Chambers Practice Area Overview 2020 – Tax (Portugal)
Located on the south-west Atlantic coast of Europe, with a stable political and social environment, Portugal is a strategic platform for African Portuguese-speaking countries, Brazil and Latin America and an excellent gateway to these wider markets. Portugal also offers excellent quality of life for investors and businesspeople. Moreover, it offers outstanding national and international accessibility through highly developed infrastructures, logistics and IT communications networks. This is reflected by the fact that Portugal is repeatedly named among the world’s best destinations. For example, last year, the Azores were named one of the best destinations by the New York Times, Braga was named second in the “European Best Destination” award, and Porto was named one of the Europe’s Leading “City Break Destinations”. 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.
Portugal boasts an extremely friendly business environment that is characterised as 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. As a result, no distinctions are made between foreign-owned and Portuguese-owned companies.
Some simplification programmes that have been implemented over recent decades are contributing significantly to making Portugal attractive to businesses and citizens. These programmes were created by successive governments 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.
At the domestic level, the standard corporate income tax rate is 21% and a reduced 17% rate applies to a part of taxable income for small-medium companies. This represents a considerably lower tax burden on companies’ profit when compared with 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 located in Portugal) 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 should not be domiciled in blacklisted jurisdictions and must not be directly or indirectly held by Portuguese residents above certain percentages.
Furthermore, Portugal has recently introduced a very attractive REIT scheme, according to which these entities benefit from a corporate income tax exemption on rental income and capital gains provided certain regulatory conditions are met.
The Madeira Free Trade Zone’s special rules should also be highlighted as creating a potential and very interesting international hub for non-resident entities. These rules provides 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.
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 and development investment (such as financial incentives – Portugal 2020 – and tax incentives – provided for in the Investment Tax Code), and a patent box regime.
Portugal has also been the location of several important international events, like the Web Summit which has been held here since 2016 and will remain here until 2028). These events 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 the 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.
When it comes to personal income taxation, Portugal provides for a low effective tax burden complemented by a special taxation scheme for the 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 benefit from (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, and (v) the harmonisation of the tax rate applicable to dividends, interest and capital gains (set at 28%).
In addition, a new scheme applicable to former tax residents was also put in place in 2019. This scheme 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.
The implementation of a tax arbitration system in 2011 was designed to achieve a quicker resolution of any tax disputes and this goal has been achieved. Moreover, recent legislative amendments endowed this alternative dispute resolution mechanism with the characteristics of the judicial procedure. As a result, the procedure has been increasingly used and has brought numerous advantages.
By Miguel C. Reis and João Velez de Lima