Reverse charge rules on domestic supplies in Portugal

Reverse charge rules in Portugal

After much consideration, the tax authorities in Portugal recently published updated guidelines on reverse charge rules on domestic supplies of goods and services for when the supplier is non-established. This article will explain the basics of the guidelines, which are effective as from 27 April 2021.

The scope of reverse charge has been extended significantly. Going forward, all supplies made by foreign businesses registered in Portugal without a permanent establishment or fiscal representative should be subject to reverse charge when the client has a permanent establishment or fiscal representative in Portugal. Before these changes, domestic reverse charge (art. 194 of EU VAT Directive) would not apply when the supplier was VAT registered. 

For example, if you are VAT registered in Portugal because you are making intra-Community acquisitions followed by local sales to Portuguese established clients, you will no longer charge VAT on your local sales. Instead, you should apply domestic reverse charge. 

What is reverse charge?

Reverse charge is a deviation from the general VAT rules in which businesses usually charge VAT on supplies and deduct VAT on purchases. Through the reverse charge mechanism, the supplier does not charge VAT on the invoice to the client, and the client is responsible for manually calculating the VAT on their VAT return. This is to be simultaneously reported as input and output VAT, making the transaction have a nil effect on the cashflow of the client.

What are the reverse charge rules in Portugal for a non-established supplier?

According to the guidelines published by the Portuguese tax authorities on reverse charge rules for non-established suppliers, certain conditions must be jointly met for reverse charge to apply:

·         The supplier is not established in Portugal and does not have a fiscal representative there

·         The client is a taxable person established in Portugal or is VAT registered there with a fiscal representative

If any of the above are not met, reverse charge will not apply, and the supplier will charge the appropriate Portuguese VAT rate on their transactions.

Additionally, it is the responsibility of the supplier to notify the client if they have a tax representative in Portugal. If no communication is received in this aspect, it is assumed that the supplier does not have a VAT representative.

Is certified billing required for these reverse charge rules?

Non-established suppliers making transactions covered under 2 (I)(g) of Article 194 of the VAT Directive will not need to use certified billing to issue invoices. However, certified billing in Portugal will be mandatory for non-established businesses carrying out other activity in Portugal starting in July 2021.

When is a VAT registration needed?

Under the guidelines, non-established suppliers who only carry out transactions covered by the reverse charge rule (2 (I)(g) of Article 194 of the VAT Directive) will not need a VAT registration. Those who carry out other types of transactions should verify the need to VAT register.