With its relatively low corporate tax rate, Portugal is becoming a more common country for foreign businesses to set up and establish business operations. Beyond forming corporate entities, US investors are also spending more money investing into the Portuguese economy.
As a result, the following is a basic summary of Portuguese tax law:
Residence: A company will be considered a resident of Portugal if the business has its place of effective management in Portugal.
Basis: A resident company of Portugal will be taxed on its worldwide income whereas nonresident companies will only be taxed on their Portuguese sourced income. Depending on certain factors, profits that are earned outside of Portugal can be elected to be exempt. In addition, branches of foreign companies in Portugal will only be tax under Portuguese source from.
Small Business: If a business qualifies as a “small business” they can make an election to request a simplified tax regime.
Corporate Tax Rate: The standard corporate tax rate for businesses in Portugal was recently reduced to 21% and is expected to decrease even further in the upcoming years.
Dividends and Capital Gains: If dividends and capital gains are received by resident Corporations (that also meet other holding and earning requirements), they may be exempt from tax.
Dividends to a Non-Resident Company: Portugal charges and withholds tax of 25% – and even more for payments to nonresident corporations that are residents of tax havens. There are mechanisms in place to try to reduce this withholding rate.
Interest: Interest paid to a nonresident company will have a 25% withholding rate and 35% again if it is being paid to a resident of a list of tax haven. These laws are subject to modification under certain tax treaty laws with different countries.
Real Property Tax: Real property taxes are levied against owners of real property at a rate that ranges between .3% and .8%, unless the owner of the property is located in a tax haven, in which the rate jumps to 7.5%.
Anti-Avoidance Rules: Portugal does have anti-avoidance rules such as transfer pricing and thin capitalization.
Transfer Pricing: In accordance with transfer pricing rules, Portugal can change and make pricing adjustments if there is a “special relationship” between the parties.
Thin Capitalization: Thin capitalization rules are complex, but Portugal does have them so that cannot artificially reduced tax rates by taking out extensive loans to increase its debt to equity ratio.
CFC: Portugal does have CFC (controlled foreign corporation) rules requiring the taxation of certain undistributed profits, which have not been distributed to owners of different companies.
General Avoidance: If one of the main, if not sole purposes of the transaction is to avoid tax, the Portugal authorities have the right to disregard the transaction for tax purposes and reconfigure the tax liability.
Residents: Residents of Portugal are taxed on their worldwide income while nonresidents of Portugal are only taxed on their Portuguese sourced income.
Residence: A person is to be considered a resident of Portugal if he or she has resided in Portugal 183 days in any 12-month period or the person’s name residence is in Portugal. There are more complex rules to evaluate residence depending on other specific factors which may impact residence qualification.
Classes of Taxable Income: Portugal taxes six categories, including employment income, business and professional income, investment income, real estate income, and increases in net worth and pensions.
Capital Gains: There is no capital gains tax on the south of the primary residence is always those procedure use the purchase another home in Portugal or a EU/EEA member state.
Individual Tax Rates: Portugal utilizes a progressive tax rate for individual taxation that goes all the way up to 48% with additional surcharges depending on overall income earnings. There are some exemptions for “For non-habitual resident individuals”
VAT: Portugal utilizes a value-added tax system with a standard tax rate of 23% and reduced rate for certain items at 13% and 6%.