Global Tax Alert | 15 October 2013

Portugal proposes amendments to exit tax to conform to EU principles

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In 2012, the Court of Justice of the European Union (CJEU) ruled1 that Portugal, by adopting and maintaining in force Articles 76 A and 76 B2 of its Corporate Tax Code (CTC) regarding exit taxes, failed to fulfill its obligations under Article 49 of the Treaty on the Foundation of the European Union. The CTC provisions relate to the transfer, by a Portuguese company, of its registered office and its effective management to another Member State or in the case of transfer, by a company not resident in Portugal, of some or all of the assets attached to a Portuguese permanent establishment (PE) from Portugal to another Member State, and require the immediate taxation of unrealized capital gains relating to the assets concerned but not of unrealized capital gains resulting from purely national operations.

Moreover, the Portuguese tax law, namely Article 85 of the CTC, also imposes taxation on the shareholders of the company moving residency abroad since a deemed liquidation was considered to occur for tax purposes.

The 2013 Budget Law provided legislative authorization to amend the exit taxation rules to conform to EU principles. Accordingly, within the CTC Reform submitted to Parliament on 15 October 2013, a significant change to the exit taxation regime is being proposed. The key provisions are summarized below:

  • The change of residency abroad results in the termination of activity for corporate tax purposes and in the computation of gains and losses determined by the difference between the market value and the tax value of the assets and liabilities. The tax return corresponding to the termination of activity period should disclose the assets and liabilities at the date of transfer of residency abroad.
  • Upon change of residency to an EU or EEA Member State, the taxpayer may opt between the following alternatives: (i) immediate payment of the full tax amount; (ii) payment of the tax whenever the gains are realized (which may be deemed to occur if the assets are extinguished, disposed of, or disconnected from the business activity or transferred to a non-EU or non-EEA Member State; or (iii) payment of the full tax amount in equal installments during a five year period.
  • The deferral of the tax payment triggers late payment interest (currently, at an annual rate of 6.112%). Moreover, a bank guarantee may be requested, amounting to the tax due plus 25%.
  • When the option to pay the tax whenever gains are realized is elected, the taxpayer must file an annual tax return on an ongoing basis (until all tax due has been paid, if applicable). Failure to file the tax return may trigger the payment of the deferred tax due amount.
  • If the five year installment option is chosen, 1/5 of the tax due should be paid upon submitting the tax return corresponding to the termination of activity period and the remaining amount should be paid by 31 May in equal installments for the following four years together with the respective late payment interest. Failure to pay any of the installments may trigger the immediate payment of the remaining deferred tax due amount.
  • If either one of the deferral options was elected and there is a subsequent transfer of the taxpayer’s residency to a non-EU or non-EEA Member State, the pending tax due amount becomes payable immediately.
  • Taxation shall not apply to assets and liabilities that remain allocated to a PE of the taxpayer in Portugal, provided certain conditions and requirements are met. The tax losses carried forward and existing at the time of transfer of residency abroad can be transferred to the PE remaining in Portugal upon petition to the Tax Authorities. This should not apply in cases where the anti-abuse provision for tax neutral transactions is triggered, which may occur, inter alia, if the transfer of residency abroad is tax driven and not based on sound business reasons.
  • The above rules apply, with the necessary adjustments, to the closing of a PE or to the transfer abroad of assets attached to a PE.
  • Article 85 of the CTC is eliminated. Hence the taxation for shareholders will no longer be triggered.

These changes, if approved, shall enter into force on 1 January 2014 and will impact group and business models reorganizations. They also require compliance with reporting obligations on a continued basis, specifically when there is an election to defer taxation.

Endnotes

1. Case C-38/10.

2. The previous Article 76 A and Article 76 B are now respectively Article 83 and Article 84 of the CTC.

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

Ernst & Young, 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
  • Anabela Silva
    + 351 22 607 9620
    anabela.silva@pt.ey.com

EYG no. CM3883