PORTUGAL: An Introduction

Chambers Portugal Overview 2020 

A) General overview 

Portugal is a medium-sized European country located on the Iberian Peninsula and bordered by the Atlantic Ocean to the west and south and by Spain to the north and east.

The country’s privileged location 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 290 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 rest of the world.

The Portuguese are known to be very friendly, good hosts, who have an above average working capacity and extraordinary skills for innovation.

Portugal is a founding member of NATO and joined the EEC (later the EU) in 1986. Mário Centeno, a former Portuguese minister of finance, was elected President of the EUROGROUP and Chair of the Board of Governors of the European Stability Mechanism in December 2017.

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

B) Economic overview 

The Portuguese economy is expected to continue to follow an expansionary path during the period of 2019-2021, with a pace of growth slightly below the one registered in recent years, but above the one currently projected for the euro area by the European Central Bank (ECB).

After a 2% increase in 2019, GDP is expected to remain at a stable rate of 1.7% in 2020 and 2021. Exports and domestic demand have become two 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 coming years. Labour market conditions will continue to improve, with a fall in the unemployment rate to 6.1%, which is the lowest unemployment rate in the country in the last 28 years.

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 2019-2021, the country’s economy will “continue to benefit from a favourable economic and financial environment, including robust external demand growth (of around 3.4%), and the maintenance of favourable financing conditions for the economic sectors. The orientation of EU monetary policy remains accommodative, in a context of a maintenance of low levels for the interest rates.”

C) Doing business and investing in Portugal 

According to the World Bank’s report “Doing Business 2019” (DB2019 Report), Portugal stands at 39 in the ranking of 190 economies on the ease of starting a business, ahead of Switzerland, Germany and Canada.

Portugal also maintained its ranking of 34th among 140 countries in the World Economic Forum’s Global Competitiveness Report 2019, with institutions, infrastructure, ICT adoption, macroeconomic stability, health, skills, product market and labour market as the pillars of the country’s position in competitiveness.

Portugal has no restrictions on foreign investment and the same rules that apply to Portuguese investors also 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”).

Portugal’s attractiveness for foreign direct investment is based on a variety of factors such as stability, telecommunication infrastructures 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 firm) and most of the steps necessary to incorporate a business can be taken on the Internet. Reforms reducing the time and cost to formalise company set-up increased the number of business start-ups in the country, which represented 1.1 % of the GDP in 2018.

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 scheme will benefit from the withholding tax exemption on dividend payments, interest, and royalties.

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 

Portugal is now harvesting the economic benefits of its added exposure in recent years. The country’s performance has been recognised internationally, due to its structural reforms in competition law, the labour market and the tax system, and its quick compliance with EU regulations in areas such as the Register of Beneficial Owners (the deadline for the register of the commercial entities’ beneficial owners was 30 November 2019). The country’s attractiveness is also linked to its growing 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 companies in the tech industry and the organisation of some of the highest profile events in that sector, such as Web Summit, which will be hosted in Portugal until 2028.

Moreover, the Portuguese financial regulators have taken firm steps in their commitment to promoting and regulating the FinTech sector. To this end, it has created 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.

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 adopt innovative work tools using AI technology, and to begin to work with industries and companies from other sectors and on a more international level. This enables them 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 investment in innovation and technology competitiveness are the main drivers for its increasing attractiveness to foreign investment in the coming years.

By Maria da Conceição Cabaços and Ana Nunes Teixeira