Bond transactions usually raise some tax concerns both for the investor and for the issuer. One of the main tax implications relates to withholding taxes on interest payments applicable to investors and ultimately to issuers, since they may be also subject to costs of such tax owing to gross-up clauses. In this respect, under the general tax regime investment income (including interest) payments arising from bonds issued by Portuguese borrowers and made to Portuguese-resident investors will be subject to withholding tax at a rate of 25 per cent, in the case of resident legal entities, or at a rate of 28 per cent, in the case of resident individuals. A final withholding tax rate of 35 per cent applies to investment income (including interest) paid or made available to accounts opened in the name of one or more account holders acting on behalf of one or more unidentified third parties (unless the relevant beneficial owner of the income is identified and thus general tax rates applicable to such beneficial owner will apply).
On the other hand, investment income obtained by non-resident legal entities without a permanent establishment in Portugal is subject to withholding tax at a rate of 25 per cent (in the case of non-resident entities), at a rate of 28 per cent (in the case of non-resident individuals), or at a rate of 35 per cent (in the case of entities or individuals domiciled in a blacklisted jurisdiction as set out in Ministerial Order No. 150/2004 of 13 February 2004, as amended, and on payments to omnibus accounts in which the beneficiary of the income is not identified), which is the final tax on that income (reduced tax rates might be applicable pursuant to an applicable double tax treaty provided the formalities have been duly met).
Notwithstanding the above general tax regime, Decree-Law No. 193/2005 of 7 November 2005, as amended, sets out a special taxation regime, which provides that interest payments (and all other investment income arising from notes whenever applicable) to non-resident bondholders that are the beneficiaries of such interest payments to be made by Portuguese resident issuers, as well as capital gains deriving from a sale or other disposition of such notes by those beneficiaries, will be exempt from Portuguese income tax and, consequently, from withholding tax, provided that the beneficiaries are:
- central banks and governmental agencies;
- international bodies recognised by the Portuguese state;
- entities resident in countries with which Portugal has in force a double tax treaty or a tax information exchange agreement; or
- other entities without headquarters, effective management or a permanent establishment in the Portuguese territory to which the relevant income is attributable that are not domiciled in a blacklisted jurisdiction as set out in Ministerial Order No. 150/2004 of 13 February 2004, as amended.
Bonds must be integrated in a centralised system for securities managed by a resident entity or by an international clearing system managing entity established in another EU member state or European Economic Area member state (in the latter case, provided it is bound by an administrative cooperation in tax matters similar to the one established within the European Union) and the procedure aimed at assessing the non-resident status of the holder of bonds should be duly complied with.
From the issuer’s perspective, interest payments in connection with bonds will, as a rule, be tax-deductible. However, Portuguese interest barrier rule limits the deductibility of net financial expenses to the higher of the following: €1 million or 30 per cent of the EBITDA. The net financial costs that are not deductible in a certain given fiscal year, as a result of the above limits, may be carried forward for a period of five fiscal years, as long as those limits are complied with. When the amount of financial costs considered as tax-deductible is lower than the percentage limit (30 per cent), the unused part of such limit may be carried forward for a period of five fiscal years (increasing the maximum deductible amount), until that remaining part is fully used.
Although no stamp tax will apply to the issuance of bonds, guarantees in connection with such transactions will trigger stamp tax, which is of territorial application to acts or contracts having legal effect within Portugal. The stamp tax rate applicable to guarantees is 0.04 per cent per month or fraction thereof on transactions with a maturity of less than 12 months, or 0.5 per cent for guarantees granted for a period from one year to five years. The rate is increased to 0.6 per cent on guarantees with maturity of five years or more or with no term. The applicable stamp tax rate is levied on the full amount of obligations guaranteed and will be borne by the issuer.
Property transfer tax is levied on the transfer for consideration of real estate located in the Portuguese territory. In the case of property transfers resulting from mortgage enforcements, bondholders as beneficiaries of the guarantee are subject to Portuguese property transfer tax at a rate of up to 6.5 per cent and also to stamp tax at a rate of 0.8 per cent over the taxable value of each property or the value foreseen on each agreement, if higher, in connection with an enforcement procedure of a mortgage deed eventually provided on such bond transaction. Property transfer tax will also apply under an enforcement scenario if the bondholder acquires at least 75 per cent of the share capital of a company incorporated as private limited company (sociedade por quotas), as well as of a privately placed closed-end real estate investment fund that owns real estate located in Portugal.
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