With the publication of Decree-Law 79/2017, some substantial changes were made to the Tax Code (Law 227/2015) effective January 1, 2018; we point out that the changes may undergo further changes.

Micro-enterprise scheme

One of the most significant changes is the increase in the ceiling within which entities are considered to be subject to the micro-enterprise regime (with flat-rate taxation on turnover and not on tax profit). Specifically, as of January 1, 2018, the limit within which one is a microenterprise has been raised to 1,000,000 euros/year. In addition, the other co-requisites that previously limited wholesale into the regime by entities having consulting/management and other activities (banking etc.) as their object of business have been removed.

In fact, all companies with revenues of less than 1,000,000 euros as of Dec. 31, 2017 will, without the possibility of an option, be subject to the micro-enterprise regime.

Tax on tax profit (profit)

Decree 79 also reduces from 16 percent to 10 percent the rate applied to tax profit for entities subject to the ordinary regime. For the sake of completeness, we point out that there has been (so far) no change in the tax rate applied to dividend income received, which remains at 5 percent (the change in the rate applied to labor and pension income, as of January 1, of 10 percent, had already been highlighted in a previous information sheet).

Deduction of tax charges

The changes also include the repeal of the previous calculation mechanism for deducting tax charges (1 to 3 ratio of Equity to Financial Debt) now replaced with a more complex system.

Specifically, the new mechanism of first determining the excess of financial charges, EOF, (financial charges – financial income); the excess thus calculated is deductible within the ceiling of 200,000 euros/year; any residual amount in excess of 200,000 euros is deductible to the extent of 10% of the calculation base obtained from the following formula:

Deduction basis of 10%= Total revenue – total costs – non-taxable revenue + ordinary tax + EOF + deductible depreciation.

The finance charge not deducted in the year can be carried over to subsequent years.

This particularly complicated topic will be the subject of subsequent discussions.

CM