This following is a first summary of the key tax measures included in the draft, which approved will apply to the current taxable year.
Tax loss carryforward
Currently tax losses may be carry-forward for 5 years (12 years for qualifying SME) and the use of those losses against profits is capped at 70% of the year taxable income. The Budget proposal extends said period to 10 years for the tax losses of 2020 and 2021 and increases the mentioned cap to 80% when deducting these tax losses. The proposal also provides the suspension of carry-forward period (for tax losses prior to 1 January 2020) during the periods of 2020 and 2021.
Tax losses in mergers for SME
Generally, in a merger of two Portuguese companies, the amount of tax losses that can be transferred to the acquiring company is restricted based on the proportion calculated between the value of net assets transferred and the total net assets of the entities involved in the merger. The Budget proposal provides for a special regime for mergers of qualifying SME (with similar activity, at least, in the last 12 months) that allows not applying said limit and for an exemption from state surtax within a 3 year period.
New safe-harbor for acquisition of SME
Tax losses carried forward are forfeited upon a change in direct ownership of more than 50% of shareholding or voting rights unless falling under a specific safe-harbor. Outside the safe-harbors, a specific request to the tax authorities is required to preserve the tax losses on a change of ownership. The Budget proposal provides for a safe-harbor regime for the transfer of tax losses when the acquired company is a qualifying SME considered a “company in difficulty” and the transaction occurs until 31 December 2020. The regime is subject to several additional conditions.
Special limitation for CIT payments on account for 2020
Currently CIT is paid in three instalments (due in July, September and by 15 December or in the 7th, 9th and up to the 15 day of the 12th month of the year in which taxable income arises, when different from the civil year) corresponding to 95% of prior year corporate tax assessment (80% for companies with turnover below EUR 500,000). The Budget proposal provides that ailing Portuguese companies may waive in 50% or totally of the 1st and 2nd CIT payment on account when reveal a decrease of, at least, 20% or 40%,, respectively, in the monthly average invoicing communicated through the E-invoice website in the first semester of 2020 compared to the same period in 2019 or, for those who started activity on or after January 1, 2019, in relation to the average of the previously period of activity. Taxpayers whose main activity falls under the classification of economic activity of accommodation, restaurants and similar are also exempt from their payment. Special rules are also provided for CIT payments on account for ailing companies in tax grouping (RETGS).
Special Investment Tax Credit (CFEI II)
With small adjustments to the tax credit put in place back in 2013, the Budget proposal reinstates a tax credit that provides a deduction to the CIT (capped at 70%) due in 2020 and 2021, for 20% of the eligible investment costs incurred, up to a maximum amount of EUR 5 million, between 1 July and 30 June 2021 . If the tax credit is not fully offset in the year of the investment, it may be carried forward for a 5 year period. The proposal provides for similar eligible investment costs as the 2013 prior tax credit. The only major addition is the requirement that the beneficiaries of the tax credit may not terminate employment contracts for three years under either a collective dismissal or a dismissal due to extinction of work.
Special extension of installment plans for companies in special restructuring processes
The Budget proposal provides that companies in insolvency process, special process of revitalisation (PER) or extrajudicial recovery procedure (RERE) with an approved plan and complying with such plan may extend, under certain circumstances, instalment plans in progress to any tax and social security debts arising between 9 of March and 30 June 2020.
Additional Solidarity Bank Levy for 2020
The Portuguese Bank Levy in place since 2011 has raised several legal issues and caused tax litigation. A recent Arbitration Court decision considered the Portuguese bank levy on Portuguese branches to be in breach of EU law. Nevertheless, the Budget Law for 2020 kept the Bank Levy for 2020. Despite this doubtful legal framework, the Budget proposal includes an Additional Solidarity Bank Levy earmarking the revenues directly to the Social Security Financial Stabilization Fund. The banking entities will be subject to a similar Bank Levy assessed on a similar taxable base composed of: (i) their liabilities, less their own Tier 1 and 2 funds and any funds allocated to the warranty deposit fund; and (ii) the notional amount of off-balance-sheet derivative financial instruments. The rates proposed for this Additional Bank Levy applicable to each elements of the taxable base are 0.02% and 0.00005% respectively.
These tax proposals mark the end of Phase 1 urgent tax responses to the pandemic focused on liquidity and income support and demonstrate the intention of the Government to move gradually towards a Phase 2 directed towards economic recovery. Some of the proposals are rather complex and narrow scope, which may limit any spillover of the measures. The reviving of the investment tax credit is a positive feature. The unveiling of an Additional Solidarity Bank Levy is a controversial measure as the Government justifies the move as a form of compensation for the VAT exemption applicable to most financial services and transactions and set the tax burden of the financial sector closer to that of others sectors.