PORTUGAL: An Introduction to Tax
Following the resignation of the previous government by the end of 2023, 2024 was a challenging year for the new government and for the tax legislator. Not only given the change in the composition of the Portuguese Parliament and the need to seek a new balance between different views regarding tax policy, but also due to the global environment that pushes any European government towards the need to safeguard foreign investment and promote the economic development of national economies.
Recent Legislative Measures
Portugal has adopted some legislative measures in that regard, which may have a positive impact on relevant projects in strategic areas, such as tourism, real estate, renewable energies and infrastructure.
By mid-2024, the Government announced a tax package supporting a new economic plan to accelerate the Portuguese economy. In line with the Tax Reform Portugal undertook back in 2014, an iconic measure consists in the gradual reduction of the Corporate Income Tax (CIT) rate, aiming to reach 15% by the 2027. While the feasibility of this measure will greatly depend on a compromise between political parties represented in the Parliament, the State Budget for 2025 took a first step in the right direction, reducing the standard CIT rate from 21% to 20%. Likewise, for small and medium-sized enterprises (SMEs) and small-mid cap companies, the CIT rate was reduced from 17% to 16% (levied on the first EUR50,000 of taxable income).
Another relevant measure that impacts the cash flow on corporate groups will be the adoption – foreseen for 2025 – of a VAT grouping regime. Although such possibility is already available in several EU member states and is aligned with the European VAT framework, Portugal has never implemented such option. The VAT group regime should allow intra-group compensation of VAT balances, improving cash flow for businesses by reducing the need for VAT refund processes and streamlining administrative procedures. This measure is also aligned with the aim of reducing the bureaucratic impact of a constant interaction between taxpayers and tax authorities, which causes significant delays in tax refunds.
Law 41/2024, of 8 November has finally transposed the EU Directive 2022/2523, of 14 December 2022 (“Pillar Two Directive”) into Portuguese domestic legislation. This new and complex legal framework ensures a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups (with annual consolidated revenue equal to, or greater than, EUR750 million. The Portuguese domestic regime (the Global Minimum Tax Regime or Regime do Imposto Mínimo Global), essentially follows the standards developed by the OECD Inclusive Framework and introduces a new top-up tax when the effective tax rate of a covered group is less than 15% (considering all the global presence of the relevant group). The Global Minimum Tax Regime includes the main features of the Pillar Two Directive, such as the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), as well as a Qualified Domestic Minimum Top-up Tax (QDMTT), which is in force from 1 January 2024, except for the UTPR, which will only apply from 1 January 2025 onwards. Moreover, Portugal opted for the application of safe harbour rules, based on Country-by-Country Reporting (CbCR), that will allow a transitional period up until 2028. Even though the magnitude of the impact of the Global Minimum Tax Regime is still uncertain, the complexity of the regime will certainly impact (negatively) the compliance costs of Portuguese groups and multinational groups present in Portugal and may lead to an increase of tax disputes resulting from the specific computation mechanisms foreseen in this regime, which deviate from the standard computation of profits under the CIT rules.
Financial Transactions and Investments
There were also relevant developments impacting financial transactions and the structuring of investments in Portugal.
Following the enactment of a new regulatory framework governing investment undertakings, which included the establishment of the new loan funds, a relevant piece of the puzzle was missing as there was no tax regime foreseen for such vehicles. Loan funds are alternative investment funds authorised to grant loans, as well as to acquire credits, including performing and non-performing loans (NPLs). This feature fills a gap in the Portuguese market, as the assignment of performing loans was limited to banks and credit institutions. Thus, loan funds may play a relevant role as an alternative lending structure, directly financing projects and companies, but also collaborating with banks that wish to transfer part of their (performing) loan portfolios.
By mid-2024, a special tax regime for loan funds was finally approved in Parliament, which assimilates loan funds to venture capital funds (fundos de capital de risco). This is currently the most favourable tax regime available in Portugal for fund structures, which may result in nil taxation. Firstly, the special tax regime foresees that loan funds are fully exempt from CIT on any income or gains. Moreover, unlike ordinary investment funds (which are subject, on a periodic basis, to stamp duty on their net asset value), loan funds are not subject to stamp duty. Lastly, for non-resident investors, a full withholding tax exemption is also available for distributions made by loan funds and capital gains realised upon the redemption or disposal of participation units in the loan fund. Such exemption is not applicable, however, to investors that are:
- legal entities directly or indirectly owned more than 25% by Portuguese-resident investors; or
- entities resident in blacklisted jurisdictions.
The enactment of this tax regime underscored Portugal’s commitment to fostering a dynamic and competitive financial sector.
At the same time, two major ECJ Court decisions were published in respect of stamp duty levied on the issuance of bonds. Stamp duty generally applies to the granting of loans, but also on the granting of securities and on fees and commissions charged by financial institutions. Deviating from the standard loans, under the Portuguese rules, the issuance of corporate bonds falls outside the scope of the stamp duty. However, the same is not foreseen in respect of guarantees securing the issuance of such bonds, nor in respect of fees (eg, underwriting fees) charged in the context of such transactions. Last year, the ECJ has confirmed in clear-cut decisions that pursuant to the EU framework, in particular the Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital (the “Capital Duties Directive”), no stamp duty could be levied on underwriting fees. The same reasoning is expected to lead soon to the same conclusion in respect of stamp duty levied on the security package. Should the ECJ confirm the line of reasoning of previous decisions, this development will change the landscape of cross-border financing structures, where stamp duty has historically been a bottleneck. This development is quite relevant, in view of a visible increase of the use of corporate bonds (in particular the Interbolsa Notes) which in many instances are a preferred option, compared, for instance, with bank loans or even intragroup loans.
Tax litigation has also impacted the energy sector. After several years of a sector-wide litigation, the Portuguese Constitutional Court has issued the first decision in favour of companies operating in the energy sector, taking the position that the Special Contribution on the Energy Sector (Contribuição Extraordinária sobre o Setor Energético or CESE) is in breach of the Portuguese Constitution. The Constitutional Court decision was confirmed by subsequent decisions harmonising this higher court’s view on the special contribution. It was a turning point in a dispute that will lead to a material impact in Portuguese treasury, given the amounts at stake and is also likely to lead to a review in the legal framework governing the application of said contribution. This is a focal point, with a wider impact in the Portuguese economy, taking into consideration the range of special contributions that have been enacted over the past few years with similar characteristics to that of CESE.
The real estate sector continues to be a driver of Portuguese economy. As a result, part of the most significant tax issues arises from new provisions aimed at taxing real estate investment, such as the aggravated property taxes levied on real estate companies that are directly or indirectly controlled by entities established in “blacklisted jurisdictions”, which includes among others Guernsey, Jersey and Cayman.The general wording of the relevant provisions and the unclear concept of “control” let to the reluctance of institutional investors, often investing through global aggregator funds based in those jurisdictions, to invest in Portugal. Portuguese tax authorities have already initiated a number of tax disputes which are currently pending in Court, however the outcome of such disputes have resulted in the cancellation of tax assessments. While this may be viewed as a positive development to ensure that sovereign funds and other relevant market players continue to invest in Portugal, ideally this is a matter that requires the attention of the tax legislator, in order to clarify the exact scope of application of the relevant provisions.
Foreign Investment Funds
Still in the context of cross-border investment, there is an increasing number of decisions favourable to foreign investment funds – which in 2024 started to cover not only EU funds, but also non-EU vehicles.
Under the current national law – which remains unchanged – foreign collective investment vehicles (CIVs) investing in Portugal are subject to withholding tax on dividends paid by Portuguese companies, which results in a clear disadvantage compared to resident CIVs which are not subject to corporate income tax on same dividends.
In light of this discrimination, several CIVs have been challenging the WHT to Portuguese sourced dividends based on the breach of EU Law (in line with litigation in other member states). These cases have been brought before Portuguese Tax Arbitration Courts by several CIVs that have claimed for the application of a full exemption (pari passu with Portuguese CIVs).
This litigation was initially filed before Tax Arbitration Courts in Portugal, one of which requested a preliminary ruling on whether the difference in treatment was in breach of the Free Movement of Capital and, therefore, incompatible with EU Law. In the well-known case C-545/19 of 17 March 2022 (AllianzGI-Fonds AEVN) the ECJ confirmed that the Portuguese withholding taxation on dividends paid to non-resident CIVs is incompatible with EU Law, in line with the arguments that were presented at the mentioned proceeding before the Portuguese Tax Arbitration Court.
Following that ECJ decision, several cases has been brought before Portuguese Tax Courts by foreign (mostly EU) CIVs, leading to a full WHT refund. The impact of this decision goes beyond national borders, paving the way for the elimination of withholding tax on dividends received by CIVs throughout Europe.
In the aftermath of the ECJ’s ruling, the Portuguese law was expected to be updated in order to remove the discriminatory regime. However, in similar instances where Portuguese law had to be amended due to incompatibilities with European law, changes were not immediate, which appears to also be the case with the WHT regime applicable to CIVs.
As the ECJ decision is based on the Free Movement of Capital, the withholding tax recovery should also be possible to third countries CIVs. Eventually this is one of the milestones of 2024, where Portuguese courts awarded the first decisions extending this case law to dividends and interest payments made by Portuguese entities to investment funds established outside the European Union.
Regarding the attraction of high-net-worth individuals and highly skilled professionals, 2024 marked a turning point from the Non-Habitual Tax Residents Regime (revoked from 2024 onwards) and the new tax incentive attracting qualified professional and entrepreneurs, with a primary focus on research and development activities.
ESG
Portugal has been increasing its focus on sustainability and ESG factors. The country has set ambitious renewable energy targets, with a goal of reaching 80% renewable energy by 2030. Additionally, Portugal has introduced several initiatives to promote sustainable business practices, including tax incentives for companies that adopt sustainable policies and certification programs aimed at promoting sustainable tourism. Portugal has unequivocally demonstrated a commitment to sustainable practices and is likely to continue to prioritise ESG factors in the coming years.
Compliance and Reporting
Alongside with substantive measures, Portugal has been addressing the need to improve the co-operation between taxpayers and tax authorities, reducing compliance costs and simplifying the terms of tax procedures, as a token of tax fairness. The Portuguese government has announced a comprehensive agenda for tax simplification, aiming to reduce costs, improve transparency, and enhance the quality of services provided to taxpayers. The agenda, presented by the Ministry of Finance and the Ministry of Economy on 16 January 2025, details 30 measures that are to be implemented in the short to medium-term.
Some of the key initiatives include the reduction or simplification of tax reporting obligations, notably the annual statement (the Informação Empresarial Simplificada or IES), a form that consolidates various tax and accounting information for companies. Moreover, simplification is expected in respect of invoicing rules, VAT compliance and custom procedures, recognising the need to an increased digitalisation process and facilitating trade. Portuguese tax authorities are already known for their sophistication in the use of software and digital solutions, but new measures are aimed to improve the use of AI tools, speeding up the responsiveness to taxpayers’ requests.