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PORTUGAL: An Introduction

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Portugal Overview 

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 approximately 250 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. Durão Barroso, a former Prime Minister, was President of the European Commission between 2004 and 2014. Mário Centeno, minister of finance of Portugal, was elected President of the Eurogroup and Chair of the Board of Governors of the European Stability Mechanism in December 2017.

António Guterres, also a former Prime Minister, currently serves as the Secretary-General of the United Nations.

B) Economic overview 

In the period of 2018-2020, the Portuguese economy is expected to continue to follow an expansionary path, with a pace of growth in line with the one currently projected for the euro area by the European Central Bank (ECB).

After a 2.7% increase in 2017, which was above the EU average, GDP is expected to grow 2.3% in 2018 and is projected to remain broadly stable at around 2% each year in 2019 and 2020. Exports have become one of the most important engines of the economy and it is predicted that further export gains, alongside domestic demand, will support economic activity in the next years. Particularly, consumption will maintain a solid growth as labour market conditions continue to improve, with a fall in the unemployment rate to below the current 7%.

The fiscal deficit is expected to disappear by 2020 and the debt-to-GDP ratio is on a firmly declining path.

According to the Bank of Portugal’s Projections for the Portuguese Economy for 2018-2020, the country’s economy will “continue to benefit from a favourable economic and financial environment, including robust external demand growth (of around 4%), an accommodative monetary policy stance in the euro area – amid a gradual reduction of non-standard stimulus adopted over the past few years – and the maintenance of economic agents’ financing conditions.”

C) Doing business and investing in Portugal

According to the World Bank’s report “Doing Business 2019” (DB2019 Report), Portugal stands at 34 in the ranking of 190 economies according to ease of doing business, ahead of the Netherlands, Switzerland, Japan and Belgium.

Portugal also ranked 34th among 140 countries in the World Economic Forum’s Global Competitive Index 2018, having climbed eight positions since the previous year. Infrastructure, health, primary education, business dynamism and innovation capability are the pillars of the country’s improvement in competitiveness.

Portugal has no restrictions on foreign investment and the same rules applicable to Portuguese investors apply to foreign investors. Investment projects that are of particular interest to the Portuguese economy (“PIN Projects”), especially those that create jobs, allow industrial reconversion, ensure the development of a priority region or introduce new technologies can apply to benefit from a special investment procedure managed by a special commission (“CPAI”).

In 2018, the country attracted over EUR 1.2 billion in direct foreign investment. Portugal’s attractiveness to foreign direct investment is based on a variety of factors such as stability, telecommunication infrastructure and a favourable legal and regulatory environment, as well as the overall incentives offered by the Government.

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. Reforms reducing the time and cost of formalising company set-up increased the number of business start-ups by 17% and created seven new jobs per 100,000 inhabitants per month.

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 with the Madeira International Business Centre (IBC), including branches of non-resident companies, may 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.

In 2018, the Portuguese Government launched the Startup Portugal Programme +, which aims to give a new impulse to the National Strategy for Entrepreneurship and to establish Portugal as a centre of excellence in innovation and in entrepreneurship at an international level. To achieve this goal, the Programme strengthens financial support and tax incentives for start-ups which include the 200M Co-Investment Fund, the DNA Startup credit line and the “Call For MVP” for access to venture capital for minimum viable projects, which are among the main financing measures made available to these companies. This Programme also deepens the relationship between start-ups and the State and creates conditions to attract smart money and highly qualified talent to the country. When it comes to highly qualified immigrant workers who wish to work in Portugal, the Tech Visa is intended to bring greater efficiency to the granting of residence visas or residence permits and this helps companies attract and retain specialist talent.

At the end of 2018 a new investment of EUR 1.45 billion was allocated for the system of incentives to companies under the framework of the European Structural and Investment Funds (ESIFs) partnership agreement Portugal entered into in 2014, for the period of 2014-2020.

Finally, the speed of the administration of justice is generally increasing, even if there is more work to be done in this area. 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 

Once considered “Europe’s best kept secret” for tourism and investment, Portugal is now harvesting the economic benefits of its added exposure in recent years.

The country’s performance has been recognised internationally, not only due to the structural reforms in competition law, the labour market and the tax system, and the quick compliance with EU regulations in areas such as Data Protection, Anti-Money Laundering and the Register of Beneficial Owners, but also thanks to its tech scene and innovation-friendly policies.

As technology and innovation are priorities of the Portuguese Government, increasingly greater funds and financial support initiatives are being channelled towards implementing measures that support both companies in the tech industry and the organisation of the most relevant events in the sector, such as Web Summit, which will be hosted in Portugal for the next ten years.

It should also be noted that the Portuguese financial regulators have taken firm steps in their commitment to promoting and regulating the FinTech sector. To this end, “Portugal FinLab”, a regulatory sandbox committed to raising the potential of Portugal as a global FinTech hub while serving as a communication channel between entrepreneurs and the Portuguese financial authorities, has been created.

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 and on a more international level, 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.

Portugal is currently in the enviable position of having world-class infrastructures combined with a highly qualified young workforce and a very competitive average salary in comparison with other countries.

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.

Portugal must continue to pursue an ambitious reform agenda and the development of education skills, and the investment in innovation and technology competitiveness are the main drivers for its increasing attractiveness to foreign investment in the coming years.