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Tax and accounting information

Anti-evasion legislation and autonomous taxation

Transfer pricing

The Portuguese rules on transfer prices follow the OCDE directions, being, thus, within the standards of developed countries.
Article 63 of the Corporate Income Tax Code clearly provides that in trading operations, notably, in operations or series of operations over goods, rights or services, as well as over financial operations carried out between a tax payer and another entity, whether subject or not to Corporate Income Tax, with which the same maintains special relations, these entities should contract, accept and practice terms or conditions substantially identical to those which would be usually contracted, accepted and practiced between independent entities within the scope of comparable operations.

The hereinabove referred principle applies to:

a) Binding operations carried out between a taxpayer subject to Corporate Income Tax or to Individual Income Tax and a non resident entity;

b) Operations carried out between a non resident entity and one of its permanent establishments, including those carried out between a permanent establishment located in the Portuguese territory and other permanent establishments of the same entity located outside this territory;

c) Binding operations carried out between entities resident in the Portuguese territory which are taxpayers of Corporate Income Tax or of Individual Income Tax

It is considered that special relations between two entities exist in the situations where one of them has the capacity to directly or indirectly exercise a significant influence in the management decisions of the other, what happens, notably, between:

a) One entity and the holders of the respective share capital, or the spouses, ascendants or descendents of same who directly or indirectly detain a shareholding of not less than 10% of the share capital or of the voting rights;

b) Entities in which the same holders of the share capital, respective spouses, ascendants or descendants directly or indirectly detain a shareholding of not less than 10% of the share capital or of the voting rights;

c) One entity and the members of its corporate bodies, or of any administration, direction, management or audit bodies and respective spouses, ascendants and descendants;

d) Entities in which the majority of the members of the corporate bodies, or of the members of any of the administration, direction, management or audit bodies are the same persons or, in case of distinct persons, are connected between them by marriage, legally acknowledged common law marriage or kinship in direct line;

e) Entities connected by a subordination contract, same level group or other of equivalent effect;

f) Companies in relation of dominion, under the terms of the definition of this expression in diplomas providing the obligation to prepare consolidated financial statements;

g) Entities among which, because of the commercial, financial, professional or legal relations directly or indirectly established or practiced among them, a situation of dependence in the exercise of the respective activity is verified, notably when among them one of the following situations occurs:

1)When the exercise of the activity of one of the entities substantially depends on the assignment of intellectual or industrial property rights or of know-how of which the other entity is the lawful holder;

2)When the supply in raw-materials or the access to sales channels of products, merchandise or services on the side of one of the entities substantially depends on the other entity;

3)When one substantial part of the activity of one of the entities can only be carried out with the other entity, or when such activity depends on decisions of the latter;

4)When the right to fix prices, or to fix conditions of economic equivalent effect, relating to traded goods or services, provided or acquired by one of the entities is, because of imposition contained within a legal act, in the ownership of the other entity;

5)When, because of the terms and conditions of their trade or legal relationship, one of the entities may condition the management decisions of the other entity, in function of facts or circumstances strange to the trade or professional relation itself.

h) One resident or non resident entity with permanent establishment located in the Portuguese territory and one entity subject to a clearly more favourable tax regime resident in a country, territory or region contained in the list approved by administrative ruling of the Minister of Finance.

Companies must, therefore, adopt, for the determination of the terms and conditions to be usually agreed, accepted or practiced between independent entities, within the ambit of normal market situations or of situations of absence of special relations, the method or methods capable of assuring the highest degree of comparability among the operations or the series of operations they carry out and other substantially identical operations.

The methods to be used must be:

a) The method of comparable market price, the method of reduced resale price or the method of increased cost;

b) The method of splitting of profits, the method of net margin of the operation or any other method, when the methods referred in the hereinabove indent cannot be applied or, even in case they could be applied, when they do not permit to obtain a more reliable measure of the terms and conditions which independent entities would usually agree, accept or practice.

Companies are obliged to maintain in good and proper order, for a term of 10 years and in an establishment or in premises located in the Portuguese territory, one filer with the tax documentation relating to each tax period. In this same documentation, the company must maintain, adequately organised, the documentation relating to the policy adopted in issues of transfer prices, including directions or instructions relating to the respective application, the agreements and other legal acts entered into with entities with which they are in situations of special relations, including all and any amendments that may have taken place with full information on the respective fulfilment, the documentation and information relating to those entities as well as to the companies and to the goods and services used as a term of comparison, the functional and financial analysis and the sector data and all other information and elements that the company has taken into consideration for the determination of the terms and conditions usually agreed, accepted or practiced between independent entities and for the selection of the used method or methods.

Likewise, companies are obliged to indicate, in their annual corporate tax return statement containing the accounting and tax information, the existence or the inexistence, during the tax period to which such statement refers, of operations with entities with which the company is in a situation of special relations.

Taxpayers may ask from the Tax Administration a ruling, the object of which is to establish, on a provisory basis, the method or method capable of assuring the determination of the terms and conditions that would be usually agreed, accepted or practiced between independent entities in the trade and financial operation, including the provision of intra-group services and the agreements for the share of costs, carried out with entities with which they are in situations of special relations, or in operations carried out between the registered office and the permanent establishments.

The Tax Administration may make the necessary corrections to the determination of the taxable profit by virtue of special relations with another taxpayer subject toCorporate Income Tax or to Individual Income Tax, implying that, on the determination of the taxable profit of the latter, the adequate adjustments, reflecting the corrections made in the determination of the taxable profit of the former, must be made.

Likewise, Tax Administration can make the correlative adjustment referred in the foregoing paragraph when such adjustment results from international conventions entered into by Portugal and under such terms and conditions as foreseen therein.

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Tax and accounting information

Anti-evasion legislation and autonomous taxation

Transfer pricing