Portugal has been adopting a set of fiscal measures to increase its competitiveness and attract foreign investment for over 10 years and, to that end, has enacted personal and corporate income tax reforms.
From the perspective of many foreign countries, Portugal is seen as the main point of liaison, not only with the EU as a member state, but also with its former colonies—namely Brazil and the group designated as African Portuguese Speaking Countries (PALOP): Angola, Guinea-Bissau, Cape Verde, São Tomé and Príncipe, Mozambique, and Equatorial Guinea. The historical ties that unite Portugal to these countries allowed the establishment of agreements that enable and encourage the circulation of individuals and goods between them.
In addition, Portugal benefits from an extensive network of double tax treaties (DTT), including with Macau, which can provide a gateway to China.
We summarize below some of the main opportunities and incentives for foreign investors.
Golden Visa Program
Under this regime, citizens of non-EU states who perform or carry out one of the investments legally provided for, such as the transfer of capital in the amount of at least 1.5 million euros ($1.29 million) or the acquisition of real estate with a minimum value of 5 million euros or 3.5 million with refurbishment, will qualify.
Non-Habitual Tax Residents’ Regime
In practical terms, this regime offers advantages related to income taxation. For example, employment income and self-employment income for rendering high value added activities of a scientific, artistic, or technical nature are subject to personal income tax at a flat 20% tax, compared to the maximum possible effective taxation rate of 53%, and most of the income earned abroad by non-habitual residents will be exempt in Portugal, as long as certain conditions are met.
No Tax on Gratuitous Transfer of Assets
Portugal does not levy tax over the gratuitous transfer of assets (gifts or donations), during life or upon death (mortis causa), when the beneficiaries are the spouses, common law spouses and descendants or ascendants in a direct line of the owner. Unlike in France, for example, there are no wealth taxes.
Taxes on Corporate Income and Gains
Corporate income tax (CIT), is levied on resident and nonresident entities. Resident companies in Portugal are taxed on their worldwide income.
There is an optional regime to exclude from taxation the profits and losses allocated to a foreign permanent establishment (PE) of a Portuguese company. This regime applies provided that (i) the profit allocated to that PE is subject to and not exempt from a tax foreseen in Article 2 of the EU Parent/Subsidiary Directive (Council Directive 2011/96/EU), or a tax similar to the Portuguese CIT where the legal rate is not lower than 60% of the standard CIT rate; and (ii) the PE is not located in a blacklisted jurisdiction.
The regime does not apply to the profit allocated to the foreign PE up to the amount of the losses attributable to that PE that have been taken into account by the Portuguese taxpayer when computing the respective taxable income for the previous five tax years (12 tax years in cases of small and medium-sized enterprises).
This is an optional regime that must cover at least all the PEs located in the same jurisdiction and is mandatory for a minimum three-year period.
CIT is also applicable to Portugal-source income attributable to a PE of a nonresident company in Portugal. Special withholding tax rates apply to income generated in Portugal that is attributable to nonresidents without a PE in Portugal.
A flat CIT rate of 21% applies on the global amount of taxable income realized by companies resident for tax purposes in mainland Portugal (also applicable to Portuguese PEs of foreign entities). The standard CIT rate is 14.7% in the Autonomous Region of Madeira and in the Autonomous Region of the Azores, 25,000 euros of the taxable amount also being subject to the standard CIT rate on the excess.
The following surtaxes may also apply:
- A local surtax (Derrama) of up to 1.5% of taxable income, prior to the deduction of any available carryforward tax losses, is levied in certain municipalities. The local surtax is assessed and paid when filing the CIT return
- A state surtax (Derrama Estadual) applies (prior to the deduction of any available carryforward tax losses) at the following rates:
- 3% on the taxable profit exceeding 1.5 million euros and up to 7.5 million euros;
- 5% on the taxable profit exceeding 7.5 million euros and up to 35 million euros;
- 9% on the taxable profit exceeding 35 million euros.
The state surtax is levied on resident taxpayers carrying on commercial, industrial, or agricultural activity and nonresidents with a PE in Portugal.
There are three VAT rates: the standard rate of 23% (22% in the Autonomous Region of Madeira; 18% in the Autonomous Region of the Azores), the intermediate rate of 13% (12% in Madeira; 9% in the Azores), and the reduced rate of 6% (5% in Madeira; 4% in the Azores).
Tax Incentives for Business
- Participation exemption regime
The participation exemption regime foresees tax advantages for companies that are tax resident in Portugal, such as the exclusion, for the purposes of determining their taxable profit, of the profits and reserves distributed to these companies, or the exemption of capital gains from the onerous sale of shareholdings held by taxable subjects, upon verification of certain legal conditions.
Nonresident entities also benefit from a tax exemption on the profits and reserves distributed to them, provided that they are resident in the EU, in the European Economic Area, or in a state with which Portugal signed a DTT.
- Business investment of deducting and reporting tax losses
The tax losses registered in a given tax period may be carried forward and deducted from tax profits for a period of five years (limited to 70% of the taxable income determined that same year). However, small and medium-sized enterprises benefit from an extension of the reporting period and are able to deduct tax losses for 12 tax years.
This regime applies to assignment contracts or temporary use of some industrial property rights. Under this regime, the income derived by these contracts is taxed at half their value, provided certain conditions are met.
The Portuguese tax neutrality regime, with the provisions of the EU Merger Directive, applies to different corporate restructuring operations, foreseeing a tax exemption of capital gains arising from these corporate restructuring operations provided certain conditions are met.
- Madeira Free Trade Zone and International Business Center of Madeira
The Madeira Free Trade Zone and the International Business Center of Madeira comprise a special tax regime, authorized by the European Commission, which offers tax benefits for companies there which were incorporated before December 2020 and create jobs, such as the application of a reduced CIT rate of 5% until December 2027.
It should also be noted that on Dec. 22, 2020, the Portuguese government approved a proposal to extend the deadline for issuing licenses to operate in the Madeira Free Trade Zone for one year. Besides the reduced general rate of 5% applicable until 2027, industrial companies established in the Industrial Free Zone may also benefit from a 50% reduction on taxable profit, provided certain requirements are met.
- Autonomous Region of the Azores
Entities resident in the Autonomous Region of the Azores benefit from a reduction to taxable income of between 20% and 40% in the case of reinvestment of the profits in fixed assets allocated to exploration.
- Incentives for business research and development—SIFIDE II
The SIFIDE II regime is in force until 2025 and provides for the deduction from corporate income tax of R&D expenses, under certain conditions, at the following rates:
- 32.5% of the expenses incurred in the tax period;
- 50% of the increase of expenses of the tax period in relation to the average of the two previous tax periods, up to a limit of 1.5 million euros.
The percentage of 32.5% is increased by 15% in the case of micro, small, or medium-sized entities that do not benefit from the incremental rate of 50% because they have not yet completed two tax periods of activity.
Eligible expenses that cannot be deducted in the tax period in which they are incurred may be deducted up to the eighth following tax period.
- Deduction for retained and reinvested profits—DLRR
The DLRR provides a tax incentive to micro, small, and medium-sized companies. It allows a CIT credit of 10% of the retained profits reinvested in eligible investments within four years as from the respective realization. The deduction is capped at 12 million euros of retained and reinvested profits and 25% of the CIT assessed.
- Remuneration of share capital
This tax benefit provides a deduction to taxable profit of the amount resulting from the application of an annual rate of 7% of the contributions—up to 2 million euros—made in the incorporation of a company or the increase of share capital, by way of cash payments or through the conversion of credits, or the use of profits of the tax period itself.
The deduction shall be made in the tax period in which the contributions are made and in the following five tax periods.
The limit of the net financial costs of taxpayers who benefit from this measure will be the higher value of 1 million euros, or 25% of the result before depreciation, amortization, net financial costs and taxes.
- Tax benefits for establishing companies in inland regions
Micro, small, and medium-sized enterprises located in inland regions whose main business activity is of an agricultural, commercial, industrial or service provision nature, may benefit from:
- A rate of 12.5% for the first 125,000 euros of taxable income;
- An increase of 20% on the maximum deduction of 10% of retained and reinvested profits allowed under the DLRR benefit, when eligible investments made in an inland territory are involved.
These benefits cannot be accumulated with other benefits of an identical nature.
- Exit taxation linked to circulation and establishment of individuals and companies in EU
The Court of Justice of the European Union had already addressed the Portuguese exit taxation regime in case C-38/10, which provided that when a Portuguese company opted to change tax residency, it would be taxed regardless of the fact that it had not actually obtained any gain or value. The court considered that this regime constituted an obstacle to the freedom of establishment.
Arbitration has several advantages compared to the judicial process. The resolution of disputes process is simplified, electronic, and faster. As a rule, the final decision is issued within a maximum period of six months (on average 4.5 months).
Double Tax Treaties
Portugal has signed DTTs with 79 countries, including all Portuguese speaking countries, 12 American countries, 17 Asian countries, and almost all European countries.
In the absence of a DTT, Portugal still unilaterally offers a reduction or even the elimination of international double taxation to resident taxpayers.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Rogério M. Fernandes Ferreira is a partner and Duarte Ornelas Monteiro is a senior associate lawyer with RFF & Associados.
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