Portugal

Portuguese corporate law generally permits inbound and outbound re-domiciliations and cross-border mergers, when the other jurisdiction is an EU Member State. In respect of other jurisdictions, a case-by-case analysis should be made to understand whether the Portuguese Commercial Registry Office would accept that re-domiciliation or merger.

However, the tax treatment of a re-domiciliation or cross-border merger could be different depending on whether the jurisdiction on the other side is an EU Member State or eligible EEA State. On outbound movements, the treatment may also differ depending on whether a Portuguese PE is retained and the assets allocated to it.

The following Q&As cover the tax treatment first of re-domiciliations and then of cross-border mergers, in each case for inbound and outbound movements.

KEY CONTACTS

Marta Pontes
Partner
[email protected]

Filipe Romão
Partner
[email protected]

António Castro Caldas
Partner
[email protected]

re-domiciliations

Inbound re-domiciliations

No transfer tax consequences result from an inbound re-domiciliation (provided it does not involve the liquidation or dissolution of a company that owns Portuguese immovable property).

Portuguese tax rules set out that corporate entities are resident here if they have their corporate seat or place of effective management in Portugal. So, unless the re-domiciling company had to be treated as a tax resident in a different country, in accordance with domestic law and the applicable double tax treaty, it would automatically become Portuguese tax resident when it changes its corporate seat to Portugal.

As a general rule, there would be no step-up. The Portuguese CIT rules stipulate that the cost basis of the assets should be their net accounting value as at the re-domiciliation date, provided that the assets were not allocated to a Portuguese PE and their accounting value does not exceed their fair market value. Different considerations would apply, if the re-domiciling company had already been Portuguese tax resident before the re-domiciliation or was deemed tax resident in a different country following the re-domiciliation.

Without prejudice to the above, if the departure State is another EU Member State, the taxpayer may (for Portuguese CIT) use the same tax value as it used for the purposes of determining income subject to CIT in that Member State (or a CIT exit charge), provided that this reflects the market value of the assets as at the date of re-domiciliation. Portuguese CIT law follows the rules in Article 5 of ATAD in this respect.

The Portuguese Tax Authorities have issued a ruling on this point (which is not explicitly addressed in the CIT rules). According to the Portuguese Tax Authorities, the acquisition date of the shares held by the re-domiciled company should be the original acquisition date, even if this is prior to the re-domiciliation of the company to Portugal.

The re-domiciled company will have to prepare the annual accounts for the year of transfer in accordance with Portuguese rules. Therefore, the re-domiciled company should follow the relevant accounting standards which may lead to the revaluation of certain assets.

Outbound re-domiciliations

No transfer tax consequences result from an outbound re-domiciliation (provided it does not involve the liquidation or dissolution of a company that owns Portuguese immovable property).

The CIT treatment of the re-domiciliation will depend on whether the re-domiciling company retains a PE in Portugal. Assets attributable to the Portuguese PE after the re-domiciliation are not subject to a CIT exit charge, as long as they are registered, for CIT purposes, at the same values as they were prior to the re-domiciliation. In addition, any tax losses accrued before the re-domiciliation may be deducted from the taxable profits of the PE retained in Portugal in proportion to the market value of the assets allocated to the PE.

Assets that are not allocated to a retained Portuguese PE would be subject to exit taxation. The Portuguese CIT Code sets out that, as a general rule, the transfer of residence from Portugal to another jurisdiction triggers a CIT exit charge (at the standard applicable rate of 20%, plus applicable municipal and state surcharges) on the positive difference between the market value of the company’s patrimonial elements (even if not expressed in the accounts) and its tax value as at the date of the re-domiciliation.

Shares held by the re-domiciling company may, however, benefit from the Portuguese participation exemption regime if the re-domiciliation is to another EU Member State or an eligible EEA State (meaning an EEA State with which Portugal has an agreement on mutual assistance in respect of tax collection equivalent to the requirements of the Mutual Assistance Directive) and certain additional conditions are met. These conditions are broadly that the re-domiciling company is not subject to a tax transparency regime, that it held (directly or indirectly) at least 10% of the share capital or voting rights of the relevant subsidiary for a consecutive period of at least a year before the re-domiciliation, that the relevant subsidiary is neither tax resident nor domiciled in a blacklisted territory, and is subject to and not exempt from Portuguese CIT (or a similar CIT), and that no more than 50% of the value of the shares derives (directly or indirectly) from Portuguese real estate and the shares are not allocated to an agricultural, industrial or commercial activity (save for real estate trading activity).

The exit tax charge must generally be paid immediately in full. However, if the re-domiciliation is to another EU Member State or to an eligible EEA State, the taxpayer may opt to pay the charge in five equal annual instalments. In this scenario, in addition to interest accruing, the Portuguese Tax Authorities require a bank guarantee for 125% of the tax due.

No withholding tax should be triggered by the re-domiciliation, even if no Portuguese PE is retained following the re-domiciliation and irrespective of which other jurisdiction is involved.

If the re-domiciled company retains a Portuguese PE, the taxable profits of that PE are, as a general rule, determined and taxed under the same rules as apply to a Portuguese resident company: the basis is the net accounting profit computed in accordance with Portuguese GAAP, as adjusted under the CIT Code. No Portuguese CIT should be due on income paid by the PE to the head office of the re-domiciled company.

Cross-border mergers

INBOUND MERGERS

Transfer taxes (e.g. Real Estate Transfer Tax and Stamp Tax) could apply, in particular, if there is Portuguese immovable property being transferred, but exemptions may be available.

If the transferring company is resident in another EU Member State, the merger may benefit from the tax neutrality regime. The Portuguese tax neutrality does not apply if the transferring company is established in a country that is not an EU Member State (although, to the extent that this includes EEA States, it is arguable that this restriction may represent a breach of the freedom of establishment under Article 31 of the EEA Agreement). The application of the tax neutrality regime is also subject to a business purpose test and reliance on the tax neutrality regime must be notified to the Portuguese Tax Authorities.

As a general rule, the Portuguese CIT Code sets out that a merger involving a Portuguese resident receiving company should benefit from the tax neutrality regime (or, technically speaking, from a tax deferral) if the Portuguese receiving company is subject to and not exempt from CIT and the transferring company resident in another EU Member State meets the criteria in Article 3 of the Merger Directive. These criteria are that the transferring company must have one of the legal forms mentioned in the Merger Directive, must be considered resident of an EU Member State for tax purposes (and not deemed resident outside the EU pursuant to an applicable double tax treaty), and must be subject, without being exempt, to one of the taxes listed in the Merger Directive. The involvement of a Portuguese PE on the inbound merger should not impact tax neutrality, provided these conditions are met and the Portuguese PE of the EU transferring company is absorbed by the Portuguese receiving company (and, therefore, the PE ceases to exist).

According to Portuguese CIT rules, when the tax neutrality regime applies, there should be no step-up resulting from the merger. One of the consequences of tax neutrality is that the receiving company maintains the same values for tax purposes as were used by the transferring company before the merger.

In contrast, a step-up might occur in the context of a merger if the receiving company, prior to the merger, decided to acquire the shares of the transferring company or if the tax neutrality regime does not apply.

If the tax neutrality regime applies to the merger (see answer to Question 2), Portuguese CIT rules set out that the relevant acquisition date of the shares, for CIT purposes, should be the date on which the transferring company acquired the assets (and not the date of the merger).

The Portuguese participation exemption regime may apply even if the merger does not fall within the tax neutrality regime.

Other points that should be considered before the merger include its impact on carried-forward tax losses and other tax reliefs, on any existing Portuguese tax consolidated group, and on the deductibility of financing expenses.

outbound mergers

Transfer taxes (e.g. Real Estate Transfer Tax and Stamp Tax) could apply, in particular if there is Portuguese immovable property being transferred, but exemptions may be available.

If the receiving company is resident in the EU, the CIT neutrality regime may apply to the extent that the contributed assets are maintained at the level of a Portuguese PE and such assets contribute to the determination of the taxable profits attributable to that PE. In that case, the Portuguese PE should inherit the historical tax registered value of the assets. The answer to Question 2 includes further details on the tax neutrality regime.

In respect of outbound cross-border mergers, it is additionally worth noting that the tax neutrality regime does not apply in respect of the transfer of ships and aircraft (or movable assets used for their operation) which are transferred to an international maritime or air navigation company not resident in Portuguese territory.

No withholding tax should be triggered by the merger, even if the receiving company will not maintain PE in Portugal and irrespective of which other jurisdictions are involved.

If the foreign receiving company retains a Portuguese PE, the taxable profits of that PE are, as a general rule, determined and taxed under the same rules as apply to a Portuguese resident company: the basis is the net accounting profit computed in accordance with Portuguese GAAP, as adjusted under the CIT Code. As a general rule, no Portuguese CIT is due on income paid by the PE to the head office of the foreign receiving company.

Back to homepage

This material is provided for general information only.
It does not constitute legal or other professional advice.