Ways to invest in Portugal
A) Company with separate legal personality
There are two main types of companies: the sociedade por quotas (Lda.), or limited liability company, and the sociedade anónima (S.A.), or public limited company.
The legal structure of the Lda. is used by individual investors or companies, and can be solely owned.
- The corporate name is the chosen name + reference to the business area + Ltd. In the case of sole-shareholder companies, the word Unipessoal is added after the reference to the business area.
- Minimum capital: €2 (€1 in the case of sole-shareholder companies), only through capital contributions (monetary or non-monetary). Payment of monetary contributions may be deferred for up to fve years. In sole-shareholder companies, only 50% of contributions can be deferred.
- Minimum of 2 shareholders (1 in sole-shareholder companies).
- Managing body: One or more directors. A priori, a statutory auditor is not required. However, companies that do not have a statutory audit board or a sole auditor must appoint an auditor to audit the company’s accounts when two of the following limits are exceeded (for two consecutive years): total balance sheet: €1,500,000; net revenue: €3,000,000; average headcount: 50.
- Shareholder liability: Limited to capital subscribed, although shareholders are jointly and severally liable for all contributions provided for in the bylaws (additional obligations may apply to controlling legal entity shareholders).
- Average time for incorporation: 2 weeks.
The S.A. is the other type of corporate structure used by individual investors and companies. Characteristics of S.A.s include:
- The corporate name is the chosen name + reference to the business area + S.A.
- Minimum capital: €50,000, through capital contributions only (monetary or non-monetary). Payment of 70% of monetary contributions may be deferred for up to fve years. Any share premium applied may not be deferred.
- Minimum of 5 shareholders (or 1, when incorporated by a legal entity).
- Alternative management structures:
(i) board of directors (or sole director, if share capital does not exceed €200,000) + statutory audit board (or sole auditor); or
(ii) board of directors (with an audit committee) + auditor; or
(iii) executive board (or sole director, if share capital does not exceed €200,000) + general supervisory board + auditor.
- Shareholder liability: Limited to capital subscribed (although additional obligations may apply to controlling legal entity shareholders).
- Average time for incorporation: 2 weeks.
Under Simplex, the administration and legislation simplifcation program, both Lda.s and S.A.s can be incorporated online in less than one hour.
Entity without separate legal personality. No limit on the liability of the parent company. The trade name must be the investor’s name + the words “Sucursal em Portugal” (Branch in Portugal).
C) Other types of companies with separate legal personality
The sociedade europeia (S.E.), or European company (societas europaea), and the agrupamento complementar de empresas (A.C.E.), or domestic joint venture.
Procedural formalities for incorporating a company
- Apply for a valid name for the new company from the National Registry of Companies (RNPC).
- Request a taxpayer identification number (NIF) for foreign shareholders and directors, whether they are individuals or legal entities.
- Sign a private incorporation document.
- Request registration of the company with the Commercial Registry.
- File a start of activity declaration for tax purposes with the tax authorities and for social security purposes.
General matters regarding investment
- Foreign investment controls: Foreign investors are subject to the same rules as domestic investors. Foreign investment is not subject to any type of special administrative notification or registration (notwithstanding the general registration obligations and compliance with regulatory obligations applicable to specific business activities).
- Accounting standards: Portugal has adopted IAS/IFRS and requires the preparation of annual financial statements.
A) Direct taxation
Corporate income tax (Portuguese IRC)
Nature: Direct tax levied on worldwide income of companies resident in Portugal.
Tax residence: Companies and other legal entities whose principal activity is commercial, industrial or agricultural and whose registered offices or principal place of business is in Portuguese territory are considered resident in Portugal for tax purposes.
Tax base: Profit or loss for accounting purposes, adjusted upwards or downwards on application of tax principles.
Tax rate: The standard rate is 21% plus an additional municipal surtax (derrama municipal) up to 1.5% of taxable profit (depending on the municipality in which the business activity is carried out), as well as a national surtax (derrama estadual) of 3% (for taxable profit over €1,500,000), 5% (for taxable profit over €7,500,000) or 9% (for taxable profit over €35,000,000). Accordingly, the tax rate could be up to 31.5% for large companies.
A special reduced corporate income tax rate is available for SMEs (companies with revenues under €50,000,000). For SMEs, taxable profit of up to €15,000 is taxed at a reduced rate of 17%. Any taxable profit above this threshold is subject to the standard corporate income tax rate.
Dividends and capital gains: Portuguese-source and foreign-source dividends received by a resident company are tax exempt if the following conditions are met: (i) minimum shareholding of 10% in the company distributing the dividends; (ii) shareholding held for one year (may be met after dividends are paid); (iii) dividends must not be received from a company in a listed tax haven (otherwise, no geographic limits on dividend source); (iv) the company distributing the dividends is subject to and not exempt from a comparable tax at a rate not below 60% of the standard Portuguese corporate income tax rate (i.e., 12.6%) (if this last condition is not met, other alternative requirements may apply).
Dividends paid by a Portuguese company are exempt if the shareholders meet the above conditions, providing that these shareholders are residents of Member States of the European Union, the European Economic Area (excluding those countries that do not exchange tax information with Portugal) or jurisdictions with which Portugal has entered into a tax treaty providing for the exchange of information.
Interest and royalties: Interest and royalties paid by a Portuguese company to its shareholders are exempt from corporate income tax if the requirements set out in EU Council Directive 2003/49/EC on interest and royalty payments are met (minimum shareholding of 25%; held during two years, companies with a specific legal structure and subject to and not exempt from income tax, and the shareholder is resident in the EU).
Offset of tax losses against future profits: Tax losses can be offset during a specified period (currently set at five years). However, companies whose principal activity is of an agricultural, commercial or industrial nature and that are subject to Law 372/2007 may carry losses forward for 12 years. The maximum offset of losses is 70% of taxable profit.
Rules on related-party transactions: In line with OECD transfer pricing guidelines, whereby related-party transactions are valued on an arm’s length basis and are subject to certain documentation requirements.
Main special regimes:
- Resident companies can opt to pay taxes jointly with their group of companies (Portuguese RETGS system). However, the Portuguese tax group is not a consolidation regime, given that each company must individually assess its taxable profits or tax loss. Among other conditions, application of this regime requires the parent to hold a direct or indirect interest of at least 75% of the subsidiaries’ capital and more than 50% of their voting rights.
- Tax neutrality regime applicable to restructuring operations such as mergers and spin-offs.
Main anti-avoidance rules:
- General anti-avoidance rule (GAAR).
- International tax transparency rules (controlled foreign corporation, CFC).
- Limit on the deductibility of net finance costs: net finance costs deductible up to the higher of the following: (i) €1,000,000; or (ii) 30% of earnings before interest, taxes, depreciation and amortization (EBITDA).
Lending and financial institutions (including branches of foreign entities) under the supervision of the Banco de Portugal and insurance companies regulated by the Portuguese insurance authority (ASF) are not subject to the interest barrier rule.
Formal obligations: Prepayments in July September and December 15 of the current tax year and filing of a corporate income tax return on May 15 of the following year (if the fiscal period is the calendar year).
Permanent establishment (PE): Profits attributable to PEs are subject to corporate income tax under the same tax rules.
Income earned by nonresident companies with no PE in Portugal:
Main tax rates:
- Standard: 25%
- Dividends, capital gains, interest and royalties: 35%
Main exclusions: Dividends, interest and royalties are excluded under EU directives when paid to associates resident in the European Union (or in the European Economic Area or jurisdictions with which Portugal has entered into a tax treaty providing for the exchange of information, in the case of dividends), providing certain requirements are met.
Rates may be reduced or taxes may be eliminated upon application of tax treaties.
Personal income tax (Portuguese IRS)
Nature: Tax levied on the worldwide income of individuals resident in Portugal for tax purposes.
Tax residence: An individual is a tax resident in Portugal if he or she has been in the country for over 183 days of any 12-month period that starts or ends the corresponding tax period. Tax residency is presumed if the individual owns a home in Portugal at any time.
Tax rate: General income (such as employment income or business income) is subject to a progressive tax up to a maximum of around 48%. Income such as interest income or dividends is taxed at a maximum of approximately 28%. An additional solidarity tax of 2.5% or 5% may be applied, depending on individual’s taxable income.
Incentives for the international mobility of workers: Individuals that have become tax residents in Portugal for a given year and that have not been taxed as Portuguese residents in any of the preceding five years may apply for the special tax regime for temporary tax residents. This regime may be applied for a ten-year period.
Under this special tax regime, the individual’s employment and self-employment income from high value-added activities is taxed at a special rate of 20%, while foreign-source income is tax exempt provided that certain requirements are met.
B) Indirect tax
Value added tax (VAT)
Nature: Indirect tax levied on supplies of goods and services, intra-Community acquisitions and imports made by traders or professionals in Portuguese territory (including the autonomous regions of Azores and Madeira, which offer reduced rates for supplies to the islands).
VAT is primarily borne by consumers and, in general, is neutral for companies that act as collection agents, given that they charge output VAT to their customers and receive a refund for input VAT paid to their suppliers. VAT is not neutral in sectors that carry out VAT-exempt activities (such as the financial sector).
Tax rates: 23%, 13% and 6%.
Excise taxes: Excise taxes apply, in line with the related EU directives:
- Tax on alcohol and alcoholic beverages (Portuguese IABA)
- Tax on oil and energy products (Portuguese ISP)
- Tax on tobacco products
Municipal property transfer tax (Portuguese IMT)
Nature: Indirect tax levied on the transfer for consideration of real estate property located in Portuguese territory. Such transfers may also be subject to the stamp tax (Portuguese IS).
Tax rates: 0%-6.5%, depending on the taxable event (but 10% for urban and rural property acquired by a resident of a tax haven). Stamp tax of 0.8%.
Stamp tax (Portuguese IS): Levied on acts, contracts, documents, books, papers and other transactions established in the general stamp tax table, including the acquisition, for no consideration, of goods by an individual (gift or inheritance), taking place in Portugal and not subject to or exempt from value added tax (VAT) (certain prizes may be subject to both VAT and stamp tax). There is no cumulative taxation on the same document or act, except for acquisitions, for no consideration, of the ownership of or other rights in real estate. Tax rate: 0.04% and 0.6% on financing.
Municipal property tax (Portuguese IMI); Levied on the tax registration value of urban and rural real estate located in Portuguese territory. Tax rate: 0.8% (rural property); 0.3%-0.45% (rural property); 7.5% (property owned by entities resident in tax havens).
Vehicle tax (Portuguese ISV): Tax paid when registering a vehicle for private use. The taxable base is determined from the engine displacement and the carbon dioxide (CO2) emissions level.
Annual road tax (Portuguese IUC): Ownership-based tax applying, inter alia, to passenger vehicles and vehicles used for mixed passenger and goods transport, vehicles used for private transport of goods and for transport services, motorcycles, boats and private aircrafts. The fna tax payable varies in accordance with the vehicle’s engine displacement and CO2 emissions level.
Social security contributions
The social security contribution rate in Portugal is 11% for employees and 23.75% for employers, based on the actual salary. There is no maximum contribution.
Labor and employment matters
Regulation: The labor relationship is governed by the Portuguese Labor Code, collective labor agreements (namely, agreements between labor unions and employer associations to regulate activities in a specific sector) as well as by other European and international regulations.
Types of contracts:
- Indefinite-term (general rule)
- Sporadic work
- Remote work
- Temporary (fixed or indefinite-term)
Salary: May be established in the employment contract in accordance with the contract terms, the governing standards or customary practice. May not be less than the minimum wage (€580 gross per month in 2017).
Working hours: As established in the employment contract. May not exceed eight hours per day or 40 hours per week, although a shorter work day or work week may be established in the collective labor agreement.
Vacation: 22 business days (although more vacation days may be agreed in the collective labor agreement).
Business succession: Employees’ labor relationships are not extinguished in the event of an inter vivos transfer or mortis causa transmission of a company.
Foreign workers: A work permit or permanent or temporary residence certificate is required, except for EU citizens, who are exempt from this requirement.