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PORTUGAL: An Introduction to Tax

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Chambers Practice Area Overview 2019 - Tax 

Located on the south-west Atlantic coast of Europe, with a stable political and social environment, Portugal is a strategic point of entry to the African Portuguese-speaking countries, Brazil and Latin America and an excellent gateway to these wider markets. Portugal also provides an excellent quality of life for investors and businesspeople. Moreover, it offers outstanding national and international accessibility through highly developed infrastructure, logistics and IT communications networks. This is reflected by the fact that Portugal is systematically named among the world’s best destinations (e.g., in 2018 Lisbon was elected World’s Leading “City Break Destination” and “City Destination”, Braga was voted amongst the 15 “European Best Destinations”, Porto was nominated for Europe’s Leading “City Break Destination”, the Algarve was a nominee for Europe's Leading “Beach Destination” – after having won the award for three years in a row – and Madeira was once again considered Europe's Leading “Island Destination”). Lisbon and Porto are also considered to be leading organisers of conferences, fairs and similar events.

As an EU Member State and part of the Eurozone, Portugal benefits from open, tariff-free trade with all EU Member States, and from free movement of labour, services and capital, which also extend to Iceland, Liechtenstein and Norway through the EEA Agreement.

Portugal boasts an extremely friendly business environment, characterised for being stable, simple and with low bureaucracy. This makes it one of the easiest places to start a business, while it is also a premium tourism and real estate location, and one of the EU-leading countries in R&D and new technologies. There are no restrictions on foreign investment in Portugal as the Portuguese system is based on non-discrimination with regard to the national origin of investment (thus, no distinctions are made between foreign-owned and Portuguese-owned companies).

Simplification programmes that have been implemented over the last decade are contributing significantly to making Portugal attractive to businesses and citizens. The SIMPLEX programme was created by the government to make everyday life easier for resident and foreign individuals and companies by cutting red tape, reducing compliance costs and using ICT (Information and Communication Technology) to deliver better public services – most of which have been made available online.

Portugal is also known for its talented, flexible and highly qualified, generally English-fluent workforce, which still boasts attractive labour costs.

The Portuguese tax system, which follows most OECD guidelines and is in line with the majority of its European counterparts, offers attractive tax-free exit solutions for the remittance of profits, investment income and capital gains under the EU Parent-Subsidiary Directive and the EU Royalties and Interest Directive. It also offers an extensive tax treaty network covering close to 80 territories and this has been continuously expanded (e.g. with a recently signed tax treaty with Angola).

At the domestic level, the standard corporate income tax rate is 21% and a reduced 17% rate applies to the first EUR15,000 of taxable income for small-medium sized companies. This represents a considerably lower tax burden on companies’ profit than in other European countries. Besides this, corporate investors can also benefit from a highly competitive participation exemption regime (dividends and capital gains), foreign tax credit relief and a nominal interest deduction for share capital.

Portuguese domestic rules also exempt non-residents without a permanent establishment on capital gains made on the transfer of securities (except direct or indirect transfers of shares in real estate companies), as well as investment income and capital gains from listed debt securities. In both cases, the beneficiaries must not be domiciled in blacklisted jurisdictions and the beneficiaries must not be directly or indirectly held by Portuguese residents above certain percentages.

Furthermore, Portugal has very recently introduced a REITs (Sociedades de Investimento e Gestão Imobiliária) regime, according to which these entities benefit from a corporate income tax exemption on rental income and capital gains, provided certain regulatory criteria are complied with.

The new tax rules for the Madeira Free Trade Zone are another potential attraction. These rules provide that, subject to meeting certain conditions, companies licensed before 31 December 2020 will benefit from a corporate income tax rate of 5% up to 31 December 2027.

A range of tax incentives are also available for urban renewal, R&D expenses and investment projects deemed to be of interest to the country’s economic development and the reduction of regional imbalances. The Budget Law for 2019 strengthened the competitiveness and attractiveness of some of these incentives by increasing the thresholds of the tax benefits available. In addition, there is also a wide range of incentives for companies that are looking to invest in Portugal. These include incentives for Productive Investment and Research & Development Investment (such as financial incentives – Portugal 2020 – and tax incentives – provided for in the Investment Tax Code), and a Patent Box regime. The Portuguese government has appointed a committee to review and revamp the tax benefits available under the Portuguese tax system and further tax benefits to promote investment are expected to be announced by the end of 2019.

Portugal has also been the place for several important international events, like the Web Summit (which has been taking place since 2016 and will continue until 2028), which are contributing to changing perceptions and making Portugal the base for a growing number of start-ups that are looking for a perfect place to set up their business. In fact, there are several incentive programmes for start-ups including “soft loans” and co-investments in innovative and tech start-ups by the government, along with contributions from EU funds.

At the personal income tax level, Portugal provides for a low effective tax burden complemented by a special taxation scheme for non-habitual residents. This scheme allows individual taxpayers who become Portuguese tax residents – provided they have not been taxed as such in the previous 5 years – to be exempt from tax on foreign-sourced income in general. Beneficiaries of the scheme also enjoy (i) a reduced 20% rate on employment and self-employment income from high value added work done in Portugal, applicable for a 10-year period, (ii) the free remittance of funds (inbound or outbound), (iii) no wealth tax, (iv) the recognition of trusts for tax purposes, (v) the harmonisation of the tax rate applicable to dividends, interest and capital gains (set at 28%), and (vi) an accessible residence permit regime (a gateway to the Schengen zone). In addition, a new regime applicable to former tax residents has also been put in place in 2019. The regime applies to individuals who were tax resident in Portugal until no later than 31 December 2015 and who become tax resident again in 2019 (or 2020). It provides for a 50% exemption from taxable income.

Portugal also offers the Golden Visa Programme, a fast track for foreign investors from non-EU countries to obtain a fully valid Portuguese residence permit, which also allows free movement within the Schengen Area. This framework has been turning Portugal into the top choice for high net-worth individuals within the European Union.

Finally, the main goals of the implementation of a tax arbitration system in 2011, which was designed to achieve a quicker resolution of any tax disputes, have been fully achieved. The government has recently submitted legislative proposals to add greater flexibility to this regime.

BY: Nuno Cunha Barnabé (Head Tax Partner) and Dinis Tracana (Senior Associate)