PORTUGAL LAW AND PRACTICE Contributed by: Joana Torres Fernandes, José Manuel Pereira da Costa, Danielle Avidago, Javier Mateo, António Pratas Nunes, Joana Loureiro Veríssimo, Madalena Mourão and David Serras Pereira, LVP Advogados
• the appropriation of distributable accounting prof - its, in accordance with commercial law, to retained earnings or directly to reserves or to a share capital increase. 5.4 Tax Consolidation Tax consolidation is available in Portugal through the Special Group Taxation Regime (RETGS). The regime is optional and allows the parent com - pany of a qualifying group to elect for a consolidated determination of the group’s taxable base, aggregat - ing the taxable profits and losses of all group mem - bers through an algebraic sum. A group exists for these purposes where a parent company holds, directly or indirectly, at least 75% of the share capital of one or more subsidiaries, provided that such holding also confers more than 50% of the voting rights. The election is only available where all of the following conditions are met on a cumulative basis: • all group companies must have their registered office and place of effective management in Portu - guese territory and their income must be subject to the standard CIT regime at the highest applicable rate; • the parent company must have held its participa - tion in each subsidiary for more than one year prior to the start of the regime; • the parent company must not itself qualify as a subsidiary of another Portuguese resident com - pany that meets the conditions to be treated as a parent; and • the parent company must not have renounced the regime in the three years preceding the election. 5.5 Thin Capitalisation Rules and Other Limitations Portugal historically applied traditional thin capitalisa - tion rules, which were replaced in 2013 by a broader interest limitation regime, in line with the OECD BEPS recommendations and subsequently aligned with the EU Anti-Tax Avoidance Directive (ATAD).
The key rule to highlight is the limitation on the deduct - ibility of net financing expenses. Net financing expens - es are deductible up to the higher of EUR1,000,000 or 30% of earnings before depreciation, amortisation, net financing expenses and taxes (EBITDA). The pur - pose of this rule is to prevent excessive debt financing from artificially reducing taxable income. Net financing expenses that exceed the applicable threshold in a given tax period may be carried forward and deducted in any of the five subsequent tax peri - ods, subject to the same limitations applying in each of those periods. 5.6 Transfer Pricing Transfer pricing rules apply in Portugal. Under the applicable legal framework, transactions carried out between a taxpayer and any related entity must be conducted on terms and conditions that are substan - tially identical to those that would normally be agreed between independent parties in comparable transac - tions. This is the arm’s length principle, which aims to ensure tax equity between companies forming part of multi - national groups and independent enterprises, neutral - ise tax avoidance practices, protect the domestic tax base and reduce obstacles to international investment and trade. In this sense, related party relationships exist where one entity has the power to exercise, directly or indi - rectly, a significant influence over the management decisions of another. To determine the arm’s length terms and conditions, taxpayers must adopt the most appropriate method having regard to, among other factors: • the nature of the transaction; • the availability of reliable information; and • the degree of comparability between the controlled transaction and comparable uncontrolled transac - tions. The available methods are: • the comparable uncontrolled price method;
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