Member Article

The new forms for reducing the amount of corporate income (IRC) tax to be withheld (MOD. 01-DJR) and for the partial refund of IRC (MOD. 02-DJR) withheld on the payment of interest and royalties between associate companies from different European Union Member- States under the Interest and Royalties Directive were  approved in February. The directive, which had already been transposed into national law, set up a tax regime for interest and royalties payments, guaranteeing equal tax treatment for national and cross-border transactions and eliminating double taxation by abolishing taxes on interest and royalty payments in the Member-State from which they derive, and having these taxed solely in the Member-State of residence of the actual beneficiary. It should be remembered that Portugal was granted a transitory eight-year period during which the withholding tax rates on interest and royalties paid to an associate company from another Member-State or to a permanent establishment situated in the other Member-State

of an associate company from a Member-State could not exceed 10% during the first four years (until 30 June 2009) and 5% during the last four years (from 1 July 2009 until 30 June 2013), provided that the remaining conditions for the application of this tax regime are met, including the condition as to the shareholdings, nature and residence of the beneficiaries of this income. The forms have been in use since 10 February and can be obtained at  http://dre.pt/pdf2sdip/2009/02/027000000/0561405626.pdf. According to the instructions, the forms must be completed in triplicate by the actual beneficiary of the interest and/or royalties obtained  in  Portugal  or  by  its  legal  representative  in  Portugal. In the case of MOD. 01-DJR (reduction of the IRC withheld), after having been certified by the relevant tax authority in the Member- State of residence of the beneficiary of the income, a copy is sent to the entity that is obliged to withhold the IRC, the relevant tax authority of the EU Member-State where the beneficiary company is resident or in which the permanent establishment receiving the income  is  situated,  and  to  the  income  beneficiary. After certification, the form is valid for a maximum of two years when the interest and royalties are paid under a contract and the beneficiary of the income must inform the entity or permanent establishment  that  is  considered  the  debtor  or  payor once the conditions  or  requirements  for  its  use  cease  to  apply. The form must be filed with the entity responsible for withholding IRC by the end of the time limit set for the tax to be paid, which is on the twentieth day of the month following the chargeable event, in other words, the tax is presumed to have become due from the time the income is earned and placed at the disposal of the beneficiary and  the  respective  amount  is  assessed  or  computed. In the case of MOD. 02-DJR (partial refund of withheld IRC), the copies are destined for the beneficiary of the income, the relevant tax authority in the EU Member-State where the beneficiary is resident or in which the permanent establishment receiving the income  is  situated,  and  to  the  International  Relations  Services Directorate (DSRI). The copy of the form for the Portuguese tax authorities should be sent to the DSRI within two years of the date on which the conditions are met, including the obligation to hold shares for an uninterrupted period of two years.

The fact that companies can benefit from the reduced 5% rate from 1 July next makes the application of the directive more attractive from a tax viewpoint whenever interest or royalties payments are made to companies whose registered office is in an EU Member- State if the respective applicability requirements are met, as the double tax treaties concluded by Portugal with other EU Member States in respect of this type of income provide for rates in excess of 5% in most cases (cf. attached rates table). We hope that the new approved forms, by  condensing  all  the information necessary to benefit from the Interest and Royalties Directive tax regime, will ease access thereto for companies wishing to avail themselves of its benefits.