Recently, Ministerial Order No. 268/2021 of 26 November was published in Portugal, repealing the transfer pricing regulations of Ministerial Order number 1446‑C/2001 of 21 December.

Ministerial Order No. 267/2021 was also published on 26 November. This Order revises the regulations on the procedures for concluding Advance Pricing Agreements (APAs), in accordance with Article 138 of the Code of the IRC, which revokes the Ministerial Order No. 620-A/2008 of 16 July.

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The amendments made to the Portuguese Transfer Pricing Regime following the publication of the Ministerial Order No. 268/2021 from 26 November are in line with the recent developments in terms of domestic and international transfer pricing legislation, in particular those arising from the OECD and the EU Joint Transfer Pricing Forum and include, among others, the following aspects:

1) Review of the transfer pricing documentation obligations in terms of (i) the introduction of the possibility of organising transfer pricing documentation in a dual structure – a Masterfile and a Local file – and (ii) the introduction of significant changes in the limits and requirements for the preparation and organisation of the transfer pricing documentation;

2) Introduction of specific regulations for the application of the arm’s length principle to transactions related to intangibles and restructurings, taking into account 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;

3) Keep the amendments previously made to Article 63 of the Corporate Income Tax Code (“IRC Code”) regarding the scope of the application of the arm’s length principle and the adoption of the most appropriate method for determining transfer prices;

4) Introduction of specific guidance of (i) the delineation of related party transactions, (ii) the comprehensiveness of the concept of terms and conditions and (iii) the comparability review process.

The alterations now introduced following the publication of Ministerial Order No. 268/2021 of 26 November aim to clarify and introduce certainty in the application of the arm’s length principle, in line with the latest international developments in this regard, as well as to reduce compliance costs for smaller companies by introducing of a simplified documentation model.

These changes also emphasise the need to maintain a high degree of cooperation between taxpayers and the tax authorities, focusing on transactions that carry a greater risk, namely (i) transactions with entities subject to a more favourable tax regime, (ii) transactions involving intangibles, (iii) financial transactions and (iv) transactions involving the transfer, reorganisation and restructuring of companies.

It is also worth mentioning that, although the limits and requirements for the mandatory preparation of the transfer pricing documentation have been broadened, taxpayers excluded from the obligation to prepare transfer pricing documentation still have to comply with the arm’s length principle in the transactions carried out with related entities, and may be notified by the Portuguese Tax Authority to demonstrate that the terms and conditions applied in those transactions comply with the arm’s length principle.

Therefore, we recommend the preparation of transfer pricing risk assessments at regular intervals and suggest that transfer pricing economic studies are carried out in a contemporary manner and prior  to the determination of transactions with related parties, in order to avoid future tax disputes in this regard.