Payments to non residents

By: Pedro Simões

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PORTUGUESE CORPORATE tax guidelines specify special obligations when a Portuguese company contracts a non resident company or person to do a service. We will focus today on the payments made to non residents who, in their countries of origin, will have to pay less tax in comparison to the tax they would have to pay in Portugal if they were resident.

There is a specific law that governs such payments. First of all, those payments will not be deductible on the corporate tax of the Portuguese company, unless they can prove that the expense was really made and that it was not unusual, and the amount was not exaggerated. This means that, generally, the expense is not deductible, as the proof is accepted at the complete discretion of the Portuguese tax authorities.

This is very complex, as this brings to light another problem: knowing if the expense is indispensable to the normal activity of the company. In such situations, the Portuguese companies must be very careful with these types of expenses. Simultaneously, what is considered an unusual expense? And what is an exaggerated amount for that expense? Either way it is very important to have documents on file for all expenses.

There are three criteria to consider when looking at those individuals who are paying less tax in their home countries than in Portugal. Generally, individuals or companies which are resident in the EU will not be affected by this specific law.

The first criterion goes back to 2004, when the Portuguese tax authorities approved a list of more than 80 territories, where the individuals and/or companies located in those territories would be affected by this law.

The second criterion is to know if the corporate, in the case of companies, or individual tax, in the case of individuals, is lower than in Portugal. This a huge problem, as the complexity of comparing the tax systems, including the different regimes of taxation, naturally generates many problems in proving that the company or individual are not paying less tax in their country of origin.

The third criterion concerns the calculation of tax that the company or individual will eventually pay in Portugal, as it is 60 per cent lower than in their origin country. This criterion has the same problem as the second. The law says that all companies that are paying a non resident, be that an individual or company, should have documentation with all the calculations mentioned in the second and third criteria, even if they aren’t located in the territories included on the approved list.

In conclusion, it is important to take special care with all payments made to individuals or companies which are non resident, as the non acceptance of the expense by the Portuguese fiscal authorities will, in turn, generate higher corporate taxes for the Portuguese companies.

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