Under Decree-Law 193/2005, in force since January 1 2006, investment income and capital gains arising from debt instruments issued by Portuguese entities are exempt from Portuguese income tax, provided the beneficiaries (i) have no residence, head office, effective management or permanent establishment in Portugal to which such income is attributable; (ii) are not domiciled in a blacklist jurisdiction; and also (iii) are non-resident entities that are not held, directly or indirectly, in more than 20% by Portuguese residents.
The application of this exemption requires certain proof documents to be produced, and the relevant debt instruments to be integrated for clearing purposes in the Portuguese centralised system for securities (CVM). Market players have coped well with these two requirements in the past few months, with a significant number of new issues coming out to a market with a growing number of issuers.
The Portuguese government has brought in this regime to encourage the bond market in Portugal, and to facilitate the raising of financing near non-resident investors. The regime was coupled with other legal measures, under which the legal limit applicable to the issuance of bonds increased to twice the issuer's own funds, and the registration costs were reduced, today representing minimal costs; in some cases the costs have been dispensed with.
Some more amendments are still expected to stimulate the market even further:
- Option for direct integration in Euroclear/Clearstream.
- Preparation of the CVM for clearing securities in all currencies (currently only euro but other currencies are expected shortly).
- Simplification of evidence of non-resident status.
Regarding this suggestion, the European Commission's Fiscal Compliance expert group (FISCO) issued information setting out solutions to fiscal compliance barriers regarding clearing and settlement of cross-border securities transactions (post-trading), when the withholding tax relief procedures differ substantially between the member states. FISCO has recommended that a harmonised withholding tax relief procedure should be introduced. Market participants currently incur substantial costs in handling these differences and sometimes forego the relief to which their clients are entitled because of the costs. Efficient refund procedures should be also standardised. We hope the Portuguese government will be sensible to these suggestions to increment even further the usage of debt capital markets that this regime has prompted.
Pedro Cassiano Santos and Ricardo Seabra Moura