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New TP rules and documentation requirements in Portugal

On 26 November 2021, the Portugal’s Official Gazzette published the Ordinance no. 268/2021, which repeals and supersedes the previous Ordinance no. 1446-C/2001, on transfer pricing regulations and documentation requirements. The new Ordinance incorporates to the Portuguese tax legislation the latest developments introduced by the BEPS 2015 Reports into the OECD’s 2017 TP Guidelines. This alert summarises the main developments.

What are the main developments in the application of the Arm’s Length Principle in the new Ordinance?

Ordinance 268/2021 aligns Portugal’s TP rules with the latest developments introduced by the OECD’s 2017 TP Guidelines, including:

  • Improvements in the definition of related-party transaction, including business restructuring such as the termination or suspension of activities.
  • Introduction of the “accurate delineation” and “arm’s length nature of the contractual terms” for the related-party transaction under analysis.
  • Description of the steps of the comparability analysis.
  • Functional analysis should also include a critical review of the contractual allocation of risks based on the financial capacity and risk-control functions of the parties.
  • Introduction of the most appropriate TP method rule for the selection of the valuation methodology. Other financial valuation methods are acceptable when the OECD-recognised methods are not practicable.
  • Introduction of the three-year validity rule for the benchmarking analysis (but financial data and arm’s length range must be updated on yearly basis).
  • Introduction of specific regulations for the application of the arm’s length principle to transactions related to intangibles and restructurings, considering the technical complexity of these transactions as well as the need to obtain certainty in the application of the arm’s length principle to these transactions and to avoid tax disputes.

What must include the TP documentation in Portugal?

In Ordinance no. 268/2021, Portugal’s tax legislation adopts the two-tier approach for TP documentation: Masterfile and Local file. However, both documents must be filed jointly when required by the Tax Authorities. The contents of the master file and local file basically follows the recommendations in OECD’s 2017 TP Guidelines.

There are also specific, additional TP documentation requirements for intragroup service transactions and cost-sharing arrangements.

Should the TP documentation be translated to Portuguese?

Yes. TP documentation must be filed in Portuguese as required by the Tax Authorities.

What are the thresholds to prepare TP documentation in Portugal?

Taxpayers with annual revenues lower than €10,000,000 are exempt from preparing the documentation (previously, €3,000,000) during the fiscal year to which the obligation refers (instead of the previous fiscal year).

Also, a de minimis clause is also introduced: related-party transactions amounting less than EUR 100,000 (per transaction, per counterparty) and, as a whole, of EUR 500,000 are except to be included in the TP documentation.

However, the exempted companies may be specifically required to evidence the arm’s length nature of their related-party transactions by the Portuguese Tax Authorities in the framework of a tax audit.

Is any simplification available for SME’s?

Yes. SME’s are allowed to prepared a simplified local file including only the following information:

  • Identification of the taxpayer and related parties.
  • Full description and details on the related-party transactions.
  • TP method selected.
  • Comparables and arm’s length range.

When are applicable these changes?

Changes in the TP provisions are in force since 27 November 2021, except for the TP documentation requirements, which are applicable for the tax years beginning by 1 January 2021.

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