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1. Scope
2. Exemptions
3. Determination of taxable income
4. Rates
5. Assessment and collection
6. Taxpayers' ancillary obligations
7. Payement on account
8. Tax Incentives
IRC - 1
1. SCOPE
1.1. Taxable persons
Subject to IRC are:
a) Corporate persons (trading companies, civil companies under commercial form, co-operative societies, public enterprises and other corporate entities of public or private law) with their head-office or effective management in the Portuguese territory, which are deemed to be resident;
b) Unincorporated entities with their head-office or effective management in the Portuguese territory (deemed to be resident) deriving income not directly liable to personal income tax or corporate income tax in the hands of both individuals and corporate persons forming part thereof, namely, inheritance in abeyance (hereditas jacens), unincorporated companies and associations, corporate persons in relation to which there is a declaration of invalidity, as well as commercial companies or civil companies in commercial form previously to the respective final registration;
c) Incorporated or unincorporated entities without their head-office or effective management in the Portuguese territory (deemed to be non-resident) deriving income therefrom not liable to personal income tax (IRS).
1.2. Taxable base
For the purposes of the taxable base, a distinction must be made between resident and non-resident entities.
Thus:
a) In relation to resident entities:
a i) If they exercise as their main activity a commercial, industrial or agricultural activity (this being always the case of commercial companies or civil companies in commercial form, co-operatives and public enterprises), the tax base is the profit, this being defined as the difference in net equity at the beginning and end of the tax period, after the adjustments provided for by the law;
a ii) If they do not exercise as their main activity a commercial, industrial or agricultural activity, the tax base is formed by the overall income corresponding to the algebraic sum of incomes of different categories as considered for IRS purposes;
b) In relation to non-resident entities:
b i) If they have a permanent establishment in the Portuguese territory, the taxable base is the profit attributable to that permanent establishment;
b ii) If they have no permanent establishment in the Portuguese territory, or if they have a permanent establishment, but such income is not attributable thereto, the taxable base is made up of incomes of the different categories separately considered for IRS purposes.
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There shall be attributable to the permanent establishment incomes of whatever nature obtained through it, as well as any other income from Portuguese source from an activity identical or similar to those carried on through that permanent establishment.
1.3. Extension of tax liability
Resident entities are liable to IRC on a personal liability base, that is to say, on the world-wide income from Portuguese and foreign sources.
Non-resident entities are liable to tax in terms of real liability, that is to say, only on incomes of Portuguese source.
For the purposes of taxation of non-resident entities, there shall be deemed to be obtained within the Portuguese territory other than incomes attributable to a permanent establishment situated therein, those incomes as mentioned below which do not satisfy these conditions:
a) Incomes in respect of immovable property situated in the Portuguese territory, including gains from the transfer against payment of such property;
b) Gains from the transfer for consideration of participations in the capital of an entity having its head-office or effective management within the Portuguese territory or other marketable securities issued by an entity with its head-office or effective management therein, as well as other corporate rights or securities where the payment of respective income, in the absence of such conditions, is attributable to a permanent establishment situated in such territory (1) ;
c) Incomes as below referred to where the person paying them has his domicile, head-office or effective management in the Portuguese territory or the payment of which is attributable to a permanent establishment situated therein:
- Income from intellectual or industrial property as well as income from information supplied in connection with an industrial, commercial or scientific experience;
- Income from the use or the right to use an agricultural, industrial, commercial or scientific equipment;
- Income from technical assistance;
- Other income from capital investment;
- Remuneration received as a member of a statutory body of a corporate person or other entities;
- Winnings from gambling, lotteries and betting as well as the amounts or prizes attributed in drawings or contests;
- Income from agency fees in concluding contracts;
- Income from other services rendered or used within the Portuguese territory other than those concerning transports, communications and financing activities.
d) Income from the exercise within the Portuguese territory of an activity of an artiste or sportsman, except if it can be proved that such artiste or sportsman does not control, directly or indirectly, the entity to which the income is paid.
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There shall not be considered to be obtained in the Portuguese territory incomes referred to in subparagraph c) where chargeable to a permanent establishment situated outside the Portuguese territory in connection with an activity carried on through such permanent establishment.
Not deemed to be obtained in the Portuguese territory are incomes derived from other services rendered or used therein other than those concerning transports, communications and financing activities where the services giving rise to them are wholly performed outside the Portuguese territory and such services do not concern property located there and are not in connection with any study, project, technical assistance or management, accounting or auditing services, organisation, research and development in whatever area.
For these purposes, a permanent establishment shall be considered to be any fixed place of business or permanent representation through which a commercial, industrial or agricultural activity is carried on.
An agricultural, forestry or cattle-breeding activity as well as a mine, an oil or gas well, a quarry or any other place of extraction of natural resources situated within the Portuguese territory, shall be treated as a permanent establishment.
There shall also be deemed to be a permanent establishment where a non-resident entity carries on its activity within the Portuguese territory through employees or other personnel engaged for that purpose, for a period or periods exceeding in the whole 120 days in any twelve month period.
1.4. Fiscal transparency regime
For IRC purposes, unincorporated entities are subject to the same treatment as corporations, although a fiscal transparency regime is applicable to certain resident companies: civil companies not incorporated in a commercial form, incorporated firms of professionals and companies holding assets, whose equity capital is controlled by a family group or a limited number of members, in certain conditions. For IRC purposes, a fiscal transparency regime also applies to ACEs (Complementary Business Groupings) constituted and operating in accordance with the law and to EEIGs (European Economic Interest Groupings), treated as resident.
For the purpose of taxation levied on the non-resident shareholder or member of a transparent company, an ACE or an EEIG, such shareholder or member shall be deemed to have a permanent establishment within the Portuguese territory.
The transparency regime is essentially characterised as imputing to the shareholders or members of the entity considered to be transparent its taxable amount (or, in case of ACE or EEIG, respective profits or losses), even if profits are not distributed. Thus, the entity considered to be transparent is not liable to IRC, the imputed amounts being therefore embodied in the taxable income of the shareholders or members, for IRC or IRS purposes, as the case may be. Under the IRS, such amounts are included as net incomes in category B, in the case of incorporated firms of professionals, and in categories C or D, in all other cases.
1.5. The taxation period
The IRC falls due for each taxation period which corresponds, in principle, to the calendar year.
Non resident entities having a permanent establishment in Portugal may adopt any yearly tax period other than the calendar year, but the adopted tax period must be used at least for the next five fiscal years.
IRC - 4
This possibility may also be extended upon request to other entities, in the same conditions, by way of a decision from the Minister of Finance, if economic interest reasons so justify.
2. Exemptions
Exempt from IRC, excluding income from capital, are: the State, the autonomous regions and local authorities as well as municipal associations and federations which do not exercise a commercial, industrial or agricultural activity;
Subject to an official decision to be published in Diário da República (Official Journal), which determines on a case by case base the extent of the exemption to be granted, the following entities are also exempted:
a) Administrative public utility companies, as well as mere public utility companies having as their main object scientific, cultural, charity, assistance or beneficence purposes;
b) Private social solidarity institutions and related entities as well as any persons assimilated thereto under the law.
Cultural, entertaining and sport associations are exempt from IRC in respect of income directly derived from the exercise of a cultural, entertaining and sport activity, being not considered as such income from a commercial, industrial or agricultural activity exercised, even as an ancillary one, in connection with such activities and, in particular, income from advertising, rights relating to any kind of transfer, immovable property, financial investment and bingo. However, even with regard to such income, an exemption shall always apply where its yearly amount does not exceed 1250 contos (paragraph 1 of Art. 48 of the Tax Incentives Statute).
Except for income subject to withholding at source, also exempted from IRC are, in certain conditions, agricultural co-operatives, group agricultural companies, housing and building co-operatives, teaching co-operatives, production co-operatives and handicraft co-operatives. The two last-mentioned ones shall only be exempted if at least three quarters of the respective workers are members thereof, provided that none of them owns more than 10% in the co-operative capital and its turnover is not higher than 30 000 contos in the period concerned. This exemption shall not apply however to income subject to IRC by way of withholding at source. The exempted co-operatives may waive the tax exemption, being therefore subject to the general taxation regime for at least five fiscal years.
Subject to a reciprocity rule, an IRC exemption shall also apply to profits derived from the exploitation of ships and aircraft by non-resident corporate persons and other entities engaged in waterways and airways transport.
Non-resident financial institutions are exempt from IRC in respect of interest on loans granted to resident credit institutions (Art. 36-A of the Tax Incentives Statute); non-resident credit institutions are also exempt from IRC in relation to fixed-term foreign currency deposits with an establishment legally authorised to accept them (Art. 40-A of the Tax Incentives Statute).
Political parties are also exempt from IRC under the applying legislation.
Public corporate persons of an associative nature, created by law to ensure the discipline and the representation of the exercise of independent professions, as well as employers and trade unions confederations and associations are exempt from IRC, except in respect of commercial, industrial or agricultural income or income from capital (Art. 49-A of the Tax Incentives Statute).
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3. Determination of taxable income
3.1. Assessment methods
The taxable income (the assessment of which is in accordance with those distinctions which result from different taxable base for persons liable to IRC) is determined, as a general rule, on the basis of a taxpayer return, without prejudice to its audit by Tax Administration. Thus, an enterprise is taxed on its effective real profit as estimated on the basis of its accounting.
The use of indicatory methods for assessing taxable profits shall be admitted only in some extraordinary conditions provided for by law, which concern, in particular, the non-existence, refusal to exhibit, concealment, destruction, forgery or vitiation, unduly delay and serious irregularities in the organisation and execution of accounting records. The law also lays down the technical criteria to be followed, in principle, in such determination, and the taxable profit thus estimated shall be notified to the taxpayer, together with any elements used, in order that without prejudice to the general guarantees he may lodge a claim for the review of taxable profits with a reviewing commission at district level.
3.2. Resident entities exercising as their main activity a commercial, industrial or agricultural one
In such case the taxable base, as mentioned, is constituted by the taxable profit, this being calculated in reference to accounting, and representing the algebraic sum of the net income for the period (the difference between profits or gains and costs or losses) as well as positive or negative changes in net equity during the same period which are not reflected in the taxable income. However, potential or underlying capital gains or losses are excluded from such changes in net equity, even if shown in the accounts.
Realised capital gains and capital losses are thus comprised in the taxable base. For this purpose, a broad concept of realisation is adopted to cover both voluntary capital gains (v.g. from sale or exchange) and involuntary capital gains (v.g. from the expropriation or compensation for destruction or robbery). Nevertheless, in order to ensure a going concern, the positive difference between realised capital gains and losses in respect of tangible assets may be excluded from tax, for that part having influenced the taxable base, where the realisation value is reinvested in the acquisition, production or construction of elements of tangible assets up to the end of the third fiscal period following that of the realisation (2). In the case of partial reinvestment, that part corresponding to such difference may be excluded from taxation. The amount of the tax excluded positive difference between capital gains and capital losses shall be allowed as a deduction from the acquisition or production cost of fixed tangible assets object of the reinvestment for the purposes of the depreciation or the determination of any taxable amount under IRC in respect thereof. As a matter of fact, depreciation of any assets in which the realisation amount has been reinvested shall not be allowed as a deduction
IRC - 6
for tax purposes for that part corresponding to the deduction attributable thereto. To be noted also that for the purposes of their inclusion in the taxable base capital gains and losses are shown by the difference between the realisation amount free from any charges connected thereto and the acquisition amount after deduction of depreciations made, taking into due account the deduction resulting from reinvestment, if any, being subject to a correction according to currency devaluation coefficients whenever the acquisition took place for more than two years.
In relation to stocks valuation rules, the following criteria are adopted, which are to be used, in principle, uniformly in the subsequent financial periods:
a) Effective acquisition or production costs;
b) Standard costs estimated in accordance with the appropriate technical and accounting principles;
c) Selling prices after deduction of the normal profit margin (only admitted in those business branches in which the calculation of the acquisition cost or the production cost is too burdensome or can not be estimated with reasonable accuracy, in which case the profit margin, if not determinable, may be replaced by a deduction not exceeding 20% of the sales price);
d) Special valuation methods for basic or normal inventory.
Depreciation (estimated as a general rule on the acquisition or production costs of fixed assets to which it relates) may be operated in relation to all fixed tangible assets either by the straight-line method or the declining balance method. There shall also be accepted as costs depreciation allowances higher than those resulting from the application of such methods by reason of an extraordinary devaluation as a result of duly justified abnormal circumstances.
Depreciation allowed by way of application of the straight-line method is in connection with the rates laid down by Decree-Regulation nr. 2/90 of 12th January, of which the most common are as follows (in %):
- Buildings
Dwelling houses, commercial and administrative buildings 2
Industrial 5
- Machinery and equipment (tools) 12.5 - 20
(provided there is no different rate)
- Computers 25
- Light vehicles 25
- Heavy vehicles (trucks) 20
- Furniture 12.5
The declining balance allowances result from the application to the book value not added back for each accounting period, of the depreciation rates used for the purpose of the straight-line method, these being adjusted in accordance with the following coefficients:
a) 1.5 if the useful life of the item is less than 5 years;
b) 2 if the useful life of the item is 5 or 6 years;
c) 2.5 if the useful life of the item is more than 6 years.
Research and development expenses may be fully accepted as costs for the financial year in which they are incurred. Costs in respect of elements belonging to fixed assets subject to obsolescence, the unit value of which does not exceed Esc. 40.000, may be fully deducted in a single period. There shall not be accepted as costs the depreciation of real estate for that part corresponding to the value of land and not liable to obsolescence, as well as depreciation IRC - 7
of light vehicles for the transport of passengers for that part corresponding to the acquisition value in excess of 6000 contos, provided that such vehicles are not used in public transport services or are not for rental in the exercise of the normal activity of the owning enterprise.
The provisions which may be deducted for tax purposes are as follows:
a) Provision for bad debts resulting from the normal activity of the enterprise, being considered as such those receivables in relation to which the debtor has a case pending for execution, bankruptcy or insolvency; receivables in dispute and overdue payments for more than 6 months, in which case the yearly cumulated amount of the provision is equal to 25% for overdue payments between 6 and 12 months, 50% between 12 and 18 months, 75% between 18 and 24 months and 100% more than 24 months;
b) Provision for devaluation of stock, calculated according to the difference between the acquisition or production cost of inventory recorded in the balance sheet at the end of the financial period and the market value in reference to the same date. Any taxable person adopting the permanent inventory system may increase by 1.3 the amount of the provisional expenses ;
c) Provision for liabilities and charges arising in connection with court proceedings;
d) Provision set up in accordance with the rules applying to insurance companies and banking institutions;
e) Provision set up by companies engaged in the exploration for, or exploitation of, petroleum, for the replacement of petroleum deposits.
There shall also be accepted for tax purposes, subject to the limits and conditions laid down by law, the expenses in connection with social utility arrangements in favour of the company personnel and their families, including contributions to pension funds and supplementary social security schemes, as well as gifts made to certain entities, namely those for cultural, charity or beneficence purposes and associations.
In determining the taxable profits, there shall not be deductible the IRC, the "derrama", the local property tax to be deducted from the IRC taxable amount, taxes levied on third persons which the enterprise is not entitled to bear, fines of a non contractual nature resulting from whatever infringement, indemnity for any event with insurable risks, lease payments in respect of light passenger or mixed vehicles, for that part exceeding the maximum depreciation which might be operated if the asset concerned had been acquired directly, registered representation fees by 20%, non substantiated charges and confidential expenditure (3) , fuel costs for that part exceeding the normal consumption or if not related to vehicles belonging to the enterprise or used by it under a leasing arrangement, as well as 20% of charges (in particular, depreciation, leasing, insurance, repair and fuel) in connection with light passenger vehicles not designed for public transport services nor for rental in the normal course of business of the holding enterprise, and any illicit expenses namely those resulting from any behaviour suggesting infringement of the Portuguese criminal law even if outside of its territorial scope .
With a view to the elimination of the economical double taxation of distributed profits, resident companies, co-operatives and public enterprises may deduct from the taxable base an amount equal to 95% of income corresponding to profits distributed by resident entities, liable to, and not exempt from IRC, and by entities who are resident in other EC countries, in which
IRC - 8
the taxable person holds directly a participation in capital of at least 25%, provided that such participation is held by the controlled company for two consecutive years. However, these conditions shall not apply in respect of income from corporate rights in the following entities (4) :
- insurance companies, mutual insurance companies and general agencies of foreign insurers (in respect of corporate rights in which the technical provisions were invested);
- venture capital companies;
- regional development companies;
- entrepreneurial promotion companies;
- domestic holding companies.
Losses carry-over is also admitted for tax purposes according to the carry-forward method up to a maximum of 6 financial years; any loss carry-over shall cease to have effect if one of the following situation occurs at the end of the fiscal period during which the deduction takes place: either the changement of the social object of the enterprise concerned, or a substantial modification in the nature of the previously exercised activity. In some specific cases of generally recognised economical interest, the Minister of Finance may authorise, upon request by the entity concerned, the non application of the above mentioned limitation.
Finally, it is to be noted that where a resident company has, according to commercial law, full control on other resident companies, the group of companies thus constituted may represent an unit for taxation purposes to be operated on a consolidated basis. However, the taxation regime based on the consolidated profit is subject to previous authorisation by the Minister of Finance, effective for a 5 years period.
3.3. Resident entities not exercising as their main activity a commercial, industrial or agricultural activity
As already referred to, since the taxable base is formed in these cases by the overall income corresponding to the algebraic sum of incomes from different categories taken into consideration for IRS purposes, the taxable income is determined by applying the provisions of this Code, except in respect of the taxable profit from commercial, industrial or agricultural activities of an ancillary nature, in which case the provisions of the IRC Code shall apply (see 3.2. above). Nevertheless, in determining such global income, consideration shall not be given to those provisions allowing, for IRS purposes, for the imputation of incomes to any year other than those during which they were received.
Any costs considered as absolutely necessary for the obtention of incomes by these entities and not deducted in determining income from each category comprised in the overall income, shall be, wholly or partly, deducted from this income in accordance with the rules laid down in this Code.
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3.4. Non-resident entities
In the case of a permanent establishment of a non-resident entity, the taxable profit attributable to such permanent establishment is determined by applying, subject to any appropriate adjustment, the rules for the determination of the taxable profit of resident persons (see 3.2. above). It must be stressed, however, that they may also be deducted as costs in determining the taxable profit, general management expenses which, in accordance with accepted criteria and within the limits deemed reasonable by Tax Administration, are attributable to the permanent establishment, such criteria being duly justified in the income tax return and uniformously used in the different financial periods. Where the allocation of such expenses is not possible on the base of the use by the permanent establishment of the goods and services to which they relate, apportionment criteria shall be accepted on the basis of gross income (turnover), direct costs or tangible fixed assets.
In relation to incomes of non-resident entities not attributable to a permanent establishment situated in the Portuguese territory, such incomes shall be determined according to the rules concerning the corresponding categories for IRS purposes, in respect of each one.
3.5. Measures designed to fight against tax avoidance
3.5.1. Transfer prices
In order to prevent either the transfer of business results between related companies or the internal transfer of results between different sectors of the same entity subject to different tax regimes, the law enables the Tax Administration to make some corrections to the taxable profit of both resident and non resident entities with a permanent establishment within the Portuguese territory to which such profit is attributable.
These adjustments are based on the following premises: special relations between the taxpayer and some other person subject to IRC or not; the establishment of conditions different from those usually agreed upon between independent persons carrying out transactions of the same nature; and the ascertainment on the base of accounting records of profits different from those that would be determined in the absence of such relations.
Wherever such adjustments are made by reason of a special relationship with other IRC or IRS taxpayer, in determining the taxable profit of the later any appropriate adjustments shall be made reflecting the adjustments introduced into the taxable profit of the former.
3.5.2. Payments to entities resident in countries with a privileged taxation system
In determining the taxable profit, there shall not be allowed as a deduction the amounts paid or payable, regardless of the reason why they are paid, by an IRC taxable person to an individual or legal person resident outside the Portuguese territory and subject therein to a clearly more favourable regime. This is the case where such persons are not subject to income tax in the territory of which they are residents or, if in respect of such amounts the income tax is lower than 20%.
This provision shall not apply if the taxpayer is able to produce evidence that the amounts concerned are in connection with expenses resulting from effectively realised operations, are not of an unusual nature or of an excessive amount.
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3.5.3. Allocation of profits of a company resident in a country with a privileged taxation system
The law provides for the allocation to members of a company who are resident within the Portuguese territory, at the pro rata of the participation held in the capital of the company and regardless of its distribution or not, of profits derived (after deduction of tax on profits already charged) by companies resident outside such territory and subject therein to a clearly more favourable taxation regime.
The application of this provision presupposes the direct or indirect holding by the member of the company of a participation of at least 25% or, if the non resident company is, directly or indirectly, held by more than 50% by resident members, of a participation not lower than 10%.
The concept of a more favourable taxation regime occurs where a company is not subject to income tax or the applicable tax rate on profits derived is lower than 20% within the territory (5) of which it is a resident.
Excluded from the scope of this provision is any company resident outside the Portuguese territory deriving more than 75% of its profits from the exercise of an agricultural, industrial or commercial activity, provided that in the last-mentioned case it has no intermediary who is a resident of the Portuguese territory or, if so, it is mainly designed to the market of the territory in which it is situated. There shall always be covered, however, those companies whose main activity consists, in particular, in banking operations, insurance of goods or persons situated outside the Portuguese territory, operations concerning corporate rights and other securities, as well as the rental of immovable property situated outside the territory in which they are resident.
Where a real distribution of profits previously allocated takes place in a given financial period, such profits shall be deducted from the taxable base giving rise to a tax credit for international double taxation, if any.
3.5.4. Thin capitalisation
In determining the taxable profit, there shall not be allowed as a deduction that part of interest in respect of any debt considered to be in excess, in relation to a loan granted by a non resident entity with which there is a special relationship.
A debt is deemed to be excessive if the amount due to each one of the above mentioned entities, with regard to any date of the fiscal year, is higher than the double value of the corresponding participation in the taxpayer's own equity.
In accordance to the provisions of law, special relations are deemed to exist where a non resident entity holds a direct or indirect participation of at least 25% in the capital of the taxpayer, or, if the participation held is lower, it effectively has a significative managing influence, or if the non resident entity and the taxpayer are under the control of the same entity. The indebtedness of a taxpayer in respect of a non resident third person shall be assimilated to the concept of special relations if there is a guarantee given by an entity with which there are special relations as above referred to.
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Thin capitalisation rules shall not apply if the taxpayer is able to produce evidence that, due regard being had to the kind of activity, the business sector, the size of the enterprise and other relevant criteria, he would have obtained the same indebtedness, under similar conditions, from an independent entity.
3.6. Special regime applicable to split-up, mergers and demergers
A special regime applies to a merger or demerger of resident companies, in order to ensure tax neutrality for these transactions under certain conditions. Thus, whenever the net worth items which are object of transfer as a result from merger or demerger, if valued according to the applicable legal rules, are inscribed in the accounts of the company into which they are transferred with the same values shown in the accounts of the merged or demerged companies, no assessment of capital gains or losses resulting from merger or demerger shall take place, nor consideration as profits of provisions constituted in the merged or demerged company in respect of receivables, inventories and liabilities and charges which are transferred as a result of such merger or demerger.
Furthermore, in case the Minister of Finance recognises the interest of such merger or demerger with a view to the appropriate redimensioning of the economical units, losses incurred by merged or demerged companies may be allowed as deductions from taxable profits of the company or companies into which the capital of such companies is transferred.
With regard to taxation of members of merged or demerged companies, it is accepted not to assess capital losses or gains, realised as a result of a merger or demerger, where in relation to the new corporate rights the value by which the former were inscribed is maintained. However, this does not preclude such members of companies to be taxed on the amounts in cash which may be attributed to them by reason of such merger or demerger.
This regime is also applicable with the necessary adjustments to the merger and demerger of companies in which participate equally companies or companies of other EC Member States. Nevertheless, where the company into which the items belonging to the assets and liabilities of a company resident in the Portuguese territory are transferred as a result from a merger or demerger, is not a resident of this territory, such application depends on whether such elements are effectively connected with a permanent establishment of that company, situated within the Portuguese territory and are taken into consideration in determining the taxable profit attributable to such permanent establishment (Directive 90/434/EC of 23 July 1990).
4. Rates
The IRC general rate is 34% and it applies to resident entities liable to tax on the basis of profits (entities exercising as their main activity a commercial, industrial or agricultural activity) and to permanent establishments of non-resident entities.
For resident entities whose main activity is not a commercial, industrial or agricultural one, the IRC rate is 20%.
Non-resident entities without a permanent establishment within the Portuguese territory or deriving income therein which is not attributable to a permanent establishment are subject to IRC at a rate of 25%, except for incomes as indicated below:
a) income from intellectual or industrial property, from information concerning an industrial, commercial or scientific experience as well as from technical assistance - rate 15%;
IRC - 12
b) income from the use or the right to use an agricultural, industrial, commercial or scientific equipment - rate 15%;
c) profits made available to a parent company resident in a EEC country (Directive nr. 90/435/EEC, of 23 July 1990) - rate 15% ( without prejudice to the provisions of double taxation agreements ) until 31 December 1996 and 10% from 1 January 1997 to 31 December 1999 ; (6)
d) income from bonds and other income from capital investment, other than profits made available by entities liable to IRC - rate 20%;
e) winnings from lotteries, raffles, betting, lotto and bingo, as well as the amounts or prizes attributed in raffles or contests - rate 35%;
f) agency fees for concluding contracts as well as income from services rendered or used within the Portuguese territory other than those concerning transports, communications and financing activities - rate 15%.
A local tax ("derrama") may be levied on IRC, at a maximal rate of 10% of IRC. Thus, if a "derrama" applies, the general rate of taxation on profits is 37.4% (34% + 3.4%).
5. Assessment and collection
The IRC payable by a resident entity or by a permanent establishment of a non-resident entity is assessed, in principle, in the year following that of the exercise to which the profit relates, such assessment being made on the basis of a periodical income tax return and the declared taxable income.
In case of income from real estate and capital gains derived by a non-resident entity without a permanent establishment within the Portuguese territory or non attributable to a permanent establishment situated therein, the tax assessment shall be made by the taxpayer on the basis of the periodical income tax return. Such entities are required to appoint a representative having his domicile, head-office or effective management in Portugal to represent them before the Tax Administration.
From the amount resulting from the application of the rate to the taxable income there shall be allowed as deductions the following:
- deduction for economical double taxation of distributed profits consisting of a tax credit equal to 60% of the IRC levied on profits distributed by resident entities liable to IRC and not exempted therefrom, and up to that part of the taxable amount proportional to those profits increased by the amount of such credit;
- deduction for international double taxation;
- deduction corresponding to the taxable amount of local property tax (applying where incomes from real estate or fractions of real estate charged to local property tax were included in the taxable amount, but the value to be deducted shall not exceed that part of the IRC payable corresponding to income from real estate or part of real estate).
After these deductions (a negative value being not accepted), the IRC withheld at source may also be deducted.
The withholding at source of IRC generally has the nature of an advance payment, except in the case of income derived by a non-resident entity not attributable to a permanent establishment situated in the Portuguese territory, in which case (if it is not income from immovable property) it is a final withholding. IRC - 13
Thus, excluding this last-mentioned case in which the withholding tax rates are applied as final ones to non-resident entities whose income is not attributable to a permanent establishment situated in Portugal, a withholding at source under the form of an advance payment shall apply to incomes derived within the Portuguese territory at the following rates:
- Income from intellectual or industrial property and income in respect of information supplied in connection with an industrial, commercial or scientific experience - 15%;
- Income from the use or the right to use an agricultural, industrial, commercial or scientific equipment - 15%;
- Income from registered or unregistered (bearer) shares - 25%;
- Interest on demand or time deposit - 20%;
- Income from bonds and debentures - 20%;
- Other income from capital - 15%;
- Income from real estate as defined for IRS purposes, where the debtor thereof is liable to IRC or if such income is considered as an expenditure in connection with a commercial, industrial or agricultural activity of a person liable to IRS who is required to keep an accounting - 15%;
- Remuneration derived as a member of a statutory body of a corporate person and other entities - 20%;
- Winnings from lotteries, raffles, betting, lotto and bingo, as well as the amounts or prizes attributed in raffles or contests - 35%;
- Income from agency for the celebration of any contract - 15%;
- Income from agency services for concluding contracts as well as income from other services rendered or used within the Portuguese territory other than those concerning transports, communications and financing activities - 15%.
The amounts withheld at source shall be deposited with the Treasury no later than the 20th day of the month following that in which they were deducted.
To be noted also that a resident entity exercising as its main activity a commercial, industrial or agricultural one as well as a non-resident entity with a permanent establishment within the Portuguese territory are required, in principle, in the fiscal year to which the taxable profit relates, to make three advance payments, each of 25% of the IRC corresponding to the previous fiscal year (after deduction of withholding at source); however, if the amount of advance payments is equal or higher than the tax payable on the basis of the taxable amount of the fiscal period, the subsequent payments may be suspended. Such advance payments shall be made in July, September and December, the remaining part being paid until the day in which the income tax return is lodged with (that is to say, 31st May of the following year) (7). With regard to those entities not exercising as their main activity a commercial, industrial or agricultural one, the tax is paid the day the tax return is produced. In the case of a tax refund (by reason of an withholding at source or an advance payment), this shall take place until the end of the third month following that in which the income tax return is produced.
Payment of IRC may be made in cash, by check, bank transfer, bank to bank transfer or post-office money transfer, and in the course of the voluntary collection period in one of the following places as the taxpayer may elect: banks, post-offices and Treasury offices.
IRC - 14
The rules concerning tax payment and tax refund are laid down by Decree-Law nr. 492/88 of 30 December, that provides, in certain cases, for the payment of IRC in instalments (up to 36 monthly instalments) subject to a previous authorisation by Minister of Finance, after expiration of the voluntary collection period and before the instituting of the competent lawsuits for payment of tax in default (executory tax process).
6. Taxpayers' ancillary obligations
Taxable persons liable to IRC and their representatives are subject to the following reporting obligations:
a) The production of a declaration in respect of the registering, changes or cancellation of register of taxable persons, the registering declaration being produced, as a general rule, within 90 days counting from the date in which the registering was made with the Internal Register for Legal Persons and the declaration of change within 15 days as from the date of change of the business name of the taxable person, or the date of change of the location of head-office, effective management or permanent establishment in which the accounting records are centralised;
b) The filing of a periodical income tax return to be filed each year until the 31st May or until the end of the fifth month subsequen to the closing date of the taxation period by resident entities, non-resident entities having a permanent establishment within the Portuguese territory and by non-resident entities deriving income from real estate and capital gains within the Portuguese territory not attributable to a permanent establishment situated therein (in the case of cessation of business or gains resulting from the transfer against payment of immovable property, corporate rights and other securities obtained within the Portuguese territory by a non-resident entity if not attributable to a permanent establishment, the tax return must be filed within 30 days counting from such event).
Resident entities exercising as their main activity a commercial, industrial or agricultural one, as well as non-resident entities with a permanent establishment within the Portuguese territory are required to keep an accounting according to the provisions of both commercial and fiscal law, any delay over 90 days counting from the last day of the month to which the operations relate being not admitted; the accounting books, auxiliary records and respective supporting documents must be duly kept for a period of 10 years.
Resident entities not exercising as their main activity a commercial, industrial or agricultural one may have, instead of an accounting, a simplified book-keeping scheme consisting of an income recording, an expenditure recording and a closing inventory; however, in relation to a commercial, industrial or agricultural activity exercised as an accessory activity, an accounting must be kept.
Both the accounting and the simplified book-keeping are to be centralised in an establishment or business office situated within the Portuguese territory.
7. Payment on account
Any entity exercising as its main business a commercial, industrial or agricultural activity shall be liable to a special advance payment to be made on March (in 1998, April) or in two instalments in the course of March and October. IRC - 15
The amount of such advance payment shall be equal to the difference between the amount corresponding to 1% of its turnover up to a minimum limit of Esc. 100,000 and a maximum limit of Esc. 300,000 and the amount of any advance payments made in the previous year. 8. Tax Incentives
Other than tax incentives provided for under the Statute of Tax Incentives (Chapter X), IRC taxable persons may benefit from the following advantages:
8.1. Investment tax credit under Decree-Law nº 121/95, of 31st May
Any IRC taxable person who is a resident of the Portuguese territory and who exercises as his main business a commercial, industrial or agricultural activity or a non-resident with a permanent establishment within such territory may deduct from IRC taxable amount, up to the amount of 15% thereof, an amount corresponding to 5% of the relevant additional investment. The relevant additional investment shall be determined by the difference between the investment made during the accounting period and the mere arithmetical average of the investment made in the previous two exercises in tangible assets connected with the carrying out of the enterprise within the Portuguese territory, provided that such assets are acquired as new, other than:
a) Land except if designed for the exploitation of mining, natural mineral water and source water, quarries, clay-pits and sand-pits in connection with extracting industry projects;
b) Construction, acquisition, reparation and enlargement of any buildings other than factory premises;
c) Light motor vehicles;
d) Furniture and decoration items;
e) Social equipment;
f) Other investment goods not directly and necessarily connected with the production activity carried out by the enterprise.
8.2 Incentives granted to micro, small and medium enterprises under Decree-Law nº 42/98, of 3rd March
Micro, small and medium enterprises exercising as their main business a commercial, industrial or agricultural activity as well as non-residents with a permanent establishment in Portugal may, in 1998, 1999 and 2000 fiscal periods, deduct from IRC taxable basis, and up to 30% thereof, an amount corresponding to 10% of the relevant additional investment, as defined for the purpose of the investment tax credit. The 30% limit shall be increased by 10 percentage points where the taxable profit, for the accounting period to which the investment relates, is higher at least 20% than the taxable profit as assessed in the immediately preceding period and if there is a profit withholding by the enterprise for an amount equal to that minimum increase, which shall not be the object of any allocation to the members of the company during the subsequent three exercises on pain of losing that advantage.
IRC - 16
8.3 Tax credit to Research and Development
IRC taxable persons who are resident in the Portuguese territory and who exercise as their main business a commercial, industrial or agricultural activity, as well as non-residents with a permanent establishment therein may, for the accounting periods of 1997 to 2000, deduct the amount corresponding to research and investment expenses for that part having not been the object of a non-recoverable State financing participation, according to a double percentage:
a) Standard rate: 8% of all expenses incurred in that period;
b) Increased Rate: 30% of increased expenses incurred in that period in relation to the mere arithmetical average of the previous two years up to a limit of 50,000 contos.
(1) However, according to the provisions of Art. 33 of the Tax Incentives Statute (EBF), such gains are exempt from IRC if derived by an entity having neither its head-office nor the effective management in the Portuguese territory neither its head-office nor the effective management in the Portuguese territory and without a permanent establishment there to which such gains are attributable.
(2) In accordance to Decree-Law nr. 495/88 of 30 December, the same treatment applies to holding companies (Sociedades Gestoras de Participações Sociais - SGPS) in respect of capital gains or losses from the sale or exchange of quotas or shares owned by them where the realisation value thereof is, wholly or partly, reinvested in the acquisition of other quotas, shares or treasury bills.
To be noted also that gains or losses concerning the transfer of any shares or corporate rights the acquisition of which occurred previously to the entry into force of the IRC Code shall not be considered as forming part of the taxable profit.
(3) Furthermore, confidential expenditures and unsubstantiated expenses are autonomously liable for IRS or IRC at a 25% rate (Art. 4 of Decree-Law nr. 192/90 of 9th June) to be increased, as from 1997, to 30% except for wholly or partly exempted taxable persons or those persons who do not exercise as their main activity a commercial, industrial or agricultural activity to which a 40% tax rate shall apply.
(4) The application of this regime is also provided for under the Tax Incentives Statute regardless of the participation percentage and the period of time during which it is held in relation to income derived by the following entities:
- investment companies;
- brokerage financing companies (for income from an independent activity).
(5) As long as the territory of Macau is under Portuguese administration, its taxation system shall not be considered clearly more favourable unless profits are therein taxed at a 15% rate.
(6) Parent company means a company that holds directly a participation in capital of at least 25% during two consecutive years or as from the incorporation of the controlled company, provided that, in this case, such participation is held during that period of time.
(7) If the taxation period is not coincident with the calendar year, the advance payments fall due during the seventh, ninth and twelfth months of the respective taxation year, the remaining part being payable up to the end of the fifth month subsequent to the end of such period of time (delay for delivery of the competent periodical income tax return)..
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