Up Again Portugal: Government Relief and Tax

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

Other than the above-mentioned suspension of the 30-day deadline for directors to present the respective company to insolvency, no further specific restructuring amendments have been announced so far.

In terms of support, the Government made available the credit lines detailed in G.10 and, on the other hand the moratorium on loans and credit facilities until 30 September 2020 was enabled, as referred in G.14.

Tax

2. What is the position with respect to the applicability of emergency tax measures , including

  1. what they are and apply to;
  2. when they are expected to be phased out on or following a return to business; and
  3. whether any transitional periods are likely to apply.

The following emergency tax measures where approved during the COVID-19 pandemic:

Extended deadline for compliance with ancillary and payment obligations:

  • The deadline for the payment of the first special CIT prepayment, to be paid until 30 March, is extended to 30 June.
  • The deadline for the payment of the first CIT prepayment, to be paid until 31 July, is extended to 31 August.
  • The deadline for the payment of the first additional CIT prepayment, to be paid until 31 July, is extended to 31 August.
  • The deadline for the submission of the CIT return for 2019, to be submitted until 31 May, is extended to 31 July.
  • The deadline for the submission of the Simplified Business Information Annual Declaration, to be submitted until 15 June, is extended to 7 August.
  • The deadline for the submission of the Transfer Pricing documentation, to be submitted until 15 July, is extended to 31 August.
  • The deadline for the payment of the withholding PIT and CIT and stamp tax regarding the months of April and May can be paid until 25 May and 25 June respectively.
  • The monthly VAT returns regarding the months of March and April can be submitted until 18 May and 18 June respectively, and any VAT due paid until 25 May and 25 June respectively.
  • The quarterly VAT return regarding Q1 2020 can be submitted until 22 May and any VAT due paid until 25 May.

Flexibility on the remittance of the PIT due, the CIT due and the VAT due (both in the monthly and quarterly regimes), to be settled in the second quarter of 2020, applicable to companies and self-employed individuals that fulfil one of the following requirements:

  • have initiated their professional activity as of 1 January 2019;
  • have restarted their professional activity as of 1 January 2019, provided that in 2018 they did not have any turnover;
  • have a turnover of up to EUR10 million , with reference to the 2018 tax period;
  • have an activity that falls within the scope of the closed sectors under the State of Emergency measures, regardless of a proven decrease in the average billing; or;
  • have a proven decrease in the average billing communicated to the Portuguese Tax Authority of at least 20% in the previous three months prior to the month where the payment obligation arises , in comparison with the same period in the preceding year.

A request must be submitted to the Portuguese Tax Authority for purposes of applying the above deferred payment regime for PIT, CIT and VAT.

Flexibility on the remittance of the social security contributions due in the months of March, April and May of 2020 (or April, May and June, if the contributions due in March had already been paid or regarding self-employed individuals) applicable to companies and self-employed individuals that fulfil the following requirements:

  • have up to 50 employees;
    • they qualify as a Private Social Solidarity Institution (IPSS) or similar;
    • the respective activity falls within the closed sectors under the state of emergency measures;
    • the respective activity falls within the aviation and tourism sectors regarding establishments or companies effectively closed; or
    • the respective activity has been suspended by legislative or administrative measures, regarding establishments or companies effectively closed.
  • have between 50 and 249 employees and, in the months included by this special measure there was a proven decrease in the invoicing communicated to the Portuguese Tax Authorities of at least 20% in comparison with the same period in the previous year; and
  • have 250 employees or more, subject to compliance with the invoicing decrease mentioned in bullet two above, and provided that they fall within one of these criteria:
  • Situations of COVID-19 infection or prophylactic isolation of taxpayers or certified accountants qualify as a justifiable reason for the impossibility of compliance with tax reporting obligations.
  • During the emergency period of the COVID-19 pandemic, donations made to health institutions (hospitals, Shared Services entities of the Portuguese Health Ministry, and other Regional Health Services) will benefit from the provisions established in the Portuguese Tax Benefits Code (namely, deduction of the expenses incurred, plus a markup) and will not be subject to Stamp Tax.
  • The VAT rate applicable to the acquisition (including intracommunity ones) and import of masks and alcohol gel will be reduced, up until the end of 2020, to 6%.

In-kind donations made to the Portuguese State, Private Social Security Institutions and nonprofit organizations for the benefit of people in need due to the COVID-19 pandemic should be exempted from VAT (full exemption, with right to deduct input VAT).

3. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

  1. payment obligations (and therefore likely pressure on cash flow); and/or
  2. filing of returns?

The emergency tax measures currently approved provide for extensions of deadlines and flexibility on the payment of the due obligations.

As such, there will be, in the following months, additional pressure on the cashflow of companies.

Regarding the new timings of payment obligations and filing of returns, please see the preceding question.

4. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

Because the known tax measures are aimed at postponement of filing obligations or payment of taxes, and not at modifying tax rates, in our view there would not be an immediate impact in terms of accelerating or postponing business reorganisations or sales.

However, businesses may consider accelerating such transactions, if expecting significant losses.

5. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

To date there are no specific tax measures officially proposed or approved targeted at particular sectors.

6. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?

We consider the tourism, food and beverage, and aviation sectors as the most fragile in Portugal.

As such, we believe that in the future additional economic, financial or tax measures may be proposed to minimize the economic impacts of the pandemic on these sectors.

These measures may include tax reliefs or the extension of deadlines for the payment of taxes and contributions, as well as specific tax incentives/exemptions.

7. Which taxes might be increased to address the financial burden caused by the crisis, for example,
a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)
b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

There are no official political measures being discussed regarding possible tax increases.

Some tax experts have been speculating on tax measures that may be adopted in the near future, such as:

  • following what has been adopted in Portugal in the past, increase of environmental taxation (“green taxes”); and
  • increase of indirect taxes.

Portugal will also most probably follow the political trends in the EU regarding the tax measures to be adopted following the pandemic crisis.

Measures such as a digital services tax or a pre-emptive response to the OECD/G20 Inclusive Framework on BEPS are not currently being discussed.

8. Are there other actions that ought to be considered by businesses in your country e.g.

  1. revisit past tax filings to claim carry back of losses;
  2. revise or update preliminary tax assessments;
  3. claim bad debt relief for VAT output tax

Other actions to be considered should include:

  • revising or updating preliminary tax assessments to ensure proper review of applicable tax benefits; and
  • claiming bad debt relief for VAT output tax.

Finance

9. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

Companies will need to assess their financials in order to ascertain if they are ready to start functioning again, namely regarding the costs of the applicable health and safety requirements – both those that apply to all businesses and any specific obligations.

The government has created the following credit lines in the context of COVID-19:

  • Capitalizar 2018 Credit Line - COVID-19: This EUR400 million credit line is managed by PME Investimentos and, in partnership with the Banks and the Mutual Guarantee System, is made available to primarily micro-, small and medium enterprises (SMEs) certified by Electronic Declaration of IAPMEI, IP. This credit line can also be made available to large companies and has two distinct purposes: the financing of working capital needs, and the financing of treasury needs.
  • four lines of credit (in the total amount of EUR3 billion) are to be made available through banking institutions and guaranteed by the state, covering all economic sectors, commerce, industry and services.

The Productive Innovation Incentive System COVID-19 of Portugal2020 aims to support companies that intend to establish, strengthen or revert their capacities for the production of goods and services aimed at fighting the pandemic, including the construction and modernisation of testing facilities and testing of relevant COVID-19 products.

Projects to be supported:

  • production of relevant drugs and treatments (including vaccines)
  • medical devices and medical and hospital equipment and the necessary raw materials
  • disinfectants and their intermediates and basic chemical substances necessary for their production
  • data collection and processing tools

The recipients of this incentive are companies (SMEs and large companies) of any nature and in any legal form. The investment amounts range from EUR25,000 to a maximum of EUR4 million, with a maximum incentive rate of 80%, with an increase of 15% for projects completed within two months.

Additional support for specific sectors may be announced.

10. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

There are no specific indebtedness mechanisms available for return to business.

However, we believe it is possible for companies to take on loans for purposes of providing liquidity necessary to return to business.

11. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

There are no specific remedies in light on return to business in the context of the COVID-19 pandemic.

General remedies should be considered where applicable.

12. What practicalities do you need to consider in relation to audit requirements?

Auditors should make the examination to the business’ financial records, taking into consideration the impact of the COVID-19 pandemic in that specific sector and specific business.

Elements that provide information in relation to this impact should accompany accounting books.

13. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

The government has decided on a loan moratorium applicable to individuals (re. mortgage loans) and SMEs that meet certain criteria, such as having their head office in Portugal and not being insolvent.

These entities might benefit from:

  • prohibition of total or partial revocation of credit lines contracted and loans granted, in the contracted amounts;
  • extension, for a period equal to the term of the measure, of all credits with principal payment at the end of the contract, together with all its associated elements, including interest, guarantees, those namely provided through insurance or in securities; and
  • suspension, in respect of credits with partial principal repayment or with partial maturity of other cash benefits, of principal payment, rents and interest with expected maturity until the end of the moratorium period, and the contractual plan for payment of capital instalments, rents, interest, commissions and other charges automatically extended for a period identical to the suspension.

The moratorium period is established until 30 September 2020.

14. Dealing with creditors, including amendments and waivers – Bonds
a. If I can’t comply with the terms of my bond covenants who do I need to notify?

Given the economic impact of COVID-19 and the ongoing uncertainty of how long it will last, borrowers may find themselves in the position of requesting their lenders to temporarily waive certain financial covenants or to defer debt payments. Notification procedures would depend on the terms and conditions of the bonds, but the common representative of the bondholders (if any) must be notified.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

Waivers and amendments to terms and conditions of the bonds must be agreed between the parties, as per the transaction documents(usually in written form).

A bondholders’ general meeting might be necessary, depending on the subject of the waiver or amendment (i.e. namely in what concerns financial covenants).

In any case, notice procedures as per the transaction documents must be followed as mentioned in paragraph (a) immediately above.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

There is no specific process agreed in light of the COVID-19 pandemic, except for the rules regarding social distancing, gatherings, use of masks and so on. So, these would all apply in the event of a personal contact.

The process to follow would be the notice procedures prescribed in the transaction documents.

However, most negotiations already occur either by email or phone, without the need of being physically present.

In syndicated facilities, the facility agent will usually sign the relevant documentation on behalf of all the lenders in the syndicate under the terms of its appointment as agent in the facility agreement.

15. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

No. Availability of any return-to-business funding or relief is not conditional on the use of proceeds for green or social purposes nor linked to sustainability-related outcomes.