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PORTUGAL: An Introduction to Tax

Morais Leitão, Galvão Teles, Soares da Silva & Associados Logo
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The preparation of this guide coincides with the most severe phase of the COVID-19 pandemic crisis in Portugal. Strict lockdown rules are being applied and teleworking, whenever possible, has become the norm. Judicial deadlines are once again temporarily suspended. Several tax measures that postpone payments or embrace flexible compliance with specific obligations are in force. To address the major difficulties and challenges created by this unprecedented scenario, the government has adopted several measures to protect the health of individuals and to sustain the economy. In addition, if the European Union redirects more than EUR1 billion of EU Cohesion policy funds to Portugal, it will tackle the economic slowdown and relaunch economic activity.

Therefore, the management and control of tax risk is more than ever a key concern for both tax authorities and taxpayers. For tax authorities the collection of the expected level of revenue is essential given the high increase of public expense as a result of the pandemic. For taxpayers, taxes are a significant business expense. An incorrect estimate can jeopardize a company’s level of profitability, inflict gross damages to its reputation, and cause great disadvantages and losses that could compromise its financial good standing.

Nevertheless, Portugal continues to be a country with a stable political and social environment, that due to its geographic and historic position could be used as a strategic platform for entering in wider markets, such as the African Portuguese-speaking countries and Brazil. As an EU Member, Portugal also benefits from tariff-free trade with all EU Member States, as well as from the free movement of labour, services, and capital.

Portugal also provides other relevant features such as a high quality of living and a business-friendly environment for investors based on outstanding national and international accessibility, infrastructures, and IT communication networks, as well as a simple, quick and informatized bureaucracy designed to cut compliance and time costs while providing better public services.

Portugal also has a flexible, highly qualified, and talented workforce along with generally attractive labour costs.

Thus, even within the current pandemic context, there are many opportunities available to acquire and capitalize on during the economic relaunch. This is especially true in some key sectors that have had remarkable and consistent growth in the last decade. For example, real estate, high tech and tourism have been internationally recognized by several renowned publications. Portugal has also gained recognition for hosting worldwide events like Web Summit.

The Portuguese tax system follows the OECD guidelines closely and is aligned with the EU Member States, offering attractive tax regimes for the free moment of dividends, investment income and capital gains as a result of the application of several international instruments such as the EU Parent-Subsidiary Directive and the EU Royalties and Interest Directive. Portugal also has an extensive tax treaty network that closely follows the OECD Tax Model Convention, currently covering approximately 80 foreign jurisdictions.

Portugal provides a special taxation regime for non-habitual residents (“NHR”) aimed to attract foreign investors and high net worth individuals. This special regime is available to individual taxpayers who become Portuguese tax residents if they have not been Portuguese tax residents in the previous 5 years.

The NHR regime sets out an exemption for employment income, self-employment income arising from high value-added activities, investment income and capital gains of foreign source, provided that some requirements are met. Moreover, pensions from a foreign source are also subject to a substantially reduced tax rate of 10%. On the other hand, employment and self-employment income from high value-added activities carried out in Portugal also benefit from a reduced rate of 20%. The NHR regime is applicable for a period of 10 years.

Portuguese tax law also sets out an exemption for employment income arising from stock option plans made available by start-ups to their employees.

Moreover, Portugal offers a Golden Visa regime, a special regime for foreign investors from non-EU countries to obtain a valid Portuguese residence permit, which also grants them access to the Schengen Area.

Finally, it is relevant to highlight that Portugal has no inheritance or wealth tax.

The Portuguese corporate income tax standard rate applicable to tax resident companies is 21%. A reduced 17% rate applies to the first EUR25,000 of taxable income for small-medium companies.

The Portuguese CIT regime also provides a highly competitive participation exemption regime, applicable both to dividends and capital gains, tax loss carry-forward, foreign tax credit relief, and relief on the taxation of capital gains in case of the reinvestment of the relevant proceeds.

Provided that some requirements are met, the Portuguese tax regime also exempts non-residents without a permanent establishment located in Portugal on capital gains made from the transfer of shares and other securities, as well as on investment income and capital gains from debt securities.

The Portuguese tax system also sets out a wide range of tax incentives for companies aiming to invest in Portugal. These tax incentives include, for instance, tax benefits (such as tax credits, as well as property tax and property transfer tax exemptions) for productive investment and tax credits for research and development activities.

The amount of tax benefits varies taking into consideration several criteria such as the relevant investment amount and the benefit to the country’s economic development and the reduction of regional imbalances. The above-mentioned regimes are in line with EU rules on state aid.

Moreover, the Portuguese patent box regime allows for tax exemptions on income derived from intellectual property. It provides a partial exemption of 50% on income arising from the sale and temporary licensing of intellectual property.

During the last decade, Portugal has also registered a significant growth in its real estate sector, which continues to provide several potentially lucrative investment opportunities for foreign investors, especially in the prime locations of Lisbon and Oporto.

For this specific context, the Portuguese tax system also sets out a wide range of tax incentives particularly in what concerns urban rehabilitation works. Moreover, Portugal also provides very attractive investment vehicles, such as real estate investment funds and a recently implemented REIT vehicle named SIGI, which are eligible to benefit from a corporate income tax exemption on rental income, investment income and capital gains provided that certain requirements are met.

Alongside the International Business Centre, which allows the application of a reduced CIT rate of 5% for companies licensed to operate within its scope, Madeira also offers the International Shipping Register of Madeira (“MAR”), established as an attractive and well-regulated regime providing full access to continental and island cabotage within the EU, applicability of all major IMO and ILO conventions, flexible crew nationality requirements, competitive social security regime, bareboat registration (in and out), and a very flexible mortgage regime.

Finally, it should be highlighted that in 2011 Portugal implemented a tax arbitration system for the settlement of tax disputes in a shorter period. During the last decade, tax arbitration has been successful in effectively decreasing the expected deadlines for resolution of tax disputes, decreasing tax uncertainty, and granting to the taxpayers a useful instrument to obtain a resolution for their tax disputes in a one year period.