SUCCESSIVE GOVERNMENTS in Portugal have come to realise that tax evasion is doubly destructive.In addition to the obvious loss of revenue, any ethic of compliance is completely undermined when rampant examples abound of those who cheat and remain untouched.In recent years, measures have been introduced into legislation to put under siege certain evasive strategies.The following is a quick overview of some of these instruments.Hopefully, the message should come through clearly that we taxpayers would be wiser to use the even more abundant measures within the law to legitimately reduce our tax burden rather than resort to condemned practices that break the law.
The Portuguese Tax System contains a number of measures (a few introduced by Law 109-8/2001 of 27th December 2001) to reduce international tax evasion with countries with favourable tax systems – named tax havens. Recently republished, these 83 countries are listed in Governmental Order 150/2004 of 13 February.
Individual income tax
Resident individuals who transfer their residence to a tax haven are considered to be Portuguese residents for taxation purposes in the tax year when the transfer takes place and in the four subsequent tax years, unless they are able to prove that the transfer was justified, namely to carry out a professional activity as employees of a Portuguese-resident company.
Manifestations of wealth
When conspicuous consumption patterns do not match declared income, the tax authorities now have concrete guidelines to tax the suspected offender in this category.The table reveals the presumed income level when certain major consumer goods are acquired.
Onus of proof
Following the principle of ‘innocent until proven guilty’, the burden of proof has always been on the taxman to prove wrong doing.This situation now reverses with the obligation falling on the taxpayer to demonstrate that returns are complete and accurate.Those who have ‘champagne taste’ yet only declare a ‘beer budget’ may be called to justify their extravagance.
Tax deductible expenses
The expenses described below are not tax deductible for the purposes of assessing taxable income:
1. Amounts paid to entities resident in tax havens by way of interest on or redemption of, loans granted for the construction, purchase or improvement of an urban building for residential purposes;
2. Rents paid to individuals or legal entities residing in tax havens without permanent operations in Portugal, whereby such payments can be attributed, regarding leases for residential purposes, located within Portugal, except if the annual value of such rents is higher than 1/15 of the taxable value of the building.
Payments made to entities
residing in tax havens
The amounts relating to all payments made or due by a resident individual to an entity residing in a tax haven are taxed at a 35% tax rate, irrespective of the tax rate applicable to other categories of income, unless the former is able to prove that such payments relate to effective operations and are not of an abnormal character and exaggerated amount.
Corporate income tax
Payments made to such companies with residence in tax havens are not tax deductible, except if the taxpayer proves that they correspond to operations, which took place, and are not of an abnormal character and exaggerated amount.
Profits obtained by a company residing in a tax haven are distributed for corporate income tax purposes, to Portuguese-resident corporate shareholders in the following way: (irrespective of dividend distribution)
• In accordance to their holdings, when these are equal or higher than 25% of the company’s share capital,
• In accordance to their holdings, when these are equal or higher than 10% if more than 50% of the company’s share capital is held, directly or indirectly, by Portuguese-resident entities.
This rule does not apply when the company residing in a tax haven derives more than 75% of its profits from agricultural, industrial or commercial activity from the territory they reside in, or when they are not involved in banking or insurance activities. These rules also apply to individual shareholders for individual income tax purposes.
When a corporation or individual entity residing in a tax haven owns an urban building in Portugal, which is not rented or used for a specific economic activity, 1/15th of the building’s taxable value is attributed as property income to the entity’s taxable profits for the purposes of corporate income tax.
Municipal tax on immovable assets owned by entities residing in a tax haven is collected at a 5% rate, irrespective of whether the asset is an urban building, construction or rural land.