Portugal: Portuguese budget bill for 2018 brings few tax changes

October 26, 2017

The Portuguese budget bill for 2018 was presented to the Parliament on October 13 2017 and the main salient feature would be an uncharacteristic lack of any major tax amendments.

Despite some very public indications that Portugal would concede on some international pressure to change the non-habitual resident (NHR) regime, at least in regards to foreign pension income, the budget bill did not include any change on the NHR regime. It also did not include any change on the state surtax for corporate income tax (CIT) purposes. The increase of the state surtax was also a tax measure floated in the weeks prior to the release of the budget bill and its non-inclusion is welcome.

In terms of tax measures affecting corporate investors, it is worth highlighting that:

The adoption of a domestic rule, deeming the indirect transfer of immovable property located in Portugal as Portuguese-sourced revenue. This refers mainly to the transfer of shares of foreign companies if, at any time during the 365 days preceding the alienation, more than 50% of the value of the shares is derived, directly or indirectly, through one or more interposed entities, from immovable property located in Portugal. This rule does not apply to properties assigned to an agricultural, industrial or commercial activities not related to property trading. The same rule is adopted in personal income tax (PIT).
Relaxing of rules covering impairments on bad debts arising from insolvency proceedings or special process of revitalisation processes (PER). This includes measures to ease VAT bad debt relief in those insolvency/revitalisation processes.
Extension of the notional interest deduction on subscribed share capital contributions, which provides for the application of deduction on the basis of a notional 7% rate over the share capital contribution not exceeding €2 million ($2.4 million) for a maximum period of five years, to cover also conversion of credits (no longer restricted to shareholders) carried out within a share capital increase.
Amendments to the transfer tax exemption (and stamp tax exemption) applicable to corporate reorganisations, which will no longer require a prior request to the tax authorities to apply (a burdensome and lengthy procedure currently). A description of the restructuring and underlying economic benefits should be included on the tax file of the entities benefiting from those exemptions.
Revamp of the tax incentives for urban rehabilitation that have been a cornerstone of the successful urban requalification of both Lisbon and Oporto.

The budget bill is expected to enter a phase of parliamentary discussion during a period of at least six weeks to arrive at a final text by December.