08/11/24

PORTUGAL: Portugal adopts Pillar Two rules

As published on: taxnews.ey.com, Friday 8 November, 2024.

Portugal has now implemented the EU Minimum Tax Directive, introducing into domestic legislation a global minimum tax of 15% for large-scale multinational and domestic groups.
The legislation includes an Income Inclusion Rule and a Qualified Domestic Minimum Top-up Tax, both applicable to tax years beginning on or after 1 January 2024, as well as an Undertaxed Profits Rule, applicable to tax years beginning on or after 1 January 2025.

Executive summary

Portugal introduced into domestic legislation, on 18 October 2024, a global minimum tax of 15% for large-scale multinational and domestic groups. Aligned with the European Union (EU) Minimum Tax Directive and the Organisation for Economic Co-operation and Development (OECD) Pillar Two Model Rules, the legislation includes an Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR), as well as a Qualified Domestic Minimum Top-up Tax (QDMTT), which allows Portugal to collect top-up taxes on low-taxed Portuguese entities of both foreign and domestic groups.

The law applies for tax years beginning on or after 1 January 2024 for the IIR and QDMTT, and tax years beginning on or after 1 January 2025 for the UTPR.

In addition to imposing a new tax, the legislation introduces new compliance obligations for both Portuguese-based groups and Portuguese subsidiaries of foreign-based groups.

Detailed discussion

The new global minimum tax applies to large-scale multinational and domestic groups, defined as groups with consolidated annual revenues of €750m or more in at least two of the last four fiscal years.

The global minimum tax includes three key elements:

An IIR, according to which ultimate parent companies of large-scale multinational or domestic groups must pay a top-up tax in relation to group entities resident in low-tax jurisdictions (this may include the ultimate parent companies themselves)
A UTPR, which requires Portuguese entities of large-scale multinational groups to pay a share of any top-up-tax attributed to the group's low-taxed entities that is not collected under an IIR
A QDMTT, which imposes a top-up tax on low-taxed Portuguese entities, effectively requiring the minimum tax of 15% to be paid in Portugal rather than at the parent-entity level through an IIR or at the level of other group entities through a UTPR
Portugal made use of the option provided in the EU Minimum Tax Directive and implemented the UTPR in the form of a top-up tax, rather than as a denial of deductions for income tax purposes.

The introduction of the QDMTT in Portugal is in line with the EU Minimum Tax Directive and contains a fallback provision stating that the amount of top-up tax resulting from the application of the QDMTT rules cannot be lower than what would be due if the IIR were applicable to the domestic entities. If it is lower, the difference is paid as additional QDMTT.

The new legislation is enacted as a separate law and effectively creates a new global minimum tax that is different from Corporate Income Tax or any other existing tax.

Liability for tax

Portuguese entities that are members of large-scale multinational or domestic groups will be liable for the global minimum tax if any of the IIR, UTPR or QDMTT applies to them.

In relation to the IIR, the rules will apply depending on the position of the Portuguese entity in the group structure, but will generally apply to entities that are the ultimate parent of in-scope groups or intermediate parents that meet certain conditions. As for the UTPR, the rules will generally apply to Portuguese entities of in-scope groups that are not subject to an IIR in the ultimate parent jurisdiction.

The QDMTT applies directly to Portuguese entities of in-scope groups if they are considered to be low-taxed entities.

Safe harbor

The legislation includes an election to apply a transitional safe harbor based on Country-by-Country Reporting (CbCR) for tax years commencing on or before 31 December 2026 and ending on or before 30 June 2028.

Filing and reporting

Each Portuguese constituent entity of an in-scope multinational or domestic group must file a return identifying which entity in the group is responsible for filing the Global Minimum Tax Information Return (the return also includes other information such as the start of the initial phase of international activity or the notification of the first period of application of the rules to domestic groups). This return is due nine months after the end of the relevant tax year, although for the first year this deadline is extended to 12 months.

Portuguese constituent entities are also, by default, responsible for filing the Global Minimum Tax Information Return. However, this responsibility is waived if the return is filed by the ultimate parent company or a designated filing entity, provided that the entity filing the return is in a country or jurisdiction with which Portugal has a qualified competent authority agreement.

Any Portuguese constituent entity liable for paying top-up tax under the IIR, the UTPR or the QDMTT must file a tax assessment return and pay the associated tax.

The UTPR and QDMTT returns are due 15 months after the end of the relevant tax year, although for the first year this deadline is extended to 18 months. Any tax due must be paid within the same deadlines. Portuguese-based constituent entities that have the obligation to file any of these returns may designate a Portuguese-based constituent entity that will be responsible for filing the returns and paying the tax (but all the group's constituent entities remain jointly liable for payment of the tax).

Penalties

There are specific penalties for companies that fail to meet their filing obligations. Failing to file a return or filing it late may attract a penalty ranging from €5,000 to €100,000, plus 5% for any day of delay in meeting the obligation.

Errors or omissions on a return may attract a penalty ranging from €500 to €23,500.

Penalties may be waived in the first year of applying the new rules (tax years commencing on or before 31 December 2026 and ending on or before 30 June 2028) if certain conditions are met.

Implications

The legislation finally brings Portugal in line with the OECD and EU initiatives aimed at subjecting multinational groups to a minimum tax rate of 15% in the jurisdictions where they operate.

These new rules represent a significant challenge for Portuguese-based groups or multinational groups operating in Portugal. Therefore, it is important that these groups evaluate the potential impact of the rules on their business structures and internal processes. This includes not only the financial impact of the new tax but also the data and systems requirements necessary to comply with the rules.

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Portugal Pillar Two