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December 7, 2021

Portugal modifies transfer pricing regime

Executive summary

With the publication of Decree-Rulings 267/2021 and 268/2021, both dated 26 November 2021, significant changes have been made to Portugal’s advance pricing agreement (APA) regime, provided for in Article 138 of the Corporate Income Tax (CIT) Code, and to the regulation of transfer pricing (TP) in transactions carried out between Personal Income Tax (PIT) or CIT taxpayers and any other entity, under Article 63 of the same code.

These changes were made in light of the experience gained since the two regimes were introduced in 2008 and 2001 respectively, in addition to reflecting the guidelines of the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) Joint Forum on Transfer Pricing. In particular, the changes under consideration stem from changes in the OECD Guidelines for Multinational Companies and Tax Administrations and the actions of the Base Erosion and Profit Shifting (BEPS) Project.

The fundamental objective of the changes is to simplify the reporting obligations imposed on businesses and to give greater legal certainty to both regimes.

The previous Decree-Rulings are repealed, namely 620-A/2008 of 16 July 2008, and 1446-C/2001 of 21 December 2001. However, Chapter IV ("Of the ancillary obligations of taxable persons") of this latter Decree-Ruling shall apply until the tax periods beginning on or after 1 January 2020.

The new Decree-Rulings come into force on the day immediately after their publication. By way of exception, chapter IV of Decree-Ruling 268/2021, of 26 November 2021 takes effect during tax periods beginning on or after 1 January 2021.

Detailed discussion

Documentation requirements

According to Decree-Ruling 268/2021, of 26 November 2021(TP Decree-Ruling), two new distinct documentation models have been created: the standard and the simplified.

The standard model is composed of a master file and a local file, which must be delivered together, each containing a set of elements specified in detail in the annexes to the TP Decree-Ruling.

The master file must contain information relating to the Group, namely the description of the following elements: organizational, legal, and operational structure, activities, intangibles, financing, TP policy adopted and other relevant information.

The local file focuses on the activity of the taxpayer and should include a description of the business; identification and characterization of related entities; characterization of controlled transactions; application of the TP methodology(ies) for each transaction; and financial information of the taxpayer.

Under the simplified model, the following information must be provided:

  • Identification of the related parties involved

  • Description, characterization, and quantification of transactions carried out with related parties

  • Identification of the TP methods applied

  • Identification of comparables and values or ranges of values resulting from the application of the methods

The simplified model must also include the elements that demonstrate the arm’s-length nature of the following transactions:

  • Related transactions of any nature carried out with nonresident persons or enterprises subject to a clearly more favorable tax regime

  • Transfer of businesses

  • Transfer of securities, shares, or equity not traded on regulated stock markets or traded on tax havens’ regulated markets

  • Business reorganizations or restructurings

  • Transactions related to real estate and intangible assets

The new legislation explicitly provides that the documentation obligation is considered fulfilled only when the documentation file submitted contains all relevant information relating to the controlled transactions in which the taxable person has been involved.

Taxpayers who, in the period to which the obligation refers, have a total annual amount of income of less than €10,000,000 shall be exempted from presenting this documentation. Even if this limit is exceeded, that exemption shall apply to controlled transactions whose value in the period has not exceeded €100,000 and, in total, €500,000, considering their market value.

The exemptions referred to in the preceding paragraph do not cover the controlled transactions carried out with natural or legal persons residing outside the territory of Portugal and are subject to a more favorable tax regime, following paragraphs 1 or 5 of Article 63-D of the General Tax Law, nor when the taxable person is notified to prove that the terms and conditions practiced in the controlled transactions are in accordance with the arm’s-length principle.

The simplified model will apply to taxpayers who, not being accompanied by the Large Taxpayers’ Unit and not covered by the exemptions already mentioned regarding the standard model, are qualified as a small or medium-sized enterprise, following the terms set out in the annex to Decree-Law No. 372/2007 of 6 November 2007. However, and as provided in the TP Decree-Ruling, the preparation of the simplified model does not preclude the obligation to provide the Portuguese Tax Authority (PTA), whenever the taxpayer is notified to do so, all relevant information to prove that the terms and conditions practiced in the controlled operations comply with the arm’s-length principle.

Preparation and filing of TP documentation

The taxpayers required to prepare the standard or the simplified model should prepare the TP documentation within the deadline for submission of the Annual Accounting and Tax Information return (IES/DA) by the 15th day of the seventh month after the end of the fiscal year or on 15 July, if the fiscal year coincides with the calendar year, and only submit it if requested by the PTA.

The obligation to submit the TP documentation to the PTA applies to taxpayers whose tax situation is monitored by the Large Taxpayers' Unit (according to Order No. 977/2019, of 28 January 2019, of the Director-General of Taxes) and it must also be submitted within the deadline set forth for the submission of the IES.

Cost-sharing agreements and intragroup services

With respect to documentation related to cost-sharing agreements and intragroup services, it is still necessary to provide all the necessary information to assess compliance with the arm's-length principle.

Hence, the TP Decree-Ruling lists in specific annexes some additional documents that must be provided to the PTA and that are necessary to analyze the compliance of the agreements with the arm's-length principle, considering the circumstances of each one, namely:

Cost-sharing arrangements

  • Costing systems used for calculating the overall costs to be shared by the participants, contribution assessment deadlines, payment methods, and any adjustments due against budget

  • Details of any public subsidies or tax incentives and their impacts

  • Description of the group's standards regarding audit policy and how they apply to the arrangement

  • Existence of safeguards to ensure consistent application of the allocation key(s)

Intragroup services

  • Explanation of the group's general policy on the centralized provision of services

  • Description of the actual or expected benefits to the recipients

  • Description of the costing systems used for determining the global cost base(s), indicating, in particular, the methods of allocating indirect costs

  • Indication of the criteria for identifying the shareholder costs to be excluded from the global cost base(s)

  • Explanation of how the allocation keys is constructed

  • Description of the audit policy at the group and/or entity level regarding the costing systems used, calculation of the global cost base, consistent application of the allocation keys, and ensuring that services are not duplicated

  • Justification, based on the arm's-length principle, of the mark-up applied or why a mark-up is not applied to certain services

  • Explanation of how new services are integrated into the system and how the provision of a service is ended or discontinued

  • Explanation of how on-demand services are handled

Documentation preparation language

The TP Decree-Ruling now clearly provides that documents containing information in a foreign language must be translated into Portuguese at the time of submission to the PTA, with the possibility to obtain, upon request submitted beforehand, an authorization to use the original language.

Statement of responsibility

For the first time, an obligation is established for third parties to issue a statement of responsibility regarding the information and techniques used in technical studies requested by the taxpayer in the preparation of the TP documentation.

General rules: the concept of relevant transactions for TP purposes

The wording of the concept of transactions adopted a definition similar to that of paragraph 2 of article 63 of the CIT Code, especially regarding the scope of business restructuring or reorganization operations.

Additionally, there are the following relevant clarifications:

  • Specification of the concept of financial transactions

  • Specific reference to the allocation of income or expenses made by entities covered by differentiated tax regimes

  • Specific reference to the relations between entities and their permanent establishments (and between them) to cover the allocation of general administration and overhead charges

In the particular case of the application of the arm’s- length principle to relations between entities and their permanent establishments (and between them), it is noted that this should take into account the guidelines contained in the OECD reports on the allocation of profits to permanent establishments, the comments to the OECD Convention Model (in conjunction with the observations of Portugal) and other recommendations resulting from the actions of the BEPS Project.

TP Methods

The TP methods hierarchy was removed from the TP Decree-Ruling, aligning it with article no. 63 of the Corporate Income Tax Code. The taxpayers are entitled to use any of the accepted TP methods (comparable uncontrolled price method, resale price method, cost-plus method, profit-split method, and transactional net margin method).

If the controlled transaction is unique (real estate rights, unlisted companies’ share capital, credit rights, intangible property) or if there is a lack of available data regarding potentially comparable transactions, the taxpayer may adopt other methods, techniques, or models of economic assets valuation, when the traditional methods are not viable.

Nonetheless, when using other methods, techniques, or models of economic assets valuation, the taxpayer needs to describe and explain the method and the rationale for its selection.

The TP Decree-Ruling adopts the principle of the prevalence of substance over form and now expressly states that controlled transactions’ terms and conditions to be considered are those in force, even if those terms and conditions are distinct from the ones contractually formalized.

Application of the arm’s-length principle (intangibles/restructuring)

With respect to transactions involving intangibles, the arm’s-length compliance is subject, among other features, to the identification of the intangibles used or transferred in the controlled transaction as well as the identification of contractual terms and comprehensive functional analysis.

In business restructurings, the arm’s-length compliance focuses on evaluating the commercial or financial relationships between the related parties involved, and the terms agreed between them, as well as establishing a comparison if the entities involved were independent of each other. Thus, an arm's-length compensation is introduced, which will be attributable to the restructured entities and it is considered a remuneration of post-restructuring controlled transactions that should comply with the aforementioned principle. Once again, emphasis is made to functional analysis before and after the transaction, the motivations that gave rise to the business restructuring, its expected benefits including the existence and relevance of synergies, and the options realistically available to the related entities involved.

Corresponding adjustments

The basis of the procedures regarding corresponding adjustments has not been substantially modified. Notwithstanding, changes were introduced resulting from the acceptance of the best international practices, in case of adjustments on taxable profits between related entities, as well as the fact that Law No. 120/2019, of 19 September 2019, introduced new tax dispute settlement mechanisms between EU Member States. Nevertheless, it is required that the taxpayer delivers more detailed information essential to their acceptance.

Advance Pricing Agreements

Decree no. 267/2021, of 26 November 2021 introduces the following changes to the APA regime:

  • Clarification of the different phases of negotiation of an APA: preliminary phase and proposal phase.

  • Clarification of the submission of the preliminary phase: the request for the preliminary assessment must be submitted by the taxpayer, in writing, up to three months before the deadline for filing the APA proposal (up to six months before the beginning of the first taxation period that is intended to be covered by the APA).

  • The APA proposal must be signed by the entities involved in the covered operations, which cannot claim or appeal the content of the agreement.

  • In the case of bilateral or multilateral APAs, the Large Taxpayer’s Unit is responsible for informing the Directorate of International Relations Services (DSRI) – as the competent authority on mutual agreement procedures aimed at avoiding double taxation – so they are then able to inform the competent authority on the submission of the APA proposal. The beginning of the negotiation process and the conclusion of the agreement are dependent on a preliminary acceptance by the other States’ competent authorities for the beginning of the mutual agreement procedures.

  • To evaluate the APA proposal, the PTA can request meetings with representatives of the entities involved, including nonresident entities that participate in the covered operations in the scope of the APA; There is the possibility to terminate the proposal evaluation procedure in cases where:

    a) After 60 days of the notification about the non-existence of an agreement between the PTA and another or other competent authorities, as to the terms of a bilateral or multilateral agreement, the taxpayer does not submit a request for conversion of the proposal into a unilateral APA.

    b) The taxpayer does not provide the necessary information for the evaluation of the APA proposal, under the terms and within the deadlines set by the PTA.

    c) The evaluation procedure is stopped for more than 90 days for reasons attributable to the taxpayer

    d) After 180 days (in the case of unilateral APAs) or 360 days (in the case of bilateral/multilateral APAs), the taxpayer and the PTA do not reach an agreement, nor is there a firm expectation of reaching it, on the characterization of the covered operations, on the methodology for determining the transfer prices or on the documentation needed to provide evidence of the accurate terms foreseen in the APA.

  • Reimbursement, by the PTA without additional need for a request by the taxpayer, of 25% of the fee corresponding to the APA negotiation process in cases where the termination of the procedure is due to the circumstances mentioned in a) and d) above.
  • The possibility of the agreement to cover taxation periods for which the taxpayer has already filed the CIT return, provided that the relevant facts and circumstances verified in these periods are identical or similar and, by the date of execution of the APA, not more than two years have elapsed after the deadline for such filing.

  • Any adjustments to taxable income must be performed by the taxpayer by submitting a new CIT return.

  • In cases of a renewal of an APA, the evaluation and negotiation procedures are the same as for the first APA proposal, with the exemption of the preliminary phase, which does not apply.

  • 25% reduction in the APA fee for taxpayers which meets the requirements of small and medium-sized companies.

This Decree also accommodates a change that had been already introduced by article 138º of the CIT Code, notably in what concerns the maximum timeline of negotiation of an APA (which cannot exceed four years).


For additional information with respect to this Alert, please contact the following:

Ernst & Young, S.A., International Tax and Transaction Services – Transfer Pricing, Lisbon

Ernst & Young LLP (United States), Portuguese Tax Desk, New York


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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