Global Tax Alert | 18 June 2013

Portugal enacts withholding tax exemption for interest and royalties paid between associated companies of EU member states and also Switzerland

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Background

European Council Directive 2003/49/CE of 3 June 2003 established a common system of taxation applicable to interest and royalty payments made between associated companies of different EU Member States (EU Directive). European Council Directive 2004/76/EC of 29 April 2004 provided for an eight-year transitional period for implementation of the provisions of the EU Directive. During this transitional period, Portugal was allowed to charge reduced withholding taxes of 10% during the first four years and 5% during the last four years.

This transitional period will end on 30 June 2013 and in order to fully implement the EU Directive in Portugal, Portugal’s Ministers Council approved the Law proposal number 152/XII/2 on 6 June 2013 which provides the requisite withholding tax exemption.

As of 1 July 2013, interest and royalties due or paid by entities resident in the Portuguese territory or by a permanent establishment located herein to associated entities located in the EU member states or to a permanent establishment located therein will be exempt from Portuguese corporate income tax.

The final implementation of the EU Directive will also require that article 15 of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (Agreement) will enter into force as of the same date. Thus, interest and royalties due or paid by entities resident in the Portuguese territory or by a permanent establishment located herein to a company resident in Switzerland or to a permanent establishment located therein will also be exempt from Portuguese corporate income tax.

Requirements for the corporate income tax exemption

The corporate income tax exemption shall apply if certain conditions are met, namely:

  • Companies are subject to one of the taxes listed in article 3 of the EU Directive and without benefiting from an exemption;
  • Companies are established in one of the forms listed in the annex to the EU Directive; and
  • Companies are deemed a tax resident of an EU member state, without being deemed a tax resident in a third country under a double tax treaty.

Further, the exemption should apply to payments of interest and royalties between associated entities which is deemed verified whenever (i) a company has a direct minimum holding of 25 % in the other company, or (ii) a third company has a direct minimum holding of 25 % in both the beneficiary company and the payer company, and (iii) in all situations a minimum holding period of two years is met.

Finally, the companies or permanent establishments to which interest and royalties are paid should be the beneficial owner, which is deemed verified whenever income is received in its own name and account and not as an intermediary.

The proof of the above conditions should be made by means of an official form to be provided by the beneficiary entity to the payer entity and before the end of the legal deadline to deliver the tax to the Portuguese State (20th day of the month following the withholding tax due date).

In case the minimum two-year holding period is not met at the time of taxable event, withholding tax should be imposed. ,However, it can be refunded upon the request of the beneficiary entity to the Portuguese tax authorities filed within two year as from the conditions above are met.

For additional information with respect to this Alert, please contact the following:

EY, S.A., Lisbon, Portugal
  • António Neves
    +351 21 791 2295
    antonio.neves@pt.ey.com
  • Nuno Bastos
    +351 21 791 2000
    nuno.bastos@pt.ey.com
  • Carlos Lobo
    +351 21 791 2146
    carlos.lobo@pt.ey.com
  • Paulo Mendonça
    +351 21 791 2045
    paulo.mendonca@pt.ey.com
  • Pedro Paiva
    +351 22 607 0694
    pedro.paiva@pt.ey.com
  • João Sousa
    +351 21 794 9305
    joao.sousa@pt.ey.com

EYG no. CM3537