PORTUGAL: An Introduction to Tax
Over the years, Portugal has successfully developed several economic sectors, notably hotel and accommodation business, shared service centres and centres for excellence for start-ups and innovation. This has been the result of targeted tax incentives (such as the non-habitual tax residents regime) that attracted expats and foreign investors, and developed high-value added functions in Portugal. By the end of 2023, the Prime Minister’s resignation and the repeal of some of the tax incentives in force may impact the market pace over the first semester of 2024. Nonetheless, the enactment of a new legal framework for asset management structures is booming the incorporation of collective investment vehicles, such as investment companies and venture capital funds.
From a legal standpoint, several measures are being adopted to promote economic growth and reduce the level of bureaucracy and bolster innovation and entrepreneurship, capitalising the high-quality technological infrastructure and know-how and developing digital services, crypto-assets and other dematerialised businesses with an international reach.
In 2023, a new legislative package designated Mais-Habitação, included a number of measures targeted to the real estate sector (in particular residential properties) providing for a broad range of tax incentives, namely, tax incentives to long-term residential lease agreements, a reduction to the Personal Income Tax (IRS) rate applicable to rental income derived from residential lease agreements, an income tax exemption for rental income arising from properties transferred from short-term renting, and a special regime that neutralises capital gains on the sale of secondary residential properties insofar as the proceeds of the sale are allocated to the amortisation of mortgage loans (of the seller or the respective descendants).
The State Budget Law for 2024 revoked the Non-Habitual Tax Residents Regime from 2024 onwards, while maintaining a transitional regime for taxpayers relocating to Portugal in the course of 2024, under certain circumstances. Concurrently, it also established a new tax incentive attracting qualified professional and entrepreneurs, with a primary focus on research and development activities, provided such individuals have not been resident in Portugal for tax purposes in any of the previous five years.
Among other measures to attract investment, the State Budget Law for 2024 reinforced the tax attractiveness of start-ups, through the reduction of the Corporate Income Tax (IRC) rate applicable to a first bracket of profits. Also, from an IRS perspective, the incentive for the acquisition of shares in start-ups (that provides for certain advantages regarding the taxation applicable to gains derived from stock option, subscription, attribution, or other plans of equivalent effect, on start-up securities) has been extended to entities that, in the year of approval of the incentive plan, are recognised as start-ups, under the terms of the legal regime in force.
In addition, the Corporate Capitalisation Incentive Scheme (ICE), which consists of a tax deduction for eligible equity increases of Portuguese companies, was updated to align with the prevailing economic conditions and the recent shifts in benchmark interest rates, as anticipated by the European Commission’s 2022 Debt-Equity Bias Reduction Allowance (DEBRA) proposal. Consequently, the ICE’s previously foreseen deduction corresponding to 4.5% of the net equity increases has been replaced by a variable rate, corresponding to the average of Euribor 12M over the respective tax period, with a spread of 1.5%. For small and medium-sized companies (PME) or small mid-cap entities, the spread can be increased to 2%. The reference period for calculating eligible net capital increases has been reduced from nine to six years prior to the application of the ICE.
As to the most mediatic developments regarding taxation in recent times, it is worth highlighting that the Portuguese Tax Authorities (PTA) have been trying to implement procedures for the taxation of certain equipment/structures such as wind farms, dams and telecommunications towers, for property tax purposes. As regards wind farms, despite the wide range of court decisions favourable to taxpayers, the PTA revamped their arguments claiming once again that wind farms should qualify as immovable property and be subject to real estate property tax accordingly.
Taxpayers are therefore challenging the PTA’s most recent reasoning. Although no rulings have yet been published, 2024 is expected to be marked by fierce litigation on this matter. Moreover, the PTA are now in the process of evaluating the dams and the telecommunications towers and litigation is expected also in this context, as the legality of the qualification of such structures as immovable property for real estate property tax purposes will continue to be challenged.
Special contributions is another important area of tax litigation. In 2024, the landscape of financial and sectoral contributions persists, marked by a continuity of a diverse range of sector-specific contributions, including: contribution on the audiovisual sector, contribution on the banking sector, additional solidarity contribution on the banking sector, contribution on the pharmaceutical industry, extraordinary contribution on suppliers of medical devices for the National Health Service.
Concurrently, noteworthy amendments are introduced to contributions linked to environmentally impactful activities, such as the Extraordinary Contribution on the Energy Sector (CESE), whose regime was changed by the State Budget Law for 2024, and the Contribution on Lightweight and Very Lightweight Plastic Bags, amended to encompass a broader segment of the value chain, thereby seeking to dissuade eco-detrimental behaviours. Nonetheless, all of the above contributions continue to give rise to extensive litigation, given the lack of compliance with the Portuguese Constitution, which would render such taxes unlawful.
Moreover, by the end of 2023 a new provisional contribution was introduced: the extraordinary contribution on short-term rental, imposed on owners of short-term rental licensees. This contribution is a new addition to the above, and will likely trigger similar disputes due to the potential breach of the Constitution.
Given the current trajectory, it is expected that disputes over contributions will continue to increase throughout 2024 and beyond. We anticipate an upsurge in litigation before the Tax Courts, extending to the Constitutional Court and, potentially, escalating to the Court of Justice of the European Union (ECJ).
Bearing in mind the significant volume of tax litigation and the need to tackle the backlog of cases in the tax courts, until 31 December 2024, cases pending before the Tax Courts of first instance, whose petitions have been filed by 31 December 2021, may be referred to Tax Arbitration, regardless of the value of the claim, provided that Tax Arbitration Courts hold jurisdiction over the issues in dispute.
The significance of this measure lies mostly in the swiftness of the Tax Arbitration Court’s rulings, which are rendered within six months to one year (although this period may be increased whenever the case is suspended, namely due to the Arbitration Court referring the case to the ECJ for a preliminary ruling).
By the end of 2024, cases pending before first instance Tax Courts and filed before 31 December 2021, which were previously ineligible for Tax Arbitration due to exceeding the EUR10,000 threshold, can now be referred to the Tax Arbitration Courts for a decision, since the EUR10,000 case value threshold does not apply to cases migrating from the judicial Tax Courts to Tax Arbitration Courts. This effectively removes a barrier and expedites the resolution of pending cases.
Furthermore, for cases exceeding EUR10,000 that are referred to Tax Arbitration, the subsequent Arbitration Court’s ruling can be appealed on equivalent grounds to those applicable to first instance Tax Court’s judgments, circumventing the more restrictive appeal limits still associated with arbitration rulings. In fact, appeals against arbitration decisions are, as a rule, limited to the Constitutional Court, in constitutional matters, and to the Supreme Administrative Court, in cases of contradiction with previous judgments of the higher tax courts (the Supreme Administrative Court or the Central Administrative Court) or with previous arbitration rulings. These limitations on appeals do not hamper resorting to arbitration, which continues to be extremely successful, rather contributing to safeguarding the coherence and harmonisation of case law.
In addition, where the Arbitration Court terminates the proceedings without deciding the material issue in dispute, it will of its own motion refer the case back to the previously competent judicial Tax Court, which will then proceed from where it was left prior to referral, and will issue its ruling.
This strategic measure is expected to have a significant impact, by swiftly resolving taxpayers’ disputes and substantially reducing the pending caseload in the Tax Courts, leading to greater efficiency in tax dispute resolution.
Notwithstanding the upcoming parliamentary elections, Portugal continues to cultivate a highly attractive environment for foreign investors. The country maintains its position at the forefront of tax litigation, distinguished by a trailblazing tax arbitration system that is a pioneer in Europe and the OECD. Tax arbitration allows tax disputes to be resolved swiftly, increasing legal certainty on contentious tax matters and allowing taxpayers to adequately arrange their investment structures in order to comply with the applicable tax framework.
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 programmes 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.