PORTUGUESE BREXIT: CIT & VAT

Corporate Income Tax (“CIT”)

Irrespectively of the actual Brexit scenario that will ultimately be implemented –​​ i.e., no-deal or an agreed exit -, one thing is certain: the tax relationship between Portugal and United Kingdom (“UK”) in a post-Brexit context will not be the same.

As from the EU perspective the UK will become a third-country, in a no-deal scenario the EU tax regime will no longer apply.

Being so,​​ dividends​​ paid by Portuguese subsidiaries (“PT Co”) held through an UK permanent establishment would not benefit from the withholding tax exemption under the conditions of Directive No. 2011/96/UE (“Parent-Subsidiaries Directive”).

The same would happen to the Portuguese-sourced​​ interest and royalties, as the withholding tax exemptions set by Directive No. 2003/49/CE (“Interest and Royalties Directive”) would be put to an end whenever the ultimate beneficial owner​​ is (i) an UK company or a permanent establishment thereof located in an EU country or (ii) an UK permanent establishment of an EU company. Likewise, the interest and royalty’s withholding tax exemption also ceases to apply where the income is due or paid by a Portuguese permanent establishment of a UK company.

As such, in a no-deal scenario, the general 25% CIT withholding tax may only be overridden by use of the existing Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (i.e., “Double Tax Treaty - “DTT”) in force between the UK and Portugal since January 17th, 1969, that can mitigate the downsides of the non-application of EU´s tax regimes and the potential double taxation resulting therefrom.​​ 

Be that as it may, instead of exemptions, DTT rules and reductions of withholding may be the best UK/Portugal interested entities may get –​​ i.e., to 15% or 10%, in case of dividends derived from qualified holdings, to 10% in case of interests, and to 5% on royalties’ payments – and even so one should prepare for the related red tape, as​​ activation of DTT protection is not automatic but otherwise has formal procedures (e.g., on the Portuguese side, the need of official RFI forms duly certified by UK tax authorities).

Since the CIT rate currently in force in the UK is not less than 12.5% (i.e., 60% of the Portuguese CIT standard rate), qualifying UK companies may even benefit from the​​ participation exemption regime provided for in the domestic legislation, on dividends paid by PT Cos, namely if a minimum stake of 10% of PT Cos’ share capital or voting rights is held for an uninterrupted 1-year period prior to the distribution.​​ 

On the other hand, shareholdings held by entities resident in the UK are no longer relevant for the purposes of​​ Groups of Companies (“RETGS”) regime. Therefore, UK tax resident companies cannot be parent companies for the purposes of RETGS regime, which will certainly entail changes to existing groups that are using this tax regime.

In addition, the Portuguese​​ special regime for tax neutrality in mergers and acquisitions, which results from the transposition of the Directive No. 2009/133/CE (“Directive on Mergers and Acquisitions”), will no longer be available to transactions involving UK entities.

Respecting​​ exit tax, there is no possibility​​ of deferred or fractional payment of the tax calculated as a result (i) of the​​ transfer of residence of a company from Portugal to the UK; (ii) the cessation of the activity in Portugal of a permanent establishment of a non-resident entity involving the transfer of assets to the UK; (iii) the transfer to the UK of the assets which are related to a permanent establishment situated in Portugal; and (iv) from the allocation of assets of a resident entity to a permanent establishment in the UK when the option for exemption from the profits and losses of that establishment was exercised.

Value Added Tax (“VAT”)

From a VAT standpoint, Brexit will majorly and foremost impact on the cross-border movements of goods between the EU and the UK. Indeed, assuming a no-deal scenario, Brexit will basically bring back the rules in force before January 1st, 1993 – a time where actual border controls of goods were in place.

Amongst other issues,​​ goods​​ dispatched from the UK to Portugal (and vice-versa) will no longer qualify as intra-community transactions, but as imports and exports subject to Customs controls. VAT exemptions will still apply at the country of origin of the goods. However, and apart from the VAT being due at the country of destination (no substantial changes here), Customs duties will start to be levied upon the arrival of the goods to Portugal/the UK.

Brexit will also impact on the​​ place of supply of services’​​ rules, notably on a​​ B2C​​ framework. Firstly, on the so-called electronically supplied services (telecommunication, television and radio broadcasting and digital services),​​ where UK entities supplying services to Portuguese consumers will need to register in Portugal to be able to continue said activity​​ or​​ apply for the​​ Mini One Stop Shop (“MOSS”) for non-EU entities, in Portugal or in other EU country. The same will be the case for non-EU suppliers that applied for the MOSS in the UK and are supplying services in Portugal under UK’s MOSS registration. Likewise, as for the moment the UK becomes a non-EU country, the use & enjoyment rules provided for in the Portuguese VAT legislation will also be applicable. These rules assure that services are taxed where the service is effectively consumed, aiming at avoiding double taxation or double non-taxation. In Portugal, use & enjoyment rules apply to the hiring of movable goods, hiring out of means of transport and to electronic supplied services.​​ This means that whenever the standard place of supply is in the UK, if the services are “actually enjoyed” in Portugal, place of supply will shift from the UK (non-EU) to Portugal.

Finally,​​ the refund​​ of input VAT borne by UK taxable persons in Portugal will no longer be claimed back under the procedure laid down in Directive No. 2008/9/EC. On the opposite, refunds must be claimed under the mechanism provided for in the VAT Directive​​ 86/560/EEC (“13th​​ Directive”). This implies, for instance, the VAT applications to be filed directly with the Portuguese Tax Authorities (contrary to what happens today, as the application is filed with the UK Authorities as country of establishment of the applicant) and any VAT refund payment will be conditional upon the reciprocity principle.

Conclusion

Whilst it is certain that on Brexit’s aftermath the​​ current EU tax regime will cease to apply, there is nebulousness on whether there will be or not negotiated tax regimes between the UK and the EU.

Hence,​​ UK/Portuguese business operators should thoroughly assess the applicable legal framework and related red tape, either on CIT and VAT.​​ 

These are challenging times but also an excellent opportunity for UK/Portugal business operators to reevaluate and enhance their relevant activity, thus preparing for Brexit.