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PORTUGAL: An Introduction

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A) General overview 

With a total area of 92 072 km² and a population of over 10 million people, Portugal is a medium-sized European country.

Despite its size, the country boasts a great diversity of geographical features and its location, along the Atlantic coast of the Iberian Peninsula in south-western Europe, allows it easy access not only to other European countries, but also to the American and African continents.

The Portuguese language is spoken by more than 200 million people on several continents, including Europe, Africa and America, and this has contributed to the deepening of historical and cultural ties between Portugal and the world.

Portugal is a founding member of NATO and joined the EEC (later the EU) in 1986. Mário Centeno, minister of finance of Portugal, was recently elected President of the Eurogroup.

B) Economic overview 

Following the eruption of the sovereign debt crisis in 2011 and the subsequent implementation of an economic adjustment programme between May 2011 and June 2014, Portugal remained on the road to recovery in 2016, having started out along this road in 2013. GDP has been growing in year-on-year terms since the fourth quarter of 2013 and it is expected to maintain its positive course. In addition, the unemployment rate is decreasing (standing at around 8.8% in the second half of 2017).

Although Portugal has tackled its external imbalances head on, the rebalancing is still ongoing.

Exports have increased substantially over recent years, mainly due to improved efficiency and product quality. However, the net international investment position is still negative and more work needs to be done to attract even more foreign direct investment.

Despite the significant progress to date in adjusting its external and internal imbalances, the adjustment is not complete and large external liabilities still represent a major source of concern.

According to the Bank of Portugal’s Projections for the Portuguese Economy 2017-2019, the country will see a “continuation of the recovery of economic activity in the period 2017-2019 with a growth pattern characterised by a high level of dynamism in exports and business investment, which will be accompanied by an increase in employment in the private sector and by a continuing reduction in the unemployment rate.

C) Doing business and investing in Portugal

According to the World Bank’s report “Doing Business 2018” (DB2018 Report), Portugal stands at 29 in the ranking of 190 economies on the ease of starting a business. The same report ranks Portugal in the top 25 of the world’s most attractive locations to do business.

Foreign investors may engage in all types of activities under the same conditions as a local investor. Investment projects that are of particular interest to the Portuguese economy (“PIN Projects”), especially those creating jobs, allowing industrial reconversion, ensuring the development of a priority region or introducing new technologies, may apply to benefit from a special investment procedure managed by a special commission (“CPAI”).

Incorporating a company or opening a branch in Portugal can take only a day (on-the-spot company) and most of the steps necessary to incorporate a business can be taken on the Internet.

The Portuguese tax system offers interesting opportunities for non-habitual tax residents, with a flat income tax rate of 20% for certain Portuguese employment and self-employment sourced income. This makes it a very attractive country to live and invest in, both for European and non-European citizens.

Portuguese companies may take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties. They can also benefit from the more than 60 double taxation treaties that Portugal has signed. Portugal has also signed more than 50 investment protection agreements, offering interesting opportunities in a tax-friendly environment.

Companies registered at the Madeira International Business Centre (IBC), including branches of non-resident companies, can benefit from a reduced corporate tax rate of 5% until 2027. Additionally, companies that take advantage of this regime will benefit from the withholding tax exemption on dividend payments, interests and royalties.  

To attract foreign investors to live in Portugal, the government created a special residence card – Golden Visa – for non-EU-citizen investors, which has already generated an investment of more than EUR2 billion, principally in real estate.

In 2014, the European Commission and Portugal entered into a partnership agreement on the use of European Structural and Investment Funds (ESIFs) for the period 2014-2020.

The programming and implementation outlined by the partnership agreement have been developed around four themes: (i) competitiveness and internationalisation, (ii) social inclusion and employment (iii) human capital and (iv) sustainability and efficiency in the use of resources.

Under this incentive programme, Portugal will be allocated EUR25,000 million in structural funds and this will undoubtedly be an important instrument to increase investment and competitiveness, and boost the Portuguese economy.

Finally, the speed of the administration of justice is generally increasing, even if there is more work to be done. ADR and, in particular, arbitration, has been gaining acceptance among both the general public and the legal profession in recent years.

D) Future challenges and opportunities 

Benchmark analysis demonstrates that Portugal fares well in most business environment indicators, particularly as a result of reforms in competition law, employment law and licensing procedures.

Furthermore, the extremely effective e-government infrastructure that allows most interactions with administrative, governmental and judicial entities to take place online is an important tool in reducing operational time and costs.

As far as law firms are concerned, there is a growing tendency to begin to work with industries and companies from other sectors, in order to develop and offer new services to clients, to improve their quality and efficiency and find new business opportunities, based on more digital work.

All these factors – together with the recognised competitive advantages of the country itself, such as location, climate, international access and safety records – serve to make Portugal attractive to investors as an investment location.

Recent enquiries show the tourism, real estate and IT sectors as drivers of Portugal’s growth in the near future and R&D, manufacturing and logistics as key areas that are most likely to attract foreign investment.

In order to truly succeed in the near future, Portugal must continue to pursue an ambitious reform agenda. While the employment market reforms adopted during the adjustment programme are increasingly starting to deliver results, the reform effort needs to continue, because long-term and youth unemployment remain high.

Overall, the key point is still the importance of increasing the flexibility and competitiveness of the Portuguese economy to underpin the gradual economic recovery, strengthen its resilience to shocks and improve potential growth prospects.