactions relate.
For other taxpayers, the delivery of documentation is only mandatory upon notification of the PTA.
Penalties arise from non-compliance with this obligation.
An advance pricing agreement (APA) mechanism allows taxpayers and the PTA to establish agreements on a taxpayer’s future transfer pricing policy. This aims to guarantee compliance with the arm's-length principle. This regime applies to transactions carried out with related parties and between a PE and the respective head office.
The conclusion of an APA implies the payment of a charge calculated with reference to the taxpayer’s turnover, capped at EUR 35,000. This charge is reduced by 50% in the case of a renewal or revision of an existing APA. The duration of these agreements is established in the agreement itself; however, they cannot exceed four years, but can be revised or renewed.
The assessment of an APA procedure takes at least 180 days for unilateral APAs, and 360 days for bilateral or multilateral APAs. This period is reduced to 100 business days for APAs concluded in connection with a relevant investment project in Portugal, as foreseen in the Tax Investment Code (Código Fiscal do Investimento).
For the PTA to confirm compliance of the transfer pricing method(s) with the terms and conditions set out in the APA, the taxpayer must prepare an annual report. The report must be made available to the PTA before the last business day of May in the year following that in which the transactions took place (i.e. when the tax year corresponds to the calendar year). Failure to comply invalidates the APA.
Country-by-country (CbC) reporting
Taxpayers belonging to an economic group with annual consolidated revenue in the preceding tax year of at least EUR 750 million are required to submit the CbC report in accordance with the official form. The report should be filed by the end of the 12th month following the end of the tax year to which it relates and must be preferentially fulfilled in the official tax authorities’ website by sending an XML file.
Additionally, taxpayers need to communicate to the PTA, by the last day of the fifth month following the end of the Portuguese entity’s tax year, which of the group entities is responsible for filing the CbC report for that year, as well as its fiscal jurisdiction and its tax ID.
Thin capitalisation rules have been revoked following the adoption of rules for the limitation on the deductibility of financing expenses. See Limitation on the deductibility of financing expenses in the Deductions section for more information.
Controlled foreign companies (CFCs)
The Portuguese CFC regime is aligned with the Anti-Tax Avoidance EU Directive.
Profits or income derived by an entity resident in a black-listed jurisdiction, or in a jurisdiction where it is subject to an effective taxation below 50% of the taxation that would have been applied if such entity was resident for tax purposes in Portugal, are imputed to the Portuguese taxpayer, provided it holds, directly or indirectly, at least 25% of the share capital, voting rights, or rights on income or assets of that entity. Upon distribution of the profits, a deduction is available for previously imputed income.
CFC rules also apply if the controlled entity (as defined above) is held by a Portuguese entity through a legal representative, fiduciary, or intermediary.
CFC rules do not apply if the CFC is resident in another EU country or in an EEA member state (bound to administrative cooperation on tax matters), provided that there are valid economic reasons underlying the incorporation and running of such company and it carries out agricultural, commercial, industrial, or services activities.
Upon a dividend distribution by the CFC, the tax credit of the tax paid abroad, which is not used, cannot be carried forward to subsequent tax years.