Taxes on Income from Business
IRC
The IRC is a tax levied on:
- Companies with head office or effective address in the Portuguese territory that run a commercial, industrial or agricultural business (companies, cooperatives) that are taxable for their universal income / profit;
- Companies, with head office or effective address in the Portuguese territory that do not run a commercial, industrial or agricultural business (associations, foundations, civil society without legal personality) that are taxable for their global income (total of the income of the categories according to IRS rules);
- Non-resident companies in the Portuguese territory that work in a permanent establishment (branch) that are taxed for their profits attributable to the permanent establishment located in the Portuguese territory;
- Non-resident companies in the Portuguese territory without permanent establishment taxed at source.
Economic double taxation
Dividends distributed to companies that are tax residents in the EU or the EEA may no longer be exempt from withholding tax in all situations where the participation held is below 10%, even if the acquisition value equals or exceeds Euro 20 million.The partial tax deduction (50%) of profits received is no longer possible. The full deduction now depends on a minimum participation in the distributing company of 10%, even in the case of the acquisition value exceeding Euro 20 million. The 10% threshold is now required for holding companies (“SGPS”), venture capital companies (“SCR”) and business angels (“ICR”).
Holding companies (“SGPS”) can no longer deduct profits received when such profits have not been subject to effective taxation in the hands of the distributing company.
Deductibility of capital losses
Capital losses and other losses related to shareholdings are no longer tax deductible to the extent that the reduction in value results from a tax-free distribution already made.Reinvestment regime
The reduction of capital gains taxation will depend exclusively on a participation of, at least, 10% of the share capital, even if the acquisition value exceeds Euro 20 million.Bad debts
Debts claimed through arbitration procedures may be considered as doubtful receivables for the computation of impairment losses.Debts recognized by arbitration courts in the course of litigation resulting from the rendering of essential public services, as well as debts that are time-barred and do not exceed the amount of Euro 750 each, can be considered as bad debts.
Tax deductibility of bad debts will now depend on evidence that the debt annulment has been communicated to the debtor.
Tax rates
There is an increase to 21.5% (previously 20%) of the withholding tax rate applicable to capital income earned by non-residents, as well as to income earned as a member of the governing bodies of an entity.Investment income paid or made available to accounts, which are opened in the name of one or more holders on behalf of non-identified third parties, shall be subject to a final withholding tax at a 30% rate, except in cases where the beneficial owner is identified.
There is an increase to 21.5% (previously 20%) of the tax rate applicable to income earned by resident entities that do not have main activities of a commercial, industrial or agricultural nature.
Additional tax rates
The beneficial tax rate of 5% for expenses incurred on light passenger vehicles with low CO2 emission levels will no longer apply. These expenses will be subject to the general (additional) taxation rules.10% rate applicable to expenses incurred (regardless of their deducibility) on light passenger vehicles, with an acquisition value determined by Ministerial Order (2010 – Euros 40 000; 2011 – Euros 30 000; 2012 and after – Euros 25 000) and motorcycles, excluding vehicles that are solely powered by electrical energy.
20% rate applicable to expenses incurred (regardless of their deductibility) on light passenger vehicles with an acquisition value exceeding the above amounts.
All additional taxes have an aggravated 10 p.p. surcharge, if the taxpayer has tax losses in the same fiscal year.
Limitation of tax benefits/special tax regimes
The assessed amount of corporate income tax cannot be lower than 90% (previously 75%) of the amount that would have been assessed in the absence of tax benefits/special tax regimes, which are now listed by exception.The tax benefits for the employment of youths will no longer be included in the calculation above.
Tax losses
The maintenance of tax losses carried forward in case of a tax neutral merger, demerger or asset contribution that determines a change of control of the company may be requested to the competent tax authority until the end of the month following the application to the Commercial Registrar (as is the case for requests due to changes in the corporate object or where there is a substantial change in the business activity).The deduction of tax losses depends on a legal certification of the accounts issued by a statutory auditor according to a new Ministerial Order that will be published.
In the case of tax losses of the fiscal year immediately preceding the year in which a change occurred, which result in the end of the carry forward, and when that change also occurred prior to the end of the time limit for filing of the annual return, the request for the maintenance of such tax losses can be filed within 15 days after the end of the time limit for filing the tax return or from the submission date, if earlier (this rule has an interpretative nature).
The time limit for the tax losses carry forward for companies which do not carry on a commercial, industrial or agricultural activity is reduced from 6 to 4 years.
Refund requests
When profits have been distributed by resident entities to EU or EEA residents, a refund of the tax withheld at source may be requested to the extent that it exceeds the tax that would be payable at standard tax rates (plus surcharge) on the total income earned by these entities, including from Portuguese sources. The refund request should be filed within two years.Special payment on account
The concept of “turnover” will be broadened for calculation of the special payment on account of banks, insurance companies or other financial entities, in order to include insurance contract commissions and operations considered as investment or service contracts.Accounting obligations
Invoices or similar documents, sales receipts or other documents that are processed by a computer and are relevant for tax purposes can be electronically archived, at any time.Expenses incurred on invoicing equipment and software
In the course of 2010 and 2011, exceptional write-downs arising from the substitution of invoicing programs or equipment, replaced due to software certification requirements, are considered as impairment losses, without the need of obtaining an approval by the tax authorities.In the course of 2010 and 2011, expenses on the acquisition of certified invoicing programs and hardware will be accepted as a cost for tax purposes in the relevant fiscal year.
Passenger and goods transport vehicles
Capital gains resulting from the transfer of passenger and goods transport vehicles remain tax exempt during 2011, if the sale proceeds are reinvested in new vehicles made after 2010.Job creation
The additional deduction of 50% of the expenses incurred on job creation can be granted to different employers in respect of the same employee, provided that the employers are not related parties.This tax benefit cannot be accumulated with other benefits, e.g. exemption from Social Security contributions (extraordinary measure in force for 2010).
Small/medium companies – Interest and remuneration of shareholders’ loans
In the case of small/medium companies’ shareholders’ loans, an interest rate of EURIBOR 12 M plus a spread up to 6% (1.5% previously) is tax deductible.Contributions on the banking sector
The banking sector will be subject to a new contribution regime.The regime applies to: (i) credit institutions whose main and effective management is located in Portuguese territory; (ii) subsidiaries in Portugal of credit institutions whose main and effective management is not located in Portuguese territory; (iii) branches in Portugal of credit institutions whose main and effective management is located outside the EU.
The contribution is calculated by reference to: (i) the liabilities computed and approved by the taxpayer, reduced by its Tier I and Tier II capital and by deposits covered by the Deposit Warranty Fund (at a rate between 0.01% and 0.05%); and (ii) the value of the derivatives not included in the balance sheet of the taxpayers (at a rate between 0.0001% and 0.0002%).
The computation and payment of this contribution must be made by the last day of June.
This contribution will not be deductible for tax purposes.
Associations in Portugal
Summary of legislation for Associations
In Portugal, an association is considered to have its own legal identity and the legislation applicable is the Corporate Tax (IRC) legislation.Article 2º of the IRC Code
Line 1 of Article 2º shows that associations are integrated into the Corporate Tax legislation. Therefore, any legislation applicable to companies is also applicable to associations.Article 49º of the IRC Code
Line 3 of Article 49º states that the only income of associations that is not taxable under the IRC legislation is as follows:- Membership fees
- Donations received
These two articles (Article 2º and 49º) show that the association is only exempt from paying tax under the IRC legislation when no member, president, treasurer or alike that forms part of the association receives any private interest or benefit from the association. The benefit has to be solely for the activity and status the association is involved in.
Article 11º of the IRC Code
Article 11º further goes on to state that association is exempted from taxation if:- The association is not, in any manner, involved in any commercial activity.
- The association is not involved in any agricultural or sales activity.
This means in practice that if the association organized social events or sold items or services such as publicity , then it is considered to be carrying out commercial and sales activities and thus it would be subject to Corporate Tax. The articles are very clear on this matter.
Article 52º of the Exemptions and Benefits Tax Code
Any patrimonial value the association receives, for example if the association received property or land, is exempted from taxation, as long as it is only used exclusively for the association´s main activity, which in your case is golf. This also includes the rental of the premises, as long as the income received does not exceed €7,481.97 per annum. However, this income still needs to be declared in Anexo F of the IES. The IES is a financial report, which is submitted to the Finanças on a yearly basis in June.Therefore, any commitments, financial interests and the sale of tickets to events are not exempt from taxes. They are taxable under Article 11ª stated above.
Article 87º of the IRC Code
All income from sales activities is taxable at 20%, in accord with Line 3 of Article 87º of the IRC Code. Thus, in relation to tickets sold for charity golf events and the sale of any other items, this income is taxable at a rate of 20%.Articles 117º and 121º of the IRC Code
Point c) of Line 1 of Article 117º of the Corporate Tax Code, in conjunction with Article 121º, states that as long as the association is practicing the activity as stated in its objects, the only two reports that the association needs to submit to the Finanças on an annual basis are as follows:- Modelo 22 in May
- IES in June
If any part of the association´s income is taxable, such as the sale of tickets or other items, then such income should be declared to the Finanças in May each year. Corporate tax will be payable on this income at a rate of 20%.
This also is enforced by Articles 63º and 75º of the LGT (Lei Geral Tributária), which is the general tax law of Portugal.
Articles 105º and 106º of the IRC Code
In addition, Articles 105º and 106º state that the association is to make provisional payments of tax in March and October each year, as is the case with companies in Portugal.The only instance these provisional payments are not applicable is when the income is membership fees and donations only. Hence, to eliminate any tax liability, membership fees and donations should be the only income that is recorded in the accounts of the association.
Associations involved in sporting activities, as long as they do not receive any taxable income, do not have to make any Corporate Tax provisional payments in accord with Line 1 of Articles 105º and 106º.
Article 123º of the IRC Code
According to Line 1 of Article 123º, associations must comply with the following regulations as part of their bookkeeping:- Records of all sources of income must be maintained and supported by valid receipts or invoices.
- All expenses directly related to the association, such as running expenses, must be supported by a valid invoice or receipt.
- A register of all assets held by the association at 31 December each year must be prepared. This register must show the patrimonial value or cost value of each asset.
According to Line 2 of Article 123º, if the association receives any income that is not exempt from Corporate Tax, i.e. income other than membership fees or donations, the association should have a chartered accountant preparing their accounts, which is also a requirement for companies in Portugal. This is reinforced by Article 3º of the Decreto-Lei nº 452/99 de 5 do Novembro.
Finally, we highlight that no member or president should receive any income that is of personal interest or advantage. If they do, this should be reported as income and taxed under the Personal Tax legislation. Social Security contributions must also be paid on this income.