New rules governing permanent establishments – 2021
PE rules determine if a given State has the right to tax nonresident enterprises’ profits.
Until January 2021, the Portuguese Corporate Income Tax Code provided a restrictive concept of Permanent Establishment.
The Portuguese concept of PE aligned with older versions of the OECD’s Model Tax Treaty. However, since January 2021, the Portugal’s State Budget enlarged the scope and breadth of the concept of PE.
The new concept of PE follows BEPS Action 7 on Permanent Establishment Status.
Still, Portugal did not follow OECD’s latest guidelines on softening the enforcement of such provisions in the Covid-19 era. Contrary to other countries, the Portuguese Tax Authorities did not issue guidelines or rules to ease the enforcement of agency PE status in situations where representatives or directors of foreign enterprises were barred from traveling and forcefully stayed in Portugal.
The PE concept now includes business activities related to the provision of services (including consulting services) performed by a resident enterprise using its own staff or subcontractors hired to carry its activities in the Portuguese territory. For the rule to be triggered, carrying out the activities more than 183 days in any twelve-month period (starting or ending in the relevant tax year) is required.
It also includes other arrangements, such as:
- Individuals that are empowered to intermediate and conclude contracts on behalf of the enterprise; or
- Individuals empowered to transfer property or grant the right of use concerning assets owned or controlled by the enterprise or for the provisions of services by that enterprise; or
- Individuals who have a determinant role for the conclusion of contracts and routinely engage in that activity; or
- Individuals that maintain a deposit of goods and merchandise for delivery in the Portuguese territory, on behalf of the enterprise, regardless of participating in the conclusion of any contracts.
Implementing the new broader PE disregarded the impact of Covid-19 in workplace arrangements and business models (even in traditional, non-digital sectors).
Considering the novelty of the new concept of PE and its disparity with current Tax Treaties, we expect some uncertainty regarding the practical application of these provisions by the Portuguese Tax Authorities. As a result, cases that traditionally posed a low level of risk of PE status now will face added scrutiny.
Foreign companies providing services within Portuguese territory or with remote employees in Portugal should examine their PE status in Portugal and adjust to the new reality.
Feel free to contact us should you required any assistance in relation to this or other matters.
Disclaimer
This publication or document contains general information and is not intended to be comprehensive nor to provide legal or tax advice or services. It should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Professional legal advice should be requested for specific cases. We do not undertake any continuing obligation to advise on future legal amendments, or of the impact on the conclusions herein. Prior results do not guarantee a similar outcome. The contents of this publication or document may not be reproduced, in whole or in part, without the express consent of GFDL.
