After the State Budget

At the end of each calendar year there is always a lot of expectation about the changes to the tax system that can be introduced in the State Budget Law.

This year is no exception and after the presentation of the document in the Assembly of the Republic, we started analysing its content and how the proposed changes could impact the activity of our clients.

And, in fact, there were several proposals for changes that it would be important to reflect on.

For instance, the proposal to encompass the capital gains on equity considered speculative. The Government intended that the capital gains on equity held for a period of less than 365 days would be subject to mandatory inclusion. More, it was expected that the inclusion would only be mandatory when the taxpayer has taxable income, including the amount of the capital gain, is equal to or greater than the limit value of the last echelon for the IRS tax.

This proposal was (very) dubious in its constitutionality as it can lead to unjustified differences in taxation between taxpayers, with serious prejudice to the principle of equality.

In connection with this measure, it was also proposed the split the taxation echelons into IRS tax. Above all, it was important to reflect on the new last level echelon of the IRS, which would be reached with only €75,009.00. In other words, according to the Government’s view, materialized in the proposed amendments to the IRS Code, any household with a taxable income above €75,009.00 is so rich that the application of a rate of 48% is justified.

At the level of the IRC, it was proposed the extinction of the obligation of special payments on account (PEC). The PEC is an advance on account of the tax due and is calculated based on the turnover of the previous tax period. It is evident that this advance entailed several cash constraints for the companies. Firstly, because it is calculated based on the turnover, assuming that it would be constant over the years. However, there are many companies, especially in the real estate sector, in which the activity is characterized by years of investment (construction) followed by years of income (sale of the finished construction). In these situations, in investment years, companies had to advance a tax to the State that was already known not to be owed, reducing their investment capacity and, in extreme cases, their solvency.

With regard to IRC, an increase from 50% to 85% of the limit of deduction from taxable income of earnings from contracts that have as their object the termination or use of industrial property rights, which implies the exemption of these taxation income of up to 85%.

Finally, there are other facts, because omitted, also imply some reflection. In this context, we highlight the fact that the regime applicable to non-habitual residents has not undergone any change, which is undoubtedly to be welcomed.

However, the truth is that the proposed State Budget Law did not receive the approval of the Assembly of the Republic. Therefore, these proposed amendments will not be implemented for the time being.

In some countries, such as the United States of America, such a circumstance – not approving the Budget – would lead to the paralysis of public services. In fact, in these circumstances, the possibility of incurring expenses is seriously compromised, so the country, in practice, stops.

In Portugal, there will not be a similar situation. What the Law determines is that the State Budget Law in force remains in force (in this case, the one approved for the year 2021), but under a regime of twelfths.

The calculation of the twelfths must be carried out with reference to the amounts established in the budget maps that specify the expenses. The duodecimal regime is thus materialized through the monthly setting of the available funds. In this context, it is responsibility of Directorate-General for the Budget to establish the necessary guidelines for the application of the twelfth regime, which are disclosed and publicized on its website.

Finally, although on a separate note and to be developed at an opportune time, we cannot fail to note that the G20 reached an agreement in principle to subject multinationals with turnover above €750 million to be subject to a tax equivalent to the IRC of, for the less, 15%.

According to available information, the mechanism, to be adopted by 2030, follows the guidelines of the OECD, of a system based on two pillars and that addresses the fiscal challenges generated by the digitization and globalization of the economy.

The first pillar establishes that the volume of the residual profit of the companies (which remains after the country where they are headquartered has collected the tax corresponding to 10% of the profit) will be shared among the countries where the companies operate, while the second pillar determines a 15% minimum tax for companies with a turnover above 750 million euros.

Due to the complexity of the topic, we will soon dedicate an exclusive informative note, in greater detail.

Martínez-Echevarría Ferreira & Rivera has at your disposal professionals with the technical capacity to help you find the solution that best suits your personal, professional or business situation so that you can properly structure your business, economically, regulatory and fiscally, your activity.