The Arbitral Court recently issued a landmark decision regarding value added tax (VAT) deductions for holding companies. The court's approach is notable for its analysis of European Court of Justice guidance on VAT deductions for holding companies set out in several relevant decisions and its innovative approach of combining the relevant reasoning behind these decisions to provide a comprehensive legal overview.
In a time when corporate investment is struggling with the legal uncertainty deriving from systematic changes to the Portuguese tax system, the Constitutional Court has an important role in reassuring corporate taxpayers that the most basic constitutional principles are respected, thus protecting their investments. Three recent cases brought before the court were ultimately decided in favour of the protection of the legitimate expectations of investors and the judicial interpretation and application of the law.
The South Administrative Central Court recently discussed the problem of the admissibility, for accounting and tax purposes, of the depreciation and amortisation of submerged lands within a concession agreement between a company and the Portuguese state relating to the use of a public hydro domain for watering and hydroelectric exploitation. The court concluded that no contradiction existed between the applicable accounting and tax rules.
The Portuguese Tax Administration recently concluded that payments received for the sale of 'standard software' (ie, software not subject to any customisations) do not fall within the scope of Article 12 of the Organisation for Economic Cooperation and Development (OECD) Model Convention. Instead, the right to tax income deriving from such payments falls within the purview of the beneficiary of such payments' state of residence under Article 7 (business income) of the OECD Model Convention.
A Constitutional Court decision on the retroactive application of tax law changes sends a clear message: as far as the principle of legitimate expectation is concerned, taxpayers' interests take second place to the interests of the public administration. Moreover, taxpayers have no legitimate right to expect that laws will not be changed.
A bank levy will be imposed on all credit institutions with a head office and effective place of management in Portugal, as well as subsidiaries of foreign institutions and branches of institutions with a non-EU head office. Doubts have been raised about the legality of the government order, but in the country's economic state of emergency, taxpayers' safeguards are more likely to be swept aside.
Until recently, Portuguese holding companies enjoyed significant tax benefits, including exemption for dividends received from controlled companies. However, changes introduced - but not adequately explained - by the tax authorities have shaken confidence and reinforced the impression that, in political terms, making a profit remains a sin. Many companies may decide that the Netherlands and Luxembourg offer better prospects.
The State Budget Law for 2011 has been presented and its proposals are under discussion. From a corporate tax perspective, apart from a few benefits granted to non-resident entities that finance economic activities in Portugal, the general purpose of the new regulations is to increase the tax base, which will mean a greater tax burden for companies.
Many experts have claimed that Portugal's grave economic position requires immediate and far-reaching measures. The government has sought to downplay the situation, but Parliament has recently discussed new measures on personal and corporate income tax law, value-added tax and stamp duty.
Recent weeks have seen intense debate over a plan to abolish the full tax exemption regime for capital gains derived from the sale of shares held by taxpayers for more than 12 months. Since the announcement, the argument has spread to the corporate tax treatment of capital gains and to the mutual funds regime, while a Constitutional Court decision has shed significant light on the retroactive application of tax legislation.
As Parliament debates the 2010 Budget, the feeling among critics is disappointment - less at the proposals than at the government's failure to tackle runaway state spending. However, the end of the special regime for small and medium-sized companies, a change to the corporate tax savings threshold, job creation benefits and a bankers' bonus tax - among other things - offer indications of the government's economic thinking.
From January 2010 a package of amendments to the Corporate Tax Code will come into force to reflect the adoption of International Accounting Standards, including measures on credit impairments, the use of the fair value model and the tax neutrality framework for mergers, demergers and contributions of assets. However, the new framework has attracted criticism from accounting experts.
The second phase of Portugal's implementation of the EU Interest and Royalties Directive has begun with the entry into force of a lower 5% withholding tax rate. The rate reduction, the introduction of simplified tax forms and the authorities' improved attitude promise companies easier access to greater benefits.
The government has approved a supplementary budget law which, among other things, introduces new tax credits in a range of sectors and extends the tax regime for Portuguese-incorporated holding companies to certain EU-incorporated entities. However, a muted reaction suggests that not all companies share the government's confidence in the tax credit regime as an economic stimulus.
The proposed 2009 Budget incorporates a new regime for investment companies and funds that provides a range of tax advantages to encourage investment in real estate. Other measures include a two-tier system for company taxation, which is intended to reduce the burden on small and medium-sized enterprises.
The government intends to introduce a new tax to be levied on companies that produce or distribute refined petroleum products, allowing for residential property tax benefits for low-income taxpayers. However, in their haste to take from the rich and give to the (relatively) poor, the authorities have overlooked practical problems that could render the plan virtually ineffective.
A new decree-law on tax evasion has been criticized as disproportionate and imprecise. Although ostensibly aimed at aggressive tax planning, the new regime requires taxpayers to report all abusive practices - that is, any operation which the authorities consider results in an unfair tax advantage. As non-compliance carries a fine of up to €100,000, confusion could prove costly.
The recent reduction in the standard rate of value added tax from 21% to 20% is unlikely to be reflected in reduced prices for consumers and will instead benefit retailers and services providers. The special rate applied in Madeira and the Azores has been reduced from 15% to 14% - particularly good news for companies in sectors such as e-commerce and telecommunications.
The 2008 Budget aims to encourage small and medium-sized enterprises (SMEs) by introducing a new form of tax relief that allows a 3% tax deduction on share capital paid up by shareholders when incorporating SMEs or increasing their capital share. However, the relief is unlikely to solve Portugal's thin capitalization problems, and could even prove detrimental.
Portuguese companies wishing to take advantage of a double taxation treaty have long struggled with the requirement to obtain certification of the necessary Portuguese tax form by the tax authorities of the other signatory state; failure to submit the form or comply with a withholding requirement can mean greatly increased tax liability. However, a proposal in the 2008 Budget may make compliance easier.