Portugal’s Government has presented Draft Law No. 177/XIII to Parliament, introducing amendments to the Income Tax Code to transpose certain ATAD 1 rules. The proposals include rules on controlled foreign corporations (CFCs), and on limiting interest deductions, among others. However, the legislation does not contain any hybrid mismatch proposals, as it says the government intends to study those rules further.
According to the Draft Law, Article 66 of the Income Tax Code aligns with Article 7 of ATAD 1 regarding CFCs. An entity will be deemed to be subject to a preferential tax regime where the jurisdiction appears in the list approved by an ordinance; or where the tax it pays on profits is less than 50% of the tax that would be due in Portugal.
Excluded from this list are non-resident entities whose income from the following categories does not exceed 25% of their total income:
- Interest or other income generated by financial assets.
- Royalties or other income from intellectual property.
- Dividends and income from the sale of shares of capital.
- Income derived from financial leasing.
- Income from banking operations.
- Income from a billing enterprise, which earns income from goods and services purchased and sold to entities with which there are special relationships and which add little or no economic value.
The proposed law includes amendments to the Income Tax Code regarding the limitation on deductibility of financing expenses. The amendments propose to adjust only the definition of “net financing expenses” since, according to the Draft Law, current Article 67 of the Income Tax Code appears to align with Article 4 of ATAD 1 in that net finance expenditure can be deducted up to the higher of either €1 million or 30% of profit/loss before depreciation, amortization, net financing expenditure, and taxes.
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