Portugal

In the 2018 Index of Economic Freedom Portugal scored 63.4 points and occupied the 72nd place in the ranking. The country’s overall score grew by 0.8 due to the dramatic changes in fiscal health and government spending, which offset the decrease in property rights and business freedom. Portugal ranks 35th among 44 European states, with its total score being below the regional but above the global average.

International trade is one of the main factors contributing to the development of the Portuguese economy: exports exceed imports by 21%. Standard custom duty rate is only 1.6%. However, some restrictions on imports and exports are imposed, and situation in financial sector remains unstable. Non-performing loans ratio is still high.

6 simple steps to purchase a company

  1. choosing a country

  2. choosing a bank

  3. payment (by any method)

  4. sending documents

  5. company registration

  6. bank account opening

Main advantages

  1. The least in the EU share capital required to obtain a residence permit (by incorporating a company or increasing the capital of an existing one)
  2. A foreigner (even without residence permit) may be the founder and the owner of a company
  3. Rapid registration (takes 2 days)
  4. One of the lowest tax rates in Europe
  5. Opportunity to carry out business activities in free trade zones: Madeira, the Azores
  6. Free movement within Europe
  7. No corruption: Portugal ranked 29th in the Corruption Perceptions Index, ahead of Spain, Italy, Israel, and China
  8. Portugal is one of the top 10 safest countries
  9. With regard to goods and services, good value for money is offered

Types of companies

The following types of companies can be established in the country:

  1. Public joint stock corporation (company) — Sociedade Anónima (S.A.)
  2. Private limited liability company — Sociedade por Quotas (Lda.)
  3. Individual Limited Liability Establishment — Estabelecimento Individual de Responsabilidade Limitada (E.I.R.L.)

Registration procedure

The name of a newly established company shall be checked in the National Registry of Collective Enterprises (Registro Nacional de Pessoas Colectivas, RNPC). If it is available, it may be reserved for up to 48 hours, provided the special fee is paid. In addition, the company’s name can be chosen from pre-approved ones, which are listed in RNPC.

To obtain a registration certificate, founders of the legal entity shall submit an application followed by the articles of association and the certificate of the name approval within a maximum of 15 days from incorporation date. Upon receipt of the aforementioned documents, the local authorities will deliver the corporate tax number, the company’s social security number, and declaration for commencement of business. The organisation’s employees must be registered in Centres for Company Formalities (Centros de Formalidades das Empresas) or Commercial Registry Offices 24 hours prior to starting their work or not later than 10 days after declaring the initiation of business activities.

The Labour Inspectorate shall as well be notified of the establishment of the new company. Registration services for employees’ accident compensation insurance are available via the internet from private insurers and do not cover non-wage workers.

Taxation

Portugal is neither offshore nor mid-shore, with the tax rate being relatively high.

Corporate income tax (IRC, Imposto sobre o Rendimento das Pessoas Colectivas)

This tax is payable only by resident companies. However, it is levied on their worldwide income, including profits earned by subsidiaries and other permanent establishments. Moreover, capital gains are also subject to IRC and therefore taxed at the same rates.

Tax Computation:

  1. Standard corporate income tax rate — 21%.
  2. Municipal surcharge — 1.5%.

State surcharge — progressive rate is adopted: 0%, on income below EUR 1.5 million; 3%, on income between EUR 1.5 million and EUR 7.5 million; 5%, on income varying between EUR 7.5 million and EUR 35 million; 9%, on income above EUR 35 million. Thus, the maximum rate is 31.5%, provided that the company’s income exceeds EUR 35 million.

Capital gains tax

As noted previously, there is no such tax in Portugal, or, to be more correct and precise, capital gains are included in the profit which is subject to corporate income tax.

Operating losses

Under current legislation, operating losses may be carried forward for future periods (5 years maximum) if and only if they do not exceed 70 percent of the taxable profit. In some cases, carryforward is allowed only if authorized by the Minister of Finance, that being an irreversible process.

Dividends

Dividends are exempt from taxation if paid and received by resident companies. For this exemption regime to be applicable to a particular enterprise, the following conditions must be fulfilled: dividend recipient is not a transparent entity and holds at least 10% of the dividend payer’s share capital (for at least 1 year).

Value Added Tax (VAT; Imposto sobre o Valor Acrescentado, IVA)

Value Added Tax is levied on the supply of goods and services, on their import (in case if the country of origin is not an EU member), on international services delivered in Portugal, and on intra-Community acquisition of goods in the country from another EU members. The local legislation provides for the following VAT rates: standard (23%), intermediate (13%), and reduced (6%).

VAT refund is available only for non-resident companies carrying out taxable supplies within the country. This issue is quite challenging, so it is recommended to seek further consultation from our experts. The VAT returns are submitted either monthly (in case if the turnover is equal or higher than EUR 650,000) or quarterly (if the turnover is less than aforementioned amount)

Monthly VAT returns shall be filed by the 10th business day of the month following the reporting period, whereas quarterly returns are due by the 15th business day.

Passive income tax (taxation at source)

Passive income traditionally encompasses dividends, interest, and licence fees, e.g. royalties. There is no any special tax to be levied on such income, so the latter is included in the profit which is subject to corporate income tax (in the case of individuals — personal income tax, or Imposto sobre rendimento das pessoas singulars, IRS). The amount to be paid depends on the taxpayer’s status and the type of income.

Passive income tax rates:

  1. Dividends and interest obtained by a non-resident company — 25%
  2. Dividends and interest obtained by a non-resident entity whose country of residency is a listed tax haven — 35%
  3. Royalties paid to a non-resident enterprise — 25%
  4. Technical services — 25%

Full exemption from the tax is possible in cases provided for in the EU directives and bilateral agreements on avoidance of double taxation.

Reporting

In accordance with the local legislation, a large part of commercial companies is obliged to file annual financial statements either electronically or in paper form. The amount information to be published varies depending on the entity’s assets, turnover, number of employees, fields of activities, and legal form.

Financial statements reporting is regulated by the Commercial Code and other normative instruments.

International Financial Reporting Standards (IFRS) are permitted for use by all companies, but small businesses may choose between IFRS and national standards.

Financial statements are filed with the Commercial Registry (officially referred to as “Information disclosure system”), which is administered by the Portuguese Institute of Registries and Notary.

Reporting is obligatory for:

  1. Public companies
  2. Limited liability companies
  3. Companies listed on the stock exchange

Financial statements of commercial entities shall be presented within four months once the financial year is closed. Three months’ time is set aside to hold the meeting of shareholders, which is to approve the statement, and one month is provided in order to carry out the filing procedure itself.

Late reporting is penalised with a fine of up to EUR 5 million or dissolution of the company.

Complete annual report includes:

  1. financial statement
  2. directors’ report
  3. confirmation statement by the company’s officials (confirms that the information provided earlier is correct and up-to-date)
  4. notes
  5. information on legal review of accounts
  6. supervising authority’s opinion
  7. audit report

Financial statement includes:

  1. balance sheet
  2. profit and loss report
  3. notes

Essential points

In Portugal, the tax year corresponds to the calendar year, However, resident companies have an important privilege: they may adopt other tax accounting period by submitting the relevant request to the Ministry of Finance (sufficient reason shall be provided).

Corporate income tax must be paid within 5 months following the end of the tax year. Interim payments are required in the 7th, 9th and 12th months of the tax year.

Net financial costs are allowed as tax-deductible expenses, but only up to the greater of the following thresholds: EUR 1 million or 30% of earnings before interest, tax, depreciation and amortisation.

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