Changes in Portugal’s Nationality Law

The Assembly of the Republic has approved on July 23, some amendments to Portugal’s Nationality Law. The approved amendments aim to ease the access to Portuguese nationality for grandchildren, spouses or non-married partners of Portuguese citizens.

Those who are Portuguese’s grandchildren, face now two major requirements: the ascendant, who must have Portuguese nationality in the original form; and proof of connection to the Portuguese community will now be proven, provided that the applicant proves to have sufficient knowledge of the Portuguese language.

In the case of acquisition of citizenship by marriage or non-marital partnership, the major change concerns the duration of the marriage or partnership. under the new law approved by the Portuguese parliament the requirement concerning the duration of the marriage or partnership – 3 years—does not apply if the couple has children with Portuguese citizenship.

In addition to the above legal recognition by a court of the partnership is also waived if the couple has a Portuguese child.

Regarding the acquisition of nationality by Sephardic Jews, the Parliament has authorized the Government to implement, within 90 days, objective requirements for proof of effective connection to Portugal. These new rules approved by Parliament mean that, acquisition of nationality by Sephardic Jews will become more difficult.

Last but certainly not least, changes to the nationality also wide de possibility of acquiring Portuguese nationality through jus soli. In accordance with the new rules approved by the Portuguese parliament: individuals born in Portugal, children of foreigners who are not in the service of their State and who do not declare that they do not want to be Portuguese, at the time of birth, one of the parents is legally resident in Portugal or, regardless of the title, has been resident in Portugal for at least one year.

The approved amendments will enter into force on the day following its publication, once presidential assent is given, which is expected to be soon.

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MIBC: licensing period extended

The MIBC

The Madeira International Business Center (MIBC) is a set a set of taxation incentives, granted since the 80s with the objective of attracting inward investment into Madeira, recognized as the most efficient mechanism to modernize, diversify and internationalize the regional economy.

Main Tax Benefits

  • Corporate tax rate of 5%, applicable on the taxable income derived from profits of operations exclusively carried out with non-resident entities or with other companies operating within the ambit of the MIBC.
  • Access to the Portuguese participation exemption regime.
  • Non-resident single and corporate shareholders of Madeira’s IBC companies will benefit from a full exemption from withholding tax on dividend remittances from the Madeira companies, provided that they are not resident in jurisdictions included in Portugal’s “black list”. Moreover, Portuguese corporate shareholders will also be exempt if holding a participation of at least 10% for 12 consecutive months.
  • Exemption on capital gains payments to shareholders not resident in black listed jurisdictions.
  • No withholding tax on the worldwide payment of interest, royalties and services.

Licensing

Companies wishing to benefit from the above tax benefits need to obtain a license from Sociedade de Desenvolvimento da Madeira which if applied for with the Vice-Presidency of the Regional Government of Madeira. Under the current regime licenses could be applied for until December 31st, 2020. However the European Commission has extended the licensing period until 2023.

The Portuguese Government is expected to legislate on the extension period soon.

Extension Period Background

The European Commission has prolonged, on July 2 the validity of certain State aid rules which would otherwise expire at the end of 2020. In this context, and to take the effects of the current crisis into due consideration, the Commission, after consulting Member States, has decided to make certain targeted adjustments to the existing rules with a view to mitigate the economic and financial impact of the coronavirus outbreak on companies.

To this end, the Commission has adopted a new Regulation amending the General Block Exemption Regulation (GBER) and the de minimis Regulation, and a Communication amending seven sets of State aid guidelines and prolonging those which would otherwise expire on 31 December 2020.

Prolongation of the existing State aid rules

In order to provide predictability and legal certainty, whilst preparing for a possible future update of the State aid rules in the context of the ongoing “fitness check” exercise and of the ongoing evaluation and future review of certain sets of State aid rules set out in the recent European Green Deal and European Industrial Strategy Communications, the Commission has decided to prolong the validity of the following State aid rules, which are due to expire by the end of 2020:

Prolongation by three years (until 2023):

–    General Block Exemption Regulation (GBER) – under which the Madeira International Business Center (MIBC) is regulated.

–    De minimis Regulation

–    Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty

After 2020

The Portuguese Government, together with the Madeira Regional Government, is expected to soon start negotiating the 5th MIBC Regime to be applicable to private and corporate investors wishing to relocate or incorporate their businesses with the MIBC framework.

MCS and its multidisciplinary team have more than 20 years of experience in assisting international private and corporate investors with incorporation, accounting and management of MIBC licensed companies. Do not hesitate to contact us.

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Tax Avoidance Directive

Portugal has effectively transposed the European Corporate Tax Avoidance Directive which introduces rules to prevent tax avoidance by companies and thus to address the issue of aggressive tax planning in the EU’s single market. Madeira, being an outermost region of the EU is subject said directive.

The directive applies to all taxpayers that are subject to company tax in one or more EU country, including permanent establishments in one or more EU countries of entities resident for tax purposes in a non-EU country.

The directive lays down anti-tax-avoidance rules in 4 specific fields to combat BEPS, while amending Directive (EU) 2017/952 (which only covered hybrid mismatches within the EU):

  • Interest limitation rules: where multinational companies artificially erode their tax base by paying inflated interest payments to affiliated companies in low-tax jurisdictions. The directive aims to dissuade companies from this practice by limiting the amount of interest that a taxpayer has the right to deduct in a tax period. The maximum amount of deductible interest is set at a maximum of 30% of the taxpayer’s earnings before interest, tax, depreciation (a measure of how much of an asset’s value has been used up at a given point in time) and amortisation (spreading payments over multiple periods).
  • Exit taxation rules: where taxpayers try to reduce their tax liability by transferring its tax residence and/or its assets to a low-tax jurisdiction, solely for the purposes for aggressive tax planning. Exit taxation rules aims to prevent the erosion of the tax base in the EU country of origin when high-value assets are transferred with ownership unchanged, outside the tax jurisdiction of that country. The directive gives taxpayers the option of deferring the payment of the amount of tax over 5 years and settling through staggered payments, but only if the transfer takes place within the EU.
  • General anti-abuse rule: this rule aims to cover gaps that may exist in a country’s specific anti-abuse rules against tax avoidance, and allows tax authorities the power to deny taxpayers the benefit of abusive tax arrangements. The general anti-abuse clause of the directive applies to arrangements that are not genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.
  • Controlled foreign company (CFC) rules: in order to reduce their overall tax liability, corporate groups are able to shift profits to controlled subsidiaries in low-tax jurisdictions. CFC rules re-attribute the income of a low-taxed controlled foreign subsidiary to its more highly taxed parent company. As a result of this, the parent company is charged to tax on this income in its country of residence.

Rules on hybrid mismatches: where corporate taxpayers take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deduction (i.e. deduction on both sides of the border) or a deduction of the income on one side of the border without its inclusion on the other side. To neutralise the effects of hybrid mismatch arrangements, the directive lays down rules whereby 1 of the 2 jurisdictions in a mismatch should deny the deduction of a payment leading to such an outcome.

For more information on how the Directive might affect your MIBC company or investments in Portugal, or fore detailed information on the transposition mechanism, please do not hesitate to contact us.

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Bitcoin

Cryptocurrency Taxation in Portugal

Portuguese Central Bank’s position on cryptocurrencies

Since there is no central entity that guarantees the irrevocability and finality of payment orders, virtual currency cannot be considered a safe currency, as there is no certainty of its acceptance as a means of payment. The same is to say that the Portuguese Central Bank (Banco de Portugal) does not techincally recognise cryptocurrency as currency per se due to lack of monetary policy regulation.

Portuguese Tax and Customs Authority

It is the understanding of the Portuguese Tax and Customs Authority that, “cryptocurrencies are not technically considered “currency” because they do not have a legal tender or liberating power in Portugal, however, (…) they can be exchanged, with profit, for real currency (…), with specialized companies for the effect, with its value, compared to the real currency, being determined by the online demand for cryptocurrencies”. Its position is, therefore, in line with that of the Portuguese Central Bank.

As such, income resulting from the sale of cryptocurrencies will not be taxable under the Personal Income Tax Code, within the scope of category E (referring to capitals), nor subject to being taxed under category G (referring to equity increases, as capital gain).

Furthermore, it is also the understanding of the Portuguese Tax and Customs Authority that the profits obtained from the sale of cryptocurrencies are not taxable under the Portuguese tax system, unless by their regularity ends up constituting a professional or entrepreneurial activity of the taxpayer, in which case it will be taxed as a qualifying income under the category B (freelancing) of the Personal Income Tax Code.

Last, but not least, the Portuguese Tax and Customs Authority issued clear guidelines in January 2019 providing many answers to questions related to dealing with cryptocurrency, reporting obligations, cryptocurrency invoicing rules, rules for initial coin offerings,etc…

European Court of Justice and VAT

Jurisprudence of the European Union Court of Justice (EJC) on bitcoin, states that  its sale is an onerous activity, subject to VAT, but covered by the exemption, as with other means of payment with a liberating value . “Considering the decision handed down by the ECJ (…) the exchange of cryptocurrency for‘ real ’currency constitutes a provision of services carried out against payment, exempt from VAT”.

Thus, the Portuguese Tax and Customs Authority concludes that although “cryptocurrency remuneration is a service provision subject to VAT”, the VAT code article that defines the exemptions covers “also cryptocurrency transactions”.

Conclusion

Although Portugal has great conditions, from a personal income tax and VAT standpoint, for those who income is generated through cryptocurrencies, some uncertainty remains due to the fact that there’s no regulatory framework, which in turns makes it difficult for individuals (and companies) to open bank accounts in the country to be used for the purpose of trading.

Further to the above, crypto traders opting for taking up residency in Portugal, for tax purposes, may combine the above benefits with the ones available under the Non-Habitual Resident taxation regime.

MCS and its team has more than 20 years of experience in assisting international investors and expats making their move to Portugal and Madeira Island. Should you request our assistance do not hesitate to contact us.

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