RERE: Deduction of irrecoverable debts

Portugal - 03 / 05 / 2018

Tax Alert 10 - 2018

Last Saturday the new Extra-judicial Regime for Corporate Recovery ("RERE"), created by Law no. 8/2018, of 2 March, came into force. This initiative is inserted in a government’s program to promote investment and strengthen the capitalization of companies ("Programa Capitalizar") which provides the possibility for debtors facing a difficult economic situation, or in imminent insolvency, to develop negotiations with one or more of its creditors, with the intent of achieving an restructuration agreement for recovery. The agreement should be voluntary, of free content and, as a general rule, confidential.

According to the diploma, a "restructuration agreement" determines the alteration of the composition, the conditions or the structure of the asset or liability, or any other part of the debtors capital, including share capital, or a combination of this elements, including the selling of assets or parts of the economic activity, with the goal of allowing the company to survive as whole or in part.

This regime is available to debtors mentioned in article 2 (1) paragraphs a) to h), of the Portuguese Insolvency and Corporate Recovery Code ("CIRE") facing difficult economic situations, or in imminent insolvency. The protocol of negotiation, which must be deposited in the Commercial Registry, should be signed by the debtor and creditors representing at least 15% of the debtors unsubordinated liabilities, according to the CIRE.

Furthermore, Law no. 8/2018 also establishes a transitory period of 18 months, during which debtors in insolvency, in the terms of the CIRE, may use the RERE, as well as the possibility of, in the mentioned period, the proceedings in course regarding the System of Extrajudicial Corporate Recovery ("SIREVE"), eliminated by the present law, can be concluded under the old regime.

From a taxation point of view this news are relevant at the level of irrecoverable debts:

The Portuguese CIT Code now provides the direct consideration as expenses or losses of the fiscal year, when an agreement is made under the RERE, as long as the impairment loss have not been admitted, or is insufficient; and
The Portuguese VAT Code now provides taxable persons the right to deduct the tax relating to the credits covered by these agreements.

For these purposes, the agreement, from which the non-definitive payment results, shall be accompanied of a statement, in Portuguese, issued by the statutory auditor certifying the restructuration agreement includes the restructuration of credits corresponding to, at least, 30% of the total unsubordinated liabilities of the debtor and that, in virtue of the restructuration agreement, the financial situation of the company is more balanced by the increase of the proportion of the assets over the liabilities, and the equity capital is higher than the share capital.