3. Value Added Tax
3.1 Summary Table
Valued Added Tax
Imposto sobre o Valor Acrescentado (IVA)
Entry into Force
1 January 1986
· Mainland – 23% (Intermediate 13% / Reduced 6%)
· Madeira – 22% (Intermediate 12% / Reduced 5%)
· Azores – 18% (Intermediate 9% / Reduced 4%)
VAT exemptions – either non-liability to VAT on supply of goods or services (such as financial transactions, cultural activities and health) or zero-rate” transactions allowing deduction or refund of VAT borne (such as exports or intra-EU dispatches).
· Monthly when turnover in preceding VAT year exceeds €650,000 or
· Quarterly when turnover in preceding VAT year is lower than €650,000.
· All VAT taxable persons required to submit an annual VAT return.
3.2 Value Added Tax - General framework
Value Added Tax is a consumption tax and is charged on goods and services supplied in the course of business. Credit is given for VAT paid by most registered businesses, thus this tax is ultimately borne by the final consumer. For VAT purposes, the territory of Portugal includes the autonomous regions of Azores and Madeira with reduced rates applicable to supplies in these islands. The EU VAT Directives have been implemented in Portuguese law and the main provisions of these Directives are harmonized in the different EU Member States.
3.3 Taxable transactions
The following transactions are subject to VAT when they are carried out by traders and professionals in the course of their business:
· Supplies of goods, generally defined as the transfer of the right to dispose of tangible property against consideration, although certain transactions not involving a transfer of this kind may also be treated as supplies of goods for the purposes of VAT.
· Supplies of services, generally defines as encompassing any transaction which does not constitute a supply of goods.
· Intra-community acquisitions of goods, generally defined as acquisitions of goods dispatched or transported to Portuguese territory from another EU Member State and the transferor thereof is a taxable person duly identified for VAT purposes in another Member State.
· Imports of goods, generally defined as including the entry into the Portuguese territory of goods proceeding from outside the EU. These transactions are subject to VAT regardless of who performs them unless they fall under. No import of goods is deemed to exist when goods are placed under certain customs or economic arrangements, such as, warehousing arrangements, inward processing arrangements, temporary importation or external or internal transit arrangements.
Every taxable person is obliged to issue an invoice in respect of all goods and services supplied by him, as well as in respect of any advance payments. The issuance of an invoice is equally required whenever a change is made to the taxable amount of a transaction or to the corresponding tax. Any invoice must be issued no later than the fifth working day following that of the taxable event and must be processed by computer.
3.4 VAT rates
The VAT rates are as follows:
· Reduced rate – 6% (4% for the Azores and 5% for Madeira) for goods and services included in List I annexed to the VAT Code;
· Intermediate rate – 13% (9% for the Azores and 12% for Madeira) for goods and services included in List II annexed to the Code;
· Standard rate – 23% (18% for the Azores and 22% for Madeira) applying to all other goods and services.
The reduced rate is applicable, namely, to some essential goods and services, such as food, agricultural goods (if not exempt), electricity, transport of passengers, accommodation in hotel units, pharmaceutical, health products and some entertainment tickets.
The intermediate rate is applicable to other foodstuff, wine, and certain equipment or machinery intended for agriculture.
Certain transactions are exempt from VAT (for example, financial and insurance transactions, medical services, educational services, rental of housing). Since the trader or professional performing these activities does not charge VAT on them, they do not give the right to deduct input VAT. Other exempt transactions, however, (mainly those relating to international trade, such as exports) do confer the right to deduct input VAT.
A VAT reduced rate of 6% may also apply for urban rehabilitation covering construction related services provided of properties located in urban rehabilitation areas.
3.5 Place of Supply Rules
Portuguese VAT is charged on the transactions which are deemed to be supplied in Portuguese territory. The Law provides rules for determining the place where the various transactions are deemed to take place.
· In the case of supplies of goods, the general rule is that the goods are deemed to be supplied in the Portuguese territory if handed over to the recipient in Portugal, unless goods are transported from another EU Member State in which case the supply will be deemed to be made in the place where the transportation commences. Other exceptions to the general rule may apply.
· In the case of supply of services, the general rule is that services will be deemed to be supplied at the recipient’s place of business or permanent establishment, where the recipient is a trader or professional (B2B). However, if the recipient is a final consumer, the services will be deemed to be supplied at the supplier’s place of business (B2C). Several exceptions may apply to the B2B and B2C general rule such as for services involving real estate (taxable where the real estate is located), restaurant and catering services (taxable where services are performed), passenger transport (taxable where the transport services are performed), cultural, artistic, sports, scientific, educational and entertainment services (taxable where activities are physically carried out).
· In the case of services rendered to customers established outside the EU, those services are taxable where the customer is established when they relate, amongst others, to transfer of licenses and similar rights, advertising and consulting services, banking and insurance services, supply of staff, hiring out of movable property, telecommunications, radio and television broadcast services and services performed electronically.
Certain transactions are exempt from VAT (for example, financial and insurance transactions, medical services, educational services, rental of housing). Since the trader or professional performing these activities does not charge VAT on them, they do not give the right to deduct input VAT.
There is an option to tax a transaction in immovable property, as well as on meals provided by companies to their employees.
Other exempt transactions, however, (mainly those relating to international trade, such as exports) do confer the right to deduct input VAT. There is an extensive list of “zero-rate” transactions that includes amongst others:
· Intra-EU dispatches
· International services provisions
· Transport of goods and people between the mainland and the islands of Azores and Madeira and in between the islands
· Supplies to national exporters
· Supplies to international organizations
If a company sells its business as a going concern, then VAT may not be due. There are certain conditions to be met: for example, the purchaser should be registered for VAT in Portugal at the time of the transfer (or immediately register as a consequence of the transfer) and should intend to use the assets to carry out transactions that are subject to VAT.
3.7 VAT deduction
Taxable persons are allowed to deduct VAT borne on supplies of goods and services, including intra-Community acquisitions and importation of goods in connection with their taxable activities.
The right to deduct only arises in respect of VAT shown in an invoice legally issued, any VAT payment receipt part of the import return, as well as documents issued by electronic where the number and date of cash flow appears, in the name of, and held by, the taxable person.
Taxpayers may claim VAT relief for bad debts under certain circumstances such as bankruptcy of the customer or his/her insolvency.
There are some operations which do not give the right to deduct VAT, even when incurred for the purposes of a taxable activity, such as:
· Passenger vehicles, whereby businesses cannot (with some exceptions) recover VAT on the purchase, use, leasing of passenger vehicles.
· Entertainment and luxury goods and services.
· Certain transport and business travel expenses.
· Expenses with fuel used in motor vehicles are VAT deductible by 50%, (other than alternative fuels deductible in full).
· Drinks and tobacco.
A taxpayer carrying both operations giving right to deduction and exempt operations determines the appropriate deductions either by applying a pro rata (based on the value of taxable supplies made compared with total turnover) or through an direct allocation method (whereby input tax that is not allocated directly to exempt and taxable supplies is apportioned).
If amount of VAT deducted exceeds amount of tax due on taxable transactions in the same period, the excess may be carried forward to the next tax periods. Taxpayer may under certain circumstances opt for claiming a tax refund to the Tax Administration. For example, a refund is possible if a credit higher than € 250 subsists after a 12-month period or when the amount of tax refund exceeds € 3,000.
For a company established in another EU Member State, VAT recovery is made by a claim to its local EU tax authority which will then be sent to the tax authorities of the Member State of refund. A non-EU business instead can recover the VAT under the 13th Directive, provided that there is a reciprocity agreement between Portugal and the tax authorities of the home country of the claimant.
3.8 Registration and returns
For a resident entity, if a taxpayer carries out taxable supplies in Portugal, it is required to register for VAT. If the turnover exceeds EUR 10,000 it is also required to account for Portuguese VAT. Businesses which are not established in the European Union, must appoint a VAT representative with joint and several liability for the delivery of VAT obligations.
If a business is not registered for VAT in Portugal, but sells and delivers goods from another Member State to customers (distance sales B2C), where the value of those sales exceeds a threshold of EUR 35,000 it is required to register and account for VAT in Portugal.
Businesses are generally required to submit VAT returns on a monthly basis (until the 10th day of the second month following transaction). However, if the estimated annual turnover is lower than EUR 650,000, companies may opt for quarterly VAT returns (until 15th day of the second month following the end of each 3-month). VAT grouping is not permitted under Portuguese law.
The taxpayer is required to deliver a Start-up Activity form for the purposes of a taxpayer’s registration. Any changes in the activity must be communicated within 15 days and the termination within 30 days.
Besides VAT returns, taxpayers have also to submit recapitulative statement in respect of any supply of goods to another Member State, annual VAT return and tax statements concerning the identification of any customers and suppliers with transactions higher than € 25,000 in the previous year.
Taxable persons shall keep an appropriate accounting allowing for a clear and accurate disclosure of all elements needed for tax assessment and its control by tax authorities. Books, records and any supporting documents or elements must be filed and kept in good order for 10 civil years.
Several penalties may apply for late submission or other compliance related failures.
Such penalties are structured as lump-sum penalties set based on the offence (negligence or wilful misconduct) involved. Penalties up to 100% of the mistake may apply to negligence cases. Interest at 4% annual rate also applies.
3.9 Special and particular schemes
In addition to the general taxation regime, there are also special VAT schemes, namely:
· Special exemption scheme.
· Special scheme for small retailers.
· Taxation scheme for liquid fuels applicable to dealers.
· Special scheme for travel agents and touristic operators.
· Special taxation scheme for second-hand goods, art collection works and antiques.
· Special scheme for investment gold.