Taxation in Portugal
Taxation in PortugalUpdated on Wednesday 22nd July 2020
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Portugal is perceived as being one of the most generous European countries in regards to the tax system, in particular when it comes to non-residents and those who may qualify as non-habitual residents (Portuguese tax residents with special rights). It is an especially favorable tax system for high-net worth individuals, and is becoming more and more popular among expats. Nevertheless, its advantages and apparent straight-forwardness, the Portuguese tax system is complex and we, therefore, recommend you to contact our Portuguese law firm in order to better take advantage of all the favorable tax opportunities.
Non-Habitual Resident Program
Non-residents are taxed at 25% on employment income and 28% on capital gains and various investment incomes. Moreover, the Portuguese NHR regime is meant to attract individuals with high value added activities and those with a high net worth. In this sense, certain professions are incentivized through a 20% tax rate on Portuguese income, and, in accordance with certain conditions, a tax exemption on income of a foreign source. Qualifying professionals are:
- those with technical professions: architecture, engineering etc.;
- artistic: actors and musicians;
- health and educational: doctors, dentists, lecturers;
- those working in the IT field;
- business investors and managers.
Nevertheless, one needs not to be involved in a high value activity in order to receive exemption on other sources of income. The NHR scheme is for individuals who are not considered to have been residing in Portugal in the five years immediately preceding the application.
Corporate Tax in Portugal
The standard corporate tax is 21%, an additional surtax being added for income exceeding 1.5 million euros, as well as of up to 1.5% municipal tax adding up to a total of 29.5%. In the Azores free trade zone, a reduced tax rate of 17.5% may be available to companies.
Investment Income Tax
Investment income, consisting of capital gains, interest and dividends, currently has a tax rate of 28%. In Portugal, capital gain is generally added to regular income. In the case of gains originating in the sale of an individual’s real estate which served as the vendor’s residence, they are exempt from tax if they are invested in purchasing alternative residential real estate in Portugal or an EU/EEA country within a short period defined by law.
Wealth Tax in Portugal
The wealth tax is applicable in Portugal since 2017 for high-valued properties in this country, established at a rate of 0.4% of the value of a property owned by a company in this country. However, an important change was made this year and that is the additional rate of 1.5% applicable to real estate properties worth more than EUR 2 million. 1% is the wealth tax applicable to properties worth EUR 1 million or more, but not exceeding EUR 2 million. The purpose of the wealth tax in Portugal was to attract more money for different governmental projects and investments. If you need to know more about the wealth tax in Portugal, do not hesitate to ask for the legal advice of our Portuguese lawyers.
Are there any tax incentives for returning residents in Portugal?
Former resident companies or sole traders who want to move back to Portugal can benefit from a series of incentives among which, a 50% reduction of self-employment income tax which is applicable for 5 years. Those who qualify for such incentives are former residents who were residents in Portugal until 2015.
Tax penalties in Portugal
The Portuguese tax returns are mandatory, so failing to report such aspects can lead to penalties ranging from EUR 200 and EUR 2,500. Also, late payment penalties range from 10% rate to 20% rate, if it is the case. Besides that, interests my be involved in penalties. It is important to pay attention to these aspects and to consider the tax return a priority in your firm. You can talk to our tax advisors and also ask for legal advice if you want to avoid any penalties.
Is there any inheritance tax in Portugal?
The inheritance tax in Portugal is set at a 10% rate and applicable to Portuguese assets. In the case of estates transferred in the family, for children or spouses, there is no inheritance tax imposed. Foreigners in Portugal will have to verify if they need to pay inheritance tax in the home country. All the aspects related to the inheritance tax in Portugal, we kindly recommend you talk to one of our Portuguese lawyers. Our team can also help international entrepreneurs start a company in Portugal.
The VAT in Portugal
The standard VAT in Portugal is set at a 23% rate and it is applicable to non-essential goods and prepared food, legal services, gas, and electricity. There is also a reduced VAT rate of 13% imposed for fishing products, household services, agricultural machinery, entertainment tickets, and many others. A VAT rate of 12% applicable to the same products and services is available in Madeira, and a 9% rate in the Azores, the autonomous region of Portugal. We remind that foreign and local entrepreneurs opening companies in Portugal must register for VAT purposes, a process that can take up to 14 days. International entrepreneurs who want to know more about the VAT in Portugal and its applicability can talk to one of our Portuguese attorneys who can also provide legal assistance and support for the entire registration with the entitled authorities.
How do I register for VAT in Portugal?
The VAT registration in Portugal is mandatory for companies selling goods and services on the market, organizing live events, or having import and export activities, supply and install services, to give some examples. It is important to note that the VAT registration takes around 14 days, a time in which the Tax Identification Number or TIN is issued by the Institute for Registration and Notary Affairs under the supervision Ministry of Justice in Portugal. Here are some extra details about the VAT registration in Portugal:
- The registration for VAT is imposed on companies surpassing the EUR 30,000 threshold.
- Non-EU companies need a local fiscal representative to register for VAT.
- The obligation for VAT registration is needed for companies organizing events and conferences in Portugal.
- Companies with activities in the e-commerce sector in Portugal also need to register for VAT.
The VAT was implemented in Portugal in 1986 and replaced the transaction tax code at that time. It is important to note that the VAT has different rates in Madeira and Azores, the independent regions of Portugal.
Taxes for self-employed in Portugal
Working as a self-employed in Portugal is for sure a good option for foreigners wanting to start a business in this country. This is another proper business structure that can be easily registered in Portugal, due to the lack of complex formalities. In matters of taxation, things differ from companies in this country. There is no corporate income tax as these entities are levied through the personal tax structure. Sole traders with profits of at least EUR 2,573 per year will have to register for social contributions in Portugal and pay a tax rate of 29.6% to social security. We also mention that low tax regimes apply to annual turnover below EUR 200,000, and more details in this matter can be solicited from one of our Portuguese lawyers.
Tax minimization methods in Portugal
Tax minimization is a useful tool for entrepreneurs wanting to reduce the amount of taxes in their firm in Portugal. Tax deductions are applicable to bonuses, office supplies, and gifts or to credits paid in advance. Also, international entrepreneurs can decide on opening a foundation in Portugal and benefit from a series of tax deductions. Tax minimization methods are often considered in Portuguese companies where owners can invest the amount of money saved in varied departments. It is good to know that a tax advisor can be useful in such a situation and can be hired by any company owner in Portugal interested in the efficiency of a tax minimization method. For a better understanding of the tax system in Portugal, we kindly recommend you address your inquiries to one of our lawyers in Portugal.
Tax treaties signed by Portugal
The elimination of the double taxation on incomes is made with the help of double taxation agreements signed by Portugal with different countries. The main purpose is to protect incomes generated in Portugal from the double taxation: one in the country of origin and one in Portugal. Portugal signed double taxation treaties with Germany, the Netherlands, Russia, Bulgaria, Spain, Romania, Canada, Denmark, Venezuela, Panama, USA, Estonia, Korea, UAE, Belgium, UK, Estonia, Algeria, South Africa, Singapore, Chile, France, Lithuania, Uruguay, Korea, Qatar, China, Hungary, Israel, India, Mexico and many more. We mention that companies with operations in Portugal can benefit from the provisions of the double taxation agreements signed by Portugal with one of the above-mentioned countries. If you need more details about the taxation in Portugal, feel free to talk to one of our advisors.
Short facts about accounting services in Portugal
Most companies established in Portugal enjoy the benefits of working with accounting firms in Portugal in charge of any financial aspect in the firm. A team of accountants in Portugal will be in charge of bookkeeping, payroll, annual financial statements, tax compliances, tax minimization tools, and many more. It is best to have in attention the advantages of an accounting firm in Portugal instead of creating an entire accounting department for your company in Portugal. Here is how we can help:
- tax registration and calculation, tax returns, plus monthly accounting system closing;
- bookkeeping and payroll services for companies in Portugal;
- Internal and external audits for companies established in Portugal;
- guidance and support for a series of monthly financial reports requested by company management;
- control and supervision of all bank payments and related transactions.
We remind you that our advisors have knowledge of the local and foreign accounting regulations, acting in compliance with the International Financial Reporting Standards (IFRS).
How can our lawyers in Portugal help you?
The registration for taxation in Portugal is extremely important to both local and foreign entrepreneurs. In some cases, foreign investors might not have a clear picture of the tax regime in Portugal, so legal advice and expertise in this area are quite recommended. Our lawyers in Portugal can help investors register their companies for tax purposes, deal with tax compliance, tax return, and tax management to give a few examples.
Making investments in Portugal
International investors in Portugal are motivated by appealing incentives offered in this country, and foreigners can have all sorts of operations in a proper business climate like the one provided by this country. Having a skilled workforce, applying for a Golden Visa and taking advantage of the ease of doing business are among the attributes that make Portugal attractive to overseas investors. You might find interesting the following facts and data about investments and business in Portugal:
- Around USD 135, 777 million was the total FDI stock in Portugal in 2018;
- For investments of about EUR 350,000 foreigners receive Portuguese citizenship;
- According to the World Bank “2019 Doing Business” report, Portugal ranks 34th out of 190 worldwide economies;
- USD 4,895 million was the FDI inward flow in Portugal in 2018.
Tax rules for foreign business entities in Portugal
Foreign investors in Portugal may choose to operate through a subsidiary or a branch. The first is essentially a Portuguese company, a tax resident that is incorporated in the country and operates in the same business field as the parent company. The foreign legal entity is not liable for the subsidiary’s debts and obligations.
The Portuguese branch will need to observe the same taxation principles and will generally be taxed the same way as a resident company. Repatriated profits derived from the branch are not taxed.
For any further details regarding the Portuguese taxation, our lawyers in Portugal advise you to contact them.