Member Article

1. The recently published Decree-Law 55/2008 of 26 March has set out the regulatory provisions necessary for  implementing incentive measures for the speedier recovery of areas in Portugal that suffer most from typical inland regional problems, as provided for in the Tax Benefits Statute (EBF).  In essence, the Decree-Law has retained the bulk of former Decree- Law 310/2001, of 10 December, which has now been repealed – governing matters discussed previously, namely the conditions of eligibility for benefits, obligations to which the beneficiary entities are subject and consequences in the event of breach.  For the first time, a review mechanism has been introduced for these beneficiary areas, in accordance with criteria which have been defined and tested in conjunction with the Minister of Finance and the remaining members of the government responsible for local government and regional planning.

2. With 39-B of the Tax Benefits Statute as its backdrop along with the provisions in the new regulatory decree, we are able to provide a general outline of the tax benefits for inland regions currently in force:

i) Framework

· Companies whose core activity is an economic activity which is agricultural, commercial or industrial in nature or  provides services in one of the beneficiary areas may benefit from the outset from a reduced corporation tax (IRC) rate, as follows: (i) as a rule, the IRC rate applicable to the taxable income will be 15%; (ii) in the case of new entities, whose core activity is situated in the beneficiary areas, the IRC rate will be 10% for the first five years:

· In respect of asset reintegration and amortization of investment expenses of up to €500,000, excluding those used for the acquisition of land and light passenger vehicles, these companies may also benefit from the deduction of an  additional 30% for the purposes of determining taxable income;

· An additional 50% of the compulsory social charges paid by employers in relation to the net creation of jobs for an indeterminate period is also deductible for the purposes of determining taxable income;

· The tax losses incurred during a given accounting period under the terms of the IRC Code may be deducted from the taxable profits, if any, of one or more of the seven subsequent accounting periods;

Finally, in relation to Property Transfer Tax (IMT), properties acquired by young persons of between 18 and 35 years of age and destined solely as their own first permanent home, provided that the value of such properties does not exceed the maximum controlled cost residence value plus 50%, and the acquisition of buildings or apartments situated in the beneficiary areas and allocated permanently to the business activity of these companies will benefit from an IMT exemption.

ii) Conditions

The grant of the above tax benefits is conditional on the applicants meeting various legal requirements, namely:· the direct core activity is an economic activity of an agricultural, commercial or industrial nature or the provision of services in inland regions; · the use of direct assessment methods for the purposes of determining IRC on profit;

· the status of the company vis-à-vis the tax authorities, social security and the respective municipality is in order;

· there are no salaries in arrears;

· proof that the company has not come about as a result of a split-off in the previous two years;

· the company is legally incorporated and complying with the legal requirements governing its business activity;

· the company keeps organized accounts, in accordance with the Official Chart of Accounts (POC).

In addition, in order for applicant companies to qualify for this benefit, the law also requires them to fulfill the following obligations:

· provide the responsible entity with all the information related to the benefit;

· communicate to the above any changes which may affect their eligibility for the benefit;

· maintain the legal conditions necessary for carrying on the business activity; and

· keep an organized tax dossier at the company containing all the documentation proving that it qualifies for the benefit.

iii) Territorial areas

The law sets down certain criteria for territorial areas to qualify for these benefits. In effect, acknowledging the existence of less favored areas in this country, the legislative assembly has defined low population density, the compensation or tax discrepancy index and inequality of social, economic and cultural opportunities as essential criteria for delimiting the beneficiary areas.

It must be highlighted, however, that for 2007 and 2008 and also for the purposes of implementing incentive measures for speedy recovery of inland regions, as set out in the EBF, the beneficiary areas are those identified in the former Ministerial Order 1467- A/2001, of 31 December.

iv) Final considerations

Although the tax benefits in question are not cumulative with others o an identical nature, they do not affect the possibility of opting or other more favorable alternatives. Further, the tax benefits established under Ministerial Order 170/2002 of 28 February will continue until a new one is approved. This will now be prepared in conjunction by the Ministers of Finance and of Employment and Social Solidarity so as to ensure full compliance with the decision of the European Commission on the incentives in question in relation to their application to different economic activities.

3. Finally, although EC Regulation 1998/2006, of 15 December 2006 of the European Commission, currently in force, provides for an upper limit of €200,000 in respect of de minimis aid, the above-mentioned Ministerial Order 170/2002, of 28 February continues to provide that tax benefits for inland regions may not exceed €100,000, per beneficiary, for a period of three years from the date the first incentive is attributed.