Change of leadership at Portuguese Bar Association as well as new government tax secretary raises hopes that law firms could soon pay less tax and therefore invest more in technology and other infrastructure
There are high hopes among lawyers in Portugal that there could
be an imminent change to the country's tax law – perhaps
within a year – that would mean law firms would be subject to
the general tax regime, which would enable them to be taxed like a
corporation and therefore build up reserves to invest in their
infrastructure.
Under the current regime for Portuguese law firms, law firms are
required to distribute all of their profits each year. When a law
firm makes a profit, each of the firm's partners must pay
individual income tax on the profit, which including surcharges,
can be as high as 53 per cent. However, Portuguese law firms have
long wanted to be taxed on a corporate basis, which means that, not
only would they not have to distribute all of their profits each
year, but they would be subject to a tax rate of 21 per cent. To
make matters worse for Portuguese firms, the tax regime applicable
to them is not applied to the Portuguese offices of foreign law
firms.
"Portuguese law firms are forced to pay taxes in advance
– this is a problem of the tax regime – whereas
Portuguese branches of foreign firms are subject to a different tax
regime," says João Afonso Fialho, president of the
Portuguese law firm association ASAP (Associação das
Sociedades de Advogados de Portugal). "They [Portuguese firms]
are required to distribute all the profits of the law firm, which
is unfair in terms of competition – Portuguese law firms want
a completely free market to level the playing field."
Afonso Fialho argues that the chances of the law changing –
possibly within one year – have improved and are now looking
good. Consequently, it is hoped Portuguese law firms will be given
the option of being taxed under the present regime or being taxed
under the general tax regime like a corporation. "There is a
good prospect of [a change in the law] happening: the new chairman
of the Portuguese Bar Association, Guilherme Figueiredo, supports
the change, so the legal profession may be in a better position to
influence the government," he says. Afonso Fialho believes the
cause could be helped by the fact that the new Secretary of State
of Tax Affairs, Fernando Rocha Andrade, is not a lawyer, so he
could not be accused of acting out of self-interest. Afonso Fialho
says that if the law was changed, it could give firms a
"better capacity to invest, so they would become more
professional from an organisational point of view".
According to Miguel Reis, partner at PLMJ, the tax framework for
law firms is unfair because they must pay irrespective of whether
they pay dividends, unlike companies in other sectors.
"Lawyers should be treated as independent professionals, like
architects or auditors, who avoid the transparency regime," he
says. "Law firms would be able to make more investments with
undistributed funds and would be placed in an equivalent position
with other professions," he adds.
Supporters of a change in the tax regime say it would enable law
firms to have non-lawyers as partners, which could be another way
of making them much more competitive. For example, some lawyers
argue that a firm having an experienced finance professional as a
partner could potentially be more beneficial than having a
first-rate lawyer.
However some lawyers doubt whether changing the tax regime will be
enough to make law firms more competitive. Reis says: "We
perceive that professional management and investment in information
technology and knowledge management can play a much more important
role than a change to the tax law."
Creating reserves
Pedro Pais de Almeida, partner at Abreu Advogados, says the current
tax rules constitute "discrimination against Portuguese law
firms in comparison with EU law firms operating in Portugal".
He continues: "A change in the tax regime would contribute to
the reinforcement of firms' financial stability, by allowing
them to create reserves without the pressure of being obliged to
distribute every cent."
João Marques Pinto, a partner at pbbr, argues that
Portuguese law firms are not necessarily disadvantaged in the tax
system. "As the profit of a law firm is calculated on an
invoicing system, partners [if taxed like a corporation] could be
subject to taxation on income that was never obtained by the law
firm, due to non-payment, or late payment of invoices, for
example." However, he acknowledges the advantage of a law
change would be a lowering of partners' taxable income,
allowing profits to be invested in infrastructure, equipment and
personnel.
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