Portugal

The purpose of this article is to outline the main aspects a foreign investor should consider when investing in Portugal. Such aspects relate to both transactional issues and structural issues. This paper purports to treat such issues in accordance with the sequence of events that are generally followed in any foreign investment. Naturally, due to length requirements, we will confine our article to an overview of such issues.

Commercial companies in Portugal generally assume the form of a joint-stock company (SA or Sociedade Anónima) or of a private limited company (LDA or Sociedade Por Quotas), and more recently, since January 5 1997, companies may also assume the form of a single partner limited company (LDA - Sociedade Unipessoal). These forms basically correspond to the German models of the AG (Aktiengesellschaft), the GmbH (Gesellschaft mit beschrankter Haftung) and the Einmann-GmbHG.

The major distinctions between a SA and a LDA (as well as the LDA-Sociedade Unipessoal) are the following: (a) Minimum capital requirements: SA - euros 50,000, LDA - euros 5,000; (b) Minimum number of founding partners: SA - five, LDA - one; (c) capital representation: SA – shares, LDA - quotas.

A Portuguese SA, however, may have only one shareholder, provided the shareholder is a Portuguese resident company. Although Portuguese law does not grant the same possibility to non-resident shareholders, there are numerous cases of Portuguese companies, which are - in practical terms - held by only one non-resident shareholder.

LDAs tend to be companies that are more based on the personal relationship between partners. This personalized view has influenced two important areas of a LDA´s life: (a) The transmission of quotas must be made before a public notary, and such notarial deed must then be registered with the Commercial Registry (thus identifying the partners); (b) A LDA's access to the capital markets is very restrictive (although they can issue bonds).

Both SA and LDA are subject to corporate income tax at a rate of 32% (which may be as high as 35.2%, as a result of a municipal surcharge).

Profits distributed by Portuguese companies to their non-resident shareholders are also subject to withholding taxes. The applicable rate varies between 0% (Parent/Affiliate Directive being applicable) and 25%. Where a Double Tax Treaty applies, the rate is generally 15%. However, profits distributed by a SA are subject to an additional 5% withholding tax. This 5% tax has been deemed by the tax authorities not to be a tax on income and, thus, not covered by the Parent/Affiliate Directive or by the Double Tax Treaties. In our opinion, this is a tax on income and, save in certain defined cases, it should be deemed to fall under the scope of any legislation applicable to income taxes.

Capital gains derived from the sale of shares or quotas are tax free, provided they are made by non-resident companies without a permanent establishment in Portugal and provided further that such non-resident companies (a) are not resident in low-tax jurisdictions and (b) are not held (more than 25%) by Portuguese residents. Capital gains made by resident companies are taxed at the normal corporate tax rates.

Investing in Portugal through a local holding company is no longer interesting. It may be made tax neutral, but reinvested capital gains no longer benefit from a full tax deferral mechanism.

One should note that the Portuguese tax codes include provisions to deal with transfer pricing rules, thin capitalization and controlled foreign corporations.

Labour concerns are one of the most prominent concerns a foreign investor must have when dealing with Portuguese interests. This results from the fact that Portuguese labour laws are still very protective of the employee.

Most important for a foreign investor is to become aware that, under Portuguese labour laws, grounds for dismissal are statutorily set forth. Fair dismissals depend upon the employer proving that there is just cause for dismissal. The concept of just cause implies that the employee has performed an illegal act, causing the immediate and definitive impossibility of maintaining the labour relationship. The burden of proof lies entirely on the employer and, in addition to such evidence, the employer must be certain of complying with a very strict formal disciplinary proceeding.

In addition to just cause, the employer may terminate a labour contract in a non-adaptation situation, in the event of the extinction of a labour position, or in the case of a collective dismissal. In all cases, however, a strict formal procedure must be followed.

Labour law concerns are also particularly relevant on asset deals, involving the transfer of undertakings. Under Portuguese law, the rights and obligations of all employees working in a given undertaking (or the part thereof which is to be transferred) will transfer automatically to the transferee on completion of the asset deal, with all their existing terms and conditions of employment, including seniority rights.

As Portugal has not yet implemented the Acquired Rights Directive (EC Directive 98/50/CE) there are currently no statutory obligations requiring transferors or transferees to inform or consult with trade unions or works councils regarding impending transfers.

However, works councils have a general right to receive information regarding the business generally and thus should be advised of a proposed transfer before it takes effect.

There is a legal obligation to proceed with a Prior Notification of any given concentration operation before the merger control authority (DGCC - Direcção-Geral de Concorrência e Preços), if one of the following conditions are met:

(a) the creation or strengthening of a market share superior to 30% of a given service or product as a result of such operation, which may be a merger or a direct or indirect acquisition; or

(b) existence of a turnover superior to EUR 150 million on behalf of the participating companies, during the last business year.

In turn, a concentration operation for the purposes above described may result from: (i) a merger of two or more companies; (ii) the direct or indirect acquisition of one or more companies, acquisition of parts of one or more companies, acquisition of real rights over such companies assets or acquisition of contractual rights granting control over corporate matters, all of such acquisitions performed by one or more companies; or (iii) incorporation of a common undertaking by two or more companies.

Pursuant to the filing of a Prior Notification, the DGCC shall analyze the case within a period of 40 days, after which the Minster for Economy shall issue a decision of non opposition within a period of 10 days after that, or in alternative, remand the case to the Competition Counsel (Conselho da Concorrência) should he consider that such a concentration operation is likely to affect the market. This Competition Counsel shall state its official position on the issue within a period of 30 days from receipt of the case remanded by the Minister for Economy who, in turn, shall adopt one of the following decisions within 15 days: (i) not oppose the concentration operation; (ii) not oppose to the concentration operation imposing the restrictions deemed adequate to ensure free market competition; or (iii) forbid the concentration operation.

Note that where the operation has a community dimension, the prior approval mechanism is pursued at the EU level and, thus, the DGCC is not involved.

There are two main stages in the acquisition or merger procedure: the due diligence process and the documentation process (negotiation, drafting and formalization). Simultaneously with this procedure, the foreign investor is determining how to structure the acquisition (new company, SA or LDA vs branch; local financing vs shareholder financing and so on).

More and more, the acquisition of Portuguese businesses is made subject to strict due diligence requirements. This is particularly the case on international deals, as many Portuguese purchasers still look at this process as time consuming and not cost effective.

In general terms the due diligence procedure includes a review of the corporate documents, including, in respect of Portuguese law, a review of the bylaws of the target company, as well as of the minutes of the meetings held by the Board of Directors and by the Shareholders (and bondholders, if any).

In addition, the due diligence procedure includes a review of the ownership structure of the target company (in the case of a LDA, the structure is identified in the Commercial Registry), as well as of the addresses of the registered offices and of any registered or unregistered branches.

Based upon official registries (Commercial Registry and Real Estate registry), it is also possible to obtain official information as to the directors and statutory auditors of the target company, who are in office, as well as of the status of any real estate property.

To determine the status of any other assets to be transferred, as well as of the financial and employee situation of the target company, one must conduct a review of its internal documentation, including: (a) balance sheet and other company records, including those which list the company's tangible assets; (b) loan agreements and other financing documentation; (c) registrations in respect of intellectual and industrial property rights; (d) agreements which are material to the company's business activities, including supplier agreements and insurance policies; (d) legal and court claims.

One of the most sensitive areas in a due diligence procedure has been the regulatory compliance area. This includes compliance with any regulated activities (specially so in areas of activity subject to a government concession – eg, highways, water usage, hydropower, waste disposals, health care industry), as well as compliance with any environmental legislation, database protection laws and anti-trust rules.

In an asset deal, it is most important to carefully review any documentation related with employees being affected to the undertaking being transferred. Such documentation should include pension-related rights, share option schemes, insurance and health benefits as well as any employee-related litigation.

In an international deal, this process often involves the drafting of letters of intent (or memoranda of understanding), of confidentiality agreements and of negotiation minutes.

Since Portuguese law is codified, there is no need to draft acquisition agreements in the Anglo Saxon manner, despite the numerous advantages of such drafting techniques. However, on international deals, it is very common that the acquisition agreement is very complete and covers all the areas of the entire acquisition process, including those that are covered and regulated by Portuguese law. One important issue to cover in the agreement is the one related with any contingencies (tax, environmental, litigation and others) of the transferred company/assets. Naturally, if need be, the agreement (or, at least, some relevant provisions of the agreement) is then made subject to the approval of the DGCC authorities (anti-trust).

One issue that should be taken into account is that the acquisition of quotas in a LDA company does not occur by means of the execution of the agreement. A notarial deed must be conducted before a Portuguese notarial officer and both notarial and registration costs become due as a result thereof. Depending upon the amounts at stake, such costs may be quite relevant. Thus, in deals of this kind, one should refer in the agreement to a closing date, which is coincident with the notarial deed.

Foreign investors wishing to acquire businesses in Portugal basically have two options available to them: Either acquire the target company or acquire the appropriate assets of the target company. In an asset deal, the purchaser has greater certainties, in terms of contingencies, but it has to look into employee matters with greater concerns. In our experience, the due diligence procedure is not that much different. In an asset deal, one is not so concerned with corporate issues, but any time saved thereon is then consumed in looking into labour concerns.

In an asset deal, it is common that a new company is incorporated in Portugal (most commonly, a LDA). Otherwise, the target company then operates as the Portuguese vehicle of the non-resident investor (until the end of 2000, it might have been advantageous to incorporate a local holding company), but as mentioned above this advantage is no longer available.

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Abreu, Cardigos & Associados

Praca Nuno Rodrigues dos Santos 14-B

1600-171 Lisbon

Tel: +351 21 723 1800

Fax: +351 21 723 1899