There are multiple purpose test provisions pursuant to which the Portuguese tax authorities can recharacterise or disregard a transaction or series of transactions, and there have been a number of recent cases applying these.
Purpose tests in the tax legislation generally rely on the following cumulative conditions:
- Subjective condition: is obtaining a tax advantage the main or one of the main purpose(s) of the transaction?
- Objective condition: is the relevant tax advantage inconsistent with the object or purpose of the applicable provision? Does the transaction lack valid economic reasons?
Both conditions are required to be met, for example, for the application of the general anti-abuse rule or the specific anti-abuse rule in the Portuguese participation exemption regime.
When it comes to considering whether there is a relevant main purpose in the context of the subjective condition, the Portuguese tax courts have previously held that the mere fact that a tax advantage has been obtained is insufficient to conclude that the transaction had a main purpose of obtaining it. This may, however, be a fine line to walk.
In a recent decision, the arbitral tax court considered that the assessment could involve indicative and presumptive elements, in a context of reasonableness and normality. It started by stating that "according to the rules of logic and common experience, it does not seem likely that in the legal structuring of the transaction [...] they have not considered or weighed in any way the convenience and tax advantage resulting from the contractual model adopted". The court further considered that the taxpayers failed to demonstrate that the structure would provide any economic benefit and concluded that the “lack of economic-business motivation and reasonableness of the interposition of a corporate entity in the transaction evidences, per se, that its determining factor was to obtain a tax gain" and, therefore, "that the chained set of legal transactions entered into with the intervention of the company [...] was essentially or primarily aimed at obtaining a tax advantage".
A number of cases related to purpose tests have come before the Portuguese courts, including in respect of the following scenarios:
- On the sale of a profitable company to another entity owned by the same shareholders, the purchase price is left outstanding so as to effectively enable the shareholders to receive operating profits as sale consideration. The Portuguese tax arbitration courts considered this arrangement abusive (Cases: 142/2020-T and 415/2020-T).
- Individuals provide services through professional services companies to save income tax and national security contributions. The Portuguese arbitration courts considered this abusive.
- An arrangement through which the shareholder gives to his spouse and children his shareholdings (transaction exempt from stamp tax), thus increasing the acquisition value of the shares for the beneficiaries and decreasing the future capital gains that may be derived from the sale of the shareholdings by his spouse and children, was not considered abusive. The arbitration court considered that the donation was executed in the context of the donor´s inheritance planning even though, prior to the donation, another company had engaged with the family in order to acquire the shareholdings (Case: 254/2022-T).
- The Portuguese tax authorities have challenged interest deductions on loans taken out by the merged entity prior to a reverse merger on the basis that these were expenses borne by the entity to “acquire” its own shares and not for the purpose of its business activity. The courts did not consider this abusive (Cases: 102/2020-T; 222/2021-T).
Beyond purpose tests, a main focus of the Portuguese tax authorities appears to be tax-neutral reorganisations, financial transactions with related parties, transfer pricing, and withholding taxes on dividends and interest, amongst others.