Corporate tax in Portugal

Summary

Corporate Income Tax Rate (%)
Corporate Income Tax 21 (a)
Municipal Surcharge 1.5 (b)
State Surcharge 3 / 5 / 7 (c)
Branch Tax Rate (%) 21 (a)
Capital Gains Tax Rate (%) 21 (d)
Withholding Tax (%)
Dividends
Paid to Residents 25 (e) (f)
Paid to Nonresidents 25 (f) (g)
Interest
Shareholders’ Loans
Resident Shareholders 25 (e)
Nonresident Shareholders 25 (f) (g)
Bonds Issued by Companies
Resident Holders 25 (e) (f)
Nonresident Holders 25 (f) (g) (h) (.i) (j)
Government Bonds 25 (f) (j)
Bank Deposits
Resident Depositors 25 (e) (f)
Nonresident Depositors 25 (f) (g)
Royalties
Paid to Residents 25 (e)
Paid to Nonresidents 25 (f) (g)
Payments for Services and Commissions
Paid to Residents 0
Paid to Nonresidents 25 (k)
Rental Income
Paid to Residents 25 (e)
Paid to Nonresidents 25 (e)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 12 (l)

a) Corporate income tax (Imposto sobre o Rendimento das Pessoas Colectivas, or IRC) applies to resident companies and nonresident companies with per­manent establishments (PEs) in Portugal. Small and medium-sized compa­nies can benefit from a 17% reduced rate for the first EUR15,000 of taxable profit. See Section B for details of other rates.

b) A municipal surcharge of 1.5% is generally imposed on the taxable profit determined for IRC purposes. Certain municipalities do not levy the sur­charge. For further details, see Section B.

c) A state surcharge of 3% is imposed on the taxable profit determined for IRC purposes between EUR1,500,000 and EUR7,500,000. If the taxable profit for IRC purposes exceeds EUR7,500,000, the state surcharge is levied at a rate of 5% on the excess up to EUR35 million. If the taxable profit for IRC pur­poses exceeds EUR35 million, the state surcharge is levied at a rate of 7% on the excess.

d) See Section B.

e) Income must be declared and is subject to the normal tax rates. Amounts withheld may be credited against the IRC due. See Section B.

f) Investment income paid to tax-haven entities is subject to a 35% withholding tax. The same tax applies if the beneficial owner of the income is not prop­erly disclosed.

g) These rates may be reduced by tax treaties or by European Union (EU) Direc­tives. Under the EU Parent-Subsidiary Directive (also applicable to dividends paid to Swiss parent companies), the rate on dividends may be reduced to 0%. The rate may also be reduced to 0% if the beneficiary is resident in a tax treaty country and if certain other conditions are met. Under the EU Interest and Royalties Directive, the rate on interest or royalties may be reduced to 0% if the interest or royalties are paid between EU associated companies.

h) This tax applies to interest from private and public company bonds.

i) This tax applies to interest on bonds issued after 15 October 1994. A 25% withholding tax applies to interest on bonds issued on or before that date.

j) Interest on certain bonds traded on the stock exchange and paid to nonresi­dents not operating in Portugal through a PE may in certain circumstances be exempt from tax. The same exemption may also apply to capital gains derived from disposals of such bonds. The exemption does not apply to entities resi­dent in tax havens (except central banks and other government agencies), unless an applicable tax treaty or an exchange of information agreement with Portugal exists.

k) The 25% rate applies to most services and commissions. The 25% rate applies to services performed by artists and sportspersons and to fees paid to board members. This tax does not apply to communication, financial and transporta­tion services. The tax is eliminated by most tax treaties, but this may not be the case for income derived from the performance of artists and sportspersons.

l) For tax losses computed before 2010, the prior six-year carryforward period applies. For tax losses computed in 2010 or 2011, a four-year carryforward period applies. For tax losses computed in 2012 or 2013, a five-year carry-forward period applies. For tax losses used from 1 January 2014, the amount deductible each year is capped by 70% of the taxable profit for the year. Except for micro, small and medium-sized companies, the carryforward pe­riod will be reduced to five years, effective from 2017.

Taxes on corporate income and gains

Corporate income tax. Corporate income tax (Imposto sobre o Rendimento das Pessoas Colectivas, or IRC) is levied on resident and nonresident entities.

Resident entities. Companies and other entities, including non­legal entities, whose principal activity is commercial, industrial or agricultural, are sub ject to IRC on worldwide profits, but a foreign tax credit may reduce the amount of IRC payable (see Foreign tax relief).

Companies and other entities, including non-legal entities, that do not carry out commercial, industrial or agricultural activities, are generally subject to tax on their worldwide income (for details regarding the calculation of the taxable profit of these entities, see Section C).

Nonresident entities. Companies or other entities that operate in Portugal through a PE are subject to IRC on the profits attribut­able to the PEs.

Companies or other entities without a PE in Portugal are subject to IRC on income deemed to be obtained in Portugal.

For tax purposes, companies or other entities are considered to have a PE in Portugal if they have a fixed installation or a perma­nent representation in Portugal through which they engage in a commercial, industrial or agricultural activity. Under rules that generally conform to the Organisation for Eco nomic Co-operation and Development (OECD) model convention, a PE may arise from a building site or installation project that lasts for more than six months or from the existence of a dependent agent. Under these rules, commissionaire structures, dependent agents and ser­vices rendered in Portugal are more likely to result in a PE for IRC purposes.

Double tax treaties may further limit the scope of a PE in Portugal.

Tax rates. For 2016, IRC is levied at the following rates.

Type of enterprise Rate (%)
Companies or other entities with a head office or effective management control in Portugal, whose principal activity is
commercial, industrial or agricultural
21
Companies or other entities with a head
office or effective management control
in the autonomous region of the Azores,
or with a branch, office, premises or other
representation there
16.8
Companies or other entities with a head
office or effective management control in
the autonomous region of the Madeira, or
with a branch, office, premises or other
representation there
21
Entities other than companies with a head
office or effective management control in
Portugal, whose principal activity is not
commercial, industrial or agricultural
21
PE.s 21
Nonresident companies or other entities
without a head office, effective management
control or a PE in Portugal
Standard rate 25
Rental income 25

Certain types of income earned by companies in the last category of companies listed above are subject to the following withhold­ing taxes.

Type of income Rate (%)
Copyrights and royalties 25
Technical assistance 25
Income from shares 25
Income from government bonds 25
Revenues derived from the use of, or the right to use, equipment 25
Other revenues from the application of capital 25
Payments for services rendered or used in Portugal, and all types of commissions 25*

* This tax does not apply to communications, financial and transportation ser­vices. It is eliminated under most tax treaties.

Applicable double tax treaties, EU directives or the agreement entered into between the EU and Switzerland may reduce the above withholding tax rates.

A 35% final withholding tax rate applies if income is paid or made available in a bank account and if the beneficial owner is not identified. A 35% final withholding tax rate also applies to investment income obtained by an entity located in a tax haven.

A municipal surcharge (derrama municipal) is imposed on resi­dent companies and nonresident companies with a PE in Portugal. The rate of the municipal surcharge, which may be up to 1.5%, is set by the respective municipalities. The rate is applied to the tax­able profit determined for IRC purposes. Consequently, the maxi­mum combined rate of the IRC and the municipal surcharge on companies is 22.5%.

A state surcharge (derrama estadual) is also imposed on resident companies and nonresident companies with a PE in Portugal. The rate of the state surcharge, which is 3%, is applied to the taxable profit determined for IRC purposes between EUR1,500,000 and EUR7,500,000. For taxable profits exceeding EUR7,500,000, a 5% rate of state surcharge is levied on the excess up to EUR35 mil­lion. For taxable profits exceeding EUR35 million, a 7% rate of state surcharge is levied on the excess. Consequently, the maxi­mum combined rate of the IRC and the surcharges on companies is 29.5%.

Companies established in the free zones of Madeira and the Azores enjoyed a tax holiday until 2011. The more important of the two, Madeira, is internationally known as the Madeira Free Zone (Zona Franca da Madeira). An extended regime has been ap­proved for companies licensed between 2007 and 2013 (extended to 31 December 2014). Under this extended regime, the reduced rate is 5% for 2013 through 2020. This rate applies to taxable in­come, subject to a cap, which is generally based on the existing number of jobs. Requirements and limitations apply to the issu­ance of licenses for the Madeira Free Zone. This regime is also available for companies licensed before 2007. However, it was subject to a formal option that should have been elected on or before 30 December 2011. A new regime has been approved for companies licensed between 2015 and 2020. Under the new re­gime, the reduced rate is 5% for 2015 through 2027. This rate applies to taxable income, subject to a cap, which is generally based on the existing number of jobs as well as other criteria (annual gross value-added, employment costs or turnover). New requirements and limitations apply to the issuance of licenses for the Madeira Free Zone. The new regime is also available for companies licensed before 2015. In addition to the benefits that previously been available, the new regime provides for exemp­tions regarding dividends and interest paid to nonresident share­holders, provided certain conditions are met.

Significant incentives are also available for qualifying new invest­ment projects established before 31 December 2020. To qualify for the incentives, the projects must satisfy the following requirements:

  • They must have a value exceeding EUR3 million.
  • They must develop sectors considered to be of strategic impor­tance to the Portuguese economy.
  • They must be designed to reduce regional economic imbalances, create jobs and stimulate technological innovation and scientific research in Portugal.

Qualifying projects may enjoy the following tax benefits for up to 10 years:

  • A tax credit of 10% to 20% of amounts invested in plant, equip­ment and intangibles used in the project. However, buildings and furniture qualify only if they are directly connected to the development of the activity.
  • An exemption from, or a reduction of, the municipal real estate holding tax for buildings used in the project.
  • An exemption from, or a reduction of, the property transfer tax (see Section D) for buildings used in the project.
  • An exemption from, or a reduction of, the stamp duty for acts and contracts necessary to complete the project, including finance agreements.

Portuguese tax law also provides for significant tax credits and deductions concerning research and development (R&D) invest­ments, fixed-asset investments (some of which must have been performed by 31 December 2013) and creation of jobs. In addi­tion, a specific tax benefit is introduced for the reinvestment of profits by small and medium-sized companies. Under this mea­sure, such companies can benefit from a tax credit of 10% of the retained earnings (capped to the lower of 25% of the IRC liability and EUR500,000 per year) reinvested in the acquisition of eligi­ble fixed assets if several conditions are met.

Micro, small and medium-sized companies held by individuals, venture capital companies and business angels (see Capital gains) can benefit for a four-year period from a notional interest deduc­tion of 5% on the amount of cash contributions by shareholders to share capital made on or after 1 January 2014.

Certain incentives are also available to land transportation of pas­sengers and stock activities, car-sharing and bike-sharing, and activities related to bicycle fleets.

Undertakings for Collective Investment. Effective from 1 July 2015, a special tax regime is introduced for Undertakings for Collective Investment (UCIs) incorporated and operating in ac­cordance with Portuguese law. UCIs can take the form of a fund or a company. UCIs are subject to IRC but benefit from a tax ex­emption for investment income, rental income and capital gains, unless the income or gains originated from a tax haven. UCIs are exempt from municipal and state surcharges.

UCIs are liable to stamp duty on net assets, which is payable quarterly. The rate of tax is 0.0025% for UCIs investing in securi­ties and 0.0125% in the remaining cases.

Resident participants in UCIs are subject to tax at IRC rates and surcharges (legal entities) or 28% (individuals).

Nonresident participants benefit from a tax exemption regarding securities’ UCIs, while a 10% rate applies with respect to real estate UCIs. Nonresident entities controlled more than 25% by resident entities, as well as entities located in tax havens, are sub­ject to tax at a rate between 25% and 35%, depending on the na­ture of the income and the type of UCI.

Simplified regime of taxation. Resident companies that have an­nual turnover not exceeding EUR200,000 and total assets not ex­ceeding EUR500,000 and that meet certain other conditions may opt to be taxed under a simplified regime of taxation. The taxable income corresponds to a percentage ranging between 4% and 100% of gross income, depending on the nature of the income.

Capital gains. Capital gains derived from the sale of fixed assets and from the sale of financial assets are included in taxable in – come subject to IRC. The capital gain on fixed assets is equal to the difference between the sales value and the acquisition value, adjusted by depreciation and by an official index. The tax author­ities may deter mine the sales value for real estate to be an amount other than the amount provided in the sales contract.

Fifty percent of the capital gains derived from disposals of tan­gible fixed assets, intangibles assets and non-consumable bio­logical assets held for more than one year may be exempt if the sales proceeds are invested in similar assets during the period beginning one year before the year of the disposal and ending two years after the year of the disposal. A statement of the intention to reinvest the gains must be included in the annual tax return for the year of disposal. The remaining 50% of the net gains derived from the disposal is subject to tax in the year of the disposal.

If only a portion of the proceeds is reinvested, the exemption is reduced proportionally. If by the end of the second year following the disposal no reinvestment is made, the net capital gains re – maining untaxed (50%) are added to taxable profit for that year, increased by 15%.

A full participation regime is available for capital gains and losses on shareholdings held for at least 12 months if the remain­ing conditions for the dividends participation regime are met. The regime does not apply if the main assets of the company that issued the shares being transferred are composed, directly or in­directly, of Portuguese real estate (except real estate allocated to an agricultural, industrial or commercial activity [other than real estate trading activities]). This applies to gains and losses from onerous transfers of shares and other equity instruments (namely, supplementary contributions), capital reductions, restructuring transactions and liquidations.

Losses from the onerous transfer of shareholdings in tax-haven entities are not allowed as deductions. Losses resulting from shares and equity instruments are not deductible in the portion corresponding to the amount of dividends and capital gains that were excluded from tax during the previous four years under the participation regime or the underlying foreign tax credit relief.

Liquidation proceeds are treated as capital gains or losses. The losses from the liquidation of subsidiaries are deductible only if the shares have been held for at least four years. If within the four-year period after the liquidation of the subsidiary, its activity is transferred so that it is carried out by a shareholder or a related party, 115% of any loss deducted by the shareholder on liquida­tion of the subsidiary is added back.

Tax credits are available for a venture capital company (sociedade de capital de risco, or SCR) as a result of investments made in certain types of companies.

Nonresident companies that do not have a head office, effective management control or a PE in Portugal are subject to IRC on capital gains derived from sales of corporate participations, secu­rities and financial instruments if any of the following apply:

  • More than 25% of the nonresident entities is held, directly or indirectly, by resident entities (unless the seller is resident in an EU, EEA or double tax treaty jurisdiction and certain require­ments are met).
  • The nonresident entities are resident in territories listed on a blacklist contained in a Ministerial Order issued by the Finance Minister.
  • The capital gains arise from the transfer of shares held in a prop­erty company in which more than 50% of the assets comprise Portuguese real estate or in a holding company that controls such a company.

Nonresident companies that do not have a head office, effective management control or a PE in Portugal are taxed at a 25% rate on taxable capital gains derived from disposals of real estate, shares and other securities. For this purpose, nonresident entities must file a tax return. A tax treaty may override this taxation.

Exit taxes. The IRC Code provides that the transfer abroad of the legal seat and place of effective management of a Portu guese company, without the company being liquidated, results in a tax­able gain or loss equal to the difference between the market value of the assets and the tax basis of assets as of the date of the deemed closing of the activity. This rule does not apply to assets and liabilities remaining in Portugal as part of the property of a Portuguese PE of the transferor company if certain requirements are met.

The exit tax also applies to a PE of a nonresident company on the closing of an activity in Portugal or on the transfer of the com-pany’s assets abroad.

Following the European Court of Justice decision in Case C-38/10, significant changes to the existing exit tax rules were made. Under the revised rules, on a change of residency to an EU or EEA member state, the taxpayer may now opt for one of the following alternatives:

  • Immediate payment of the full tax amount
  • Payment of the tax whenever the gains are (deemed) realized
  • Payment of the full tax amount in equal installments during a five-year period

The deferral of the tax payment triggers late payment interest. In addition, a bank guarantee may be requested. This guarantee equals the tax due plus 25%. In addition, annual tax returns are required if the tax is deferred.

Administration. Companies with a head office, effective manage­ment control or a PE in Portugal are re quir ed to make estimated payments with respect to the current financial year. The pay­ments are due in July, September and December. For companies with turnover of up to EUR500,000, the total of the estimated payments must equal at least 80% of the preceding year’s tax. For companies with turnover exceeding EUR500,000, the total of the estimated payments must equal at least 95% of the preceding year’s tax. The first payment is mandatory. However, the obliga­tion to pay the other installments depends on the tax situation of the company. For example, a company may be excused from mak­ing the third installment if it establishes by adequate evidence that it is suffering losses in the current year. However, if a com­pany ceases making installment payments and if the balance due exceeds by 20% or more the tax due for that year under normal conditions, compensatory interest is charged. Companies must file a tax return by 31 May of the following year. Companies must pay any balance due when they file their annual tax return.

Companies with a head office, effective management control or a PE in Portugal that have adopted a financial year other than the calendar year must make estimated payments as outlined above, but in the 7th, 9th and 12th months of their financial year. They must file a tax return by the end of the 5th month following the end of that year.

Advance payments concerning the state surcharge are also re­quired in the 7th, 9th and 12th months of the tax year.

In addition, companies must make a Special Payment on Account (SPA) in the 3rd month of the financial year, or they can elect to pay the amount in the 3rd and 10th months. The SPA is equal to the difference between the following amounts:

  • 1% of turnover of the preceding year, with a minimum limit of EUR1,000, or, if the minimum limit is exceeded, EUR1,000 plus 20% of the excess with a maximum limit of EUR70,000
  • The ordinary payments on account made in the preceding year

The SPA may be subtracted from the tax liability in the following six years, or refunded if, on the occurrence of certain events (for example, the closing of activity), a petition is filed.

A nonresident company without a PE in Portugal must appoint an individual or company, resident in Portugal, to represent it con­cerning any tax liabilities. The representative must sign and file the tax return using the general tax return form. IRC on capital gains derived from the sale of real estate must be paid within 30 days from the date of sale. IRC on rents from leasing build­ings must be paid by 31 May of the following year.

Binding rulings. A general time frame of 150 days exists in the tax law to obtain a binding ruling. This period can be reduced to 90 days if the taxpayer pays a fee between EUR2,550 and EUR25,500 and if the ruling petition with respect to an already executed transaction contains the proposed tax treatment of the transaction as understood by the taxpayer. This tax treatment is deemed to be tacitly accepted by the tax authorities if an answer is not given within the 90-day period.

Dividends. Dividends paid by companies to residents and nonresi­dents are generally subject to withholding tax at a rate of 25%.

On distributions to resident parent companies, the 25% withhold­ing tax is treated as a payment on account of the final IRC due.

A resident company subject to IRC may deduct 100% of divi­dends received from another resident company if all of the follow­ing conditions apply:

  • The recipient company owns directly or directly and indirectly at least 10% of the capital or voting rights of the payer.
  • The recipient company holds the interest described above for an uninterrupted period of at least one year that includes the date of distribution of the dividends, or it makes a commitment to hold the interest until the one-year holding period is complete.
  • The payer of the dividends is a Portuguese resident company that is also subject to, and not exempt from, IRC or Game Tax (tax imposed on income from gambling derived by entities such as casinos).

A 100% dividends-received deduction is granted for dividends paid by entities from EU member countries to Portuguese entities (or Portuguese PEs of EU entities) if the above conditions are satis­fied and if both the payer and recipient of the dividends qualify under the EU Parent-Subsidiary Directive. The same regime is also available for dividends received from European Economic Area (EEA) subsidiaries. The participation exemption regime also applies to dividends from subsidiaries in other countries, except tax havens, if the subsidiary is subject to corporate tax at a rate not lower than 60% of the standard IRC rate (this requirement can be waived in certain situations).

The participation exemption regime does not apply in certain circumstances, including among others, the following:

  • The dividends are tax deductible for the entity making the dis­tribution.
  • The dividends are distributed by an entity not subject to or ex­empt from income tax, or if applicable, the dividends are paid out of profits not subject to or exempt from income tax at the level of sub-affiliates, unless the entity making the distribution is resident of an EU or an EEA member state that is bound to administrative cooperation in tax matters equivalent to that es­tablished within the EU.

If a recipient qualifies for the 100% deduction, the payer of the dividends does not need to withhold tax. This requires the satisfac­tion of a one-year holding period requirement before distribution.

A withholding tax exemption applies to dividends distributed to EU and EEA parent companies and to companies resident in treaty countries that have entered into tax treaties with Portugal that includes an exchange of tax information clause, owning (directly or directly and indirectly through eligible companies) at least 10% of a Portuguese subsidiary for more than one year. Com panies outside the EU and EEA must be subject to corporate tax at a rate not lower than 60% of the standard IRC rate. A full or partial refund of the withholding tax may be available under certain conditions. A withholding tax exemption is also available for dividends paid to a Swiss parent company, but the minimum holding percentage is increased to 25%.

The participation exemption on dividends received and the with­holding tax on distributed dividends does not apply if an arrange­ment or a series of arrangements are performed with the primary purpose, or with one of the principal purposes, to obtain a tax advantage that frustrates the goal of eliminating double taxation on the income and if the arrangement or series of arrangements is not deemed genuine, taking into account all of the relevant facts and circumstances. For this purpose, an arrangement or series of arrangements is deemed not to be genuine if it is not performed for sound and valid economic reasons and does not reflect eco­nomic substance.

Foreign PE profits. Resident taxpayers may opt for an exemption regime for foreign PE profits. Under this regime, foreign PE loss­es are also not deductible if the PE is subject to one of the taxes listed in the EU Parent-Subsidiary Directive or to corporate tax at a rate not lower than 60% of the standard IRC rate and if the PE is not located in a tax-haven territory.

Transactions between the head office and the foreign PE must respect the arm’s-length principle, and the costs related to the PE are not deductible for the head office.

The following are recapture rules:

  • PE profits are not exempt up to the amount of PE losses de­ducted by the head office in the 12 preceding years (5 years from 2017).
  • If the PE is incorporated, subsequent dividends and capital gains from shares are not exempt up to the amount of PE losses de­ducted by the head office in the 12 preceding years (5 years from 2017).
  • If the exemption regime ceases to apply, the PE losses as well as the dividends and capital gains from shares (if the PE was previ­ously incorporated) are not deductible or exempt, respectively, up to the amount of the PE profits that were exempt from tax during the preceding 12 years (5 years from 2017).

Foreign tax relief. Foreign-source income is taxable in Portugal. However, direct foreign tax may be credited against the Portuguese tax liability up to the amount of IRC attributable to the net foreign-source income. The foreign tax credit can be carried forward for five years.

In addition, taxpayers may opt to apply an underlying foreign tax credit with respect to foreign-source dividends that are not eligible for the participation exemption regime. Several conditions must be met, including the following:

  • The minimum holding percentage is 10% for at least 12 months.
  • The entity distributing the dividends is not located in a tax-haven territory, and indirect subsidiaries are not held through a tax-haven entity.

Determination of trading income

General. Taxable profit is determined according to the following rules:

  • For companies with a head office or effective management con­trol in Portugal that are principally engaged in commercial, agricultural or industrial activities, the taxable profit is the net accounting profit calculated in accordance with Portuguese gen­erally accepted accounting principles (GAAP), as adjusted by the IRC Code.
  • For companies with a head office or effective management con­trol in Portugal that do not principally engage in commercial, industrial or agricultural activities, the taxable profit is the net total of revenues from various categories of income as described in the Personal Tax (IRS) Code, less expenses.
  • For PEs, the taxable profit is determined as outlined in the first item. In calculating taxable profit, general administrative ex­penses that are attributable to the PE may be deducted as a cost if justified and accept able to the fiscal authorities.

Effective from 2010, Portuguese GAAP is similar to International Financial Reporting Standards (IFRS). In addition, the tax law has been adapted to the new GAAP, but several adjustments are still required between net accounting profit and taxable profit.

An intellectual property (IP) regime provides for a 50% exclusion from the tax base with respect to income derived from contracts for the transfer or temporary use of patents and industrial designs or models. To benefit from the IP regime, several conditions must be satisfied. This regime applies to patents and industrial designs or models registered on or after 1 January 2014.

Expenses that are considered essential for the generation or main­tenance of profits are deductible. However, certain expenses are not deductible including, but not limited to, the following:

  • The tax depreciation of private cars, on the amount of the acqui­sition price exceeding EUR25,000 but not exceeding EUR62,500 (de pending on the acquisition date and type of vehicle), as well as all expenses concerning pleasure boats and tourism airplanes, except for those allocated to public transportation companies or used for rental purposes as part of the company’s normal activities
  • Daily allowances and compensation for costs incurred in travel­ing in the employees’ own vehicles at the service of the employer that are not charged to clients if the company does not maintain a control map of the expenses, allowing it to identify the place, length and purpose of the displacements, except for the amounts on which the beneficiary is subject to IRS
  • Expenses shown on documents issued by entities without a valid taxpayer number
  • Improperly documented expenses
  • IRC and surcharges (see Section B)
  • Penalties and interest charges
  • Contribution on banking sector (see Section D)

Assets under financial leases are deemed to be owned by the lessee, and consequently the lessee may deduct only applicable tax depre­ciation and any interest included in the rent payments. Special rules apply to sale and leaseback transactions.

Although representation expenses and expenses related to pri­vate cars are deductible with some limits, they are subject to a special stand-alone tax at a rate of 10%. This rate is increased to 27.5% for expenses related to private cars if the acquisition price of the car is between EUR25,000 and EUR35,000, or to 35% if the acquisition price of the car exceeds EUR35,000. The rates applicable to expenses related to private cars may be signifi­cantly reduced, depending on the type of car (electric, liquefied petroleum gas [LPG] or natural gas powered and hybrid plug-in).

The 5% tax also applies to tax-deductible daily allowances and compensation for costs incurred in traveling in the employees’ own vehicles at the service of the employer that is not charged to clients and not subject to IRS. The tax also applies if such ex – penses are not tax deductible as a result of the lack of proper doc­umentation and if the taxpayer incurs a tax loss in the financial year.

Undocumented expenses are not deductible. In addition, these expenses are subject to a special stand-alone rate of 50% (70% with respect to entities partially or totally exempt from IRC, not principally engaged in commercial, industrial or agricultural ac­tivities or subject to the Game Tax). The tax authorities may clas­sify an expense as undocumented if insufficient supporting docu­mentation exists.

Certain indemnities and compensation paid to board members and managers (including “golden parachutes”) are subject to a special stand-alone tax at a rate of 35%.

A special stand-alone tax at a rate of 35% applies to bonuses and other variable compensation paid to board members and manag­ers, if such compensation exceeds 25% of the annual remunera­tion and EUR27,500. This tax does not apply if at least 50% of the payment is deferred over a period of at least three years and conditioned on the positive performance of the company during such period.

A “Robin Hood” tax is levied on both oil production and distribu­tion companies and is charged based on the rise in value of the oil stocks held. For tax purposes, the first-in, first-out (FIFO) method or the weighted average cost method is deemed to be used for the valuation of oil stocks. The positive difference between the gross margin determined based on these methods and the gross margin determined under the accounting method used by the company is subject to a stand-alone tax at a flat rate of 25%. This tax is not deductible for IRC purposes and cannot be reflected in the purchase price paid by the final consumer.

The above stand-alone taxes are imposed regardless of whether the company earns a taxable profit or suffers a tax loss in the year in which it incurs the expenses. In addition, all stand-alone rates are increased by 10 percentage points if the taxpayer incurs a tax loss in the relevant year.

Inventories. Inventories must be consistently valued by any of the following criteria:

  • Effective cost of acquisition or production
  • Standard costs in accordance with adequate technical and accounting principles
  • Cost of sales less the normal profit margin
  • Cost of sales of products cropped from biological assets, which is determined at the time of cropping, less the estimated costs at the point of sale, excluding transportation and other costs re – quired to place the products in the market
  • Any other special valuation considered basic or normal, pro­vided that it has the prior approval of the tax authorities

Changes in the method of valuation must be justifiable and accept­able to the tax authorities.

Provisions. The following provisions, among others, are deduct­ible:

  • Bad and doubtful debts, based on a judicial claim or on an analy­sis of the accounts receivable
  • Inventory losses (inventory values in excess of market value)
  • Warranty expenditures
  • Technical provisions imposed by the Bank of Portugal or the Portuguese Insurance Institute

Depreciation. In general, depreciation is calculated using the straight-line method. The declining-balance method may be used for new tangible fixed assets other than buildings, office furniture and automobiles not used for public transport or rental. Maxi mum depreciation rates are established by law for general purposes and for certain specific industries. If rates that are less than 50% of the official rates are used, total depreciation will not be achieved over the life of the asset. The following are the principal official straight-line rates.

Asset Rate (%)
Commercial buildings 2
Industrial buildings 5
Office equipment 12.5 to 25
Motor vehicles 12.5 to 25
Plant and machinery 5 to 33.33

Companies may request the prior approval of the tax authorities for the use of depreciation methods other than straight-line or declining-balance or rates up to double the official rates. Approval is granted only if the request is justified by the company’s busi­ness activities.

For tax purposes, the maximum depreciable cost of private motor cars is between EUR25,000 and EUR50,000, depending on the acquisition date and type of vehicle.

Intangibles (excluding patents and goodwill from shares) that are acquired on or after 1 January 2014 for consideration and that do not have a defined economic life can be amortized over 20 years. Investment properties and non-consumable biological assets that are subsequently measured at fair value can also be depreciated during the remaining period of their maximum economic life.

Relief for losses. Tax losses may be carried forward for 12 years (6 years if the losses were computed before 2010, 4 years if the losses were computed in 2010 or 2011, or 5 years if the losses were computed in 2012 or 2013). For losses incurred in or after 2017, the 12-year period is reduced to 6 years (except for micro, small and medium-sized companies). For tax losses used from 1 January 2014, the amount deductible each year is capped at 70% of the taxable profit for the year. Loss carrybacks are not allowed. Tax losses existing at the time of the occurrence of certain changes may not be carried forward. A change of at least 50% of the share­holders or voting rights can trigger the cancellation of tax losses, unless it is derived from certain situations.

Groups of companies. Resident groups of companies may elect to be taxed on their consolidated profit. To qualify for tax consol­idation, a group must satisfy certain conditions, including the following:

  • The parent company must hold, directly or indirectly, at least 75% of the subsidiaries’ registered capital, provided that the hold ing accounts for more than 50% of the voting rights.
  • The parent company may not be deemed to be dominated by the other resident company.
  • All companies belonging to the group must have their head office and place of effective management in Portugal.
  • The parent company must hold the participation in the subsid­iary for more than one year beginning from the date the regime begins to be applied.
  • All group companies must be subject to IRC at the standard rate of 21%.

Effective from 2015, tax grouping is also allowed if the parent entity of the Portuguese resident companies is a local branch of an EU or EEA resident company or if Portuguese resident com­panies are under common control by the same EU or EEA resi­dent company.

Applications for consolidated reporting must be filed with the Ministry of Finance before the end of the third month of the year for which the application is intended to take effect.

Losses of individual group companies may be offset against tax­able profit within the consolidated group, in accordance with the following rules:

  • Losses of individual group companies incurred in years before the consolidation can only be offset up to the amount of the tax­able profit derived by the company that incurred such losses.
  • Consolidated losses may be offset against consolidated profits only.
  • Consolidated losses may not be offset against profits generated by companies after they leave the group.
  • The consolidated group may not deduct losses incurred by com­panies after they leave the group.

The cap of 70% of the taxable profit with respect to deductible losses also applies for tax group purposes.

The consolidated taxable profit equals the sum of the group’s com­panies’ taxable profits or losses, as shown in each of the respec­tive tax returns.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate
Value-added tax (IVA), levied on goods and
services, other than exempt services
General rates
Portugal 23.00%
Madeira 22.00%
Azores 18.00%
Intermediate rates
Portugal 13.00%
Madeira 12.00%
Azores 9.00%
Reduced rates
Portugal 6.00%
Madeira 5.00%
Azores 4.00%
Social security contributions, on salaries, wages and regular bonuses but excluding meal subsidies, up to a specified amount; paid by
Employer 23.75%
Employee 11.00%
Property transfer tax, payable by purchaser
Buildings 6.50%
Farm land 5.00%
Offshore companies 10.00%
Municipal real estate holding tax; local tax
imposed annually on the assessed tax value
of the property on 31 December; tax payable
by the owner of the property; tax rate for
urban property established by the Municipal
Assembly in the location of the property
Offshore companies 7.50%
Other entities 0.3% to 0.45%
Stamp duty
Loans and mortgages (maximum rate) 0.60%
Interest on bank loans 4.00%
Transfer of real estate 0.80%
Insurance premiums 3% to 9%
Transfer of business as a going concern 5.00%
Immovable property with a tax value
exceeding EUR1 million
For residential purposes 1.00%
Owned by offshore companies 7.50%
Contribution on banking sector; imposed
on Portuguese resident credit institutions
and branches of credit institutions resident
outside the EU
Debt deducted by own funds (Tier 1 and
Tier 2; own funds are computed based on
the regulations of the Bank of Portugal)
and deposits covered by the Deposits
Guarantee Fund
0.01% to 0.11%
Notional value of derivate financial
instruments not stated in the balance sheet
0.0001% to
0.0003%
Contribution on energy sector; applicable
to entities that integrate the national energy
sector and that have their domicile, legal seat,
effective management or PE in Portugal; the
tax base is the sum of the value of the
tangible fixed assets, intangible fixed assets
(except industrial property) and financial
assets allocated to concessions or licensed
activities; for regulated activities, the tax base
is the value of the regulated assets, if higher
0.285% to
0.85%
Contribution on pharmaceutical industry; applicable to entities that commercialize medicines; tax base is the turnover for
each quarter
2.5% to 14.3%
Contribution on light plastic bags; applicable
to entities that produce, import or acquire
light plastic bags from outside mainland
Portugal; tax base is each light plastic bag
EUR0.08

Miscellaneous matters

Foreign-exchange controls. Portugal does not impose foreign-exchange controls. No restrictions are imposed on inbound or outbound investments.

Mergers and reorganizations. Mergers and other types of corporate reorganizations may be tax-neutral in Portugal if certain condi­tions are met.

Controlled foreign entities. The rules described below apply to controlled foreign entities (CFEs).

A Portuguese resident owning, directly or indirectly, at least 25% in the capital, voting rights or rights to income or estate of a CFE is subject to tax on its allocable share of the CFE’s net profit or income. However, if at least 50% of the CFE’s capital or rights is owned by Portuguese residents, the percentage described in the preceding sentence is reduced to 10%. For computing the 25% or 10% threshold, the capital and rights owned, directly or indirectly, by related parties are also considered.

An entity is deemed to be subject to a clearly more favorable tax regime if the entity is not subject to corporate income tax or is subject to tax at a rate of tax equal to or lower than 60% of the IRC standard rate or if its place of business is included in a black­list of tax-haven territories provided in a Ministerial Order of the Finance Minister.

Several rules, which are based on the nature of the activity and whether the activity is predominantly directed to the Portuguese market, may result in the non-imputation of profits or income.

The income of the CFE is allocated to the first company subject to the regular IRC rate. This prevents the imposition of a Madeira Free Zone company, which may be exempt from tax or subject to a reduced rate but is considered to be resident in Portugal for tax purposes, between a CFE and a Portuguese resident company.

The CFE rules do not apply to entities resident in the EU or EEA if in the latter case a cooperation agreement on tax matters exists and if the taxpayer proves that the incorporation and functioning of the nonresident entity is based on valid economic reasons and that the entity carries out an agricultural, commercial, industrial or service activity.

In general, payments made by Portuguese residents to nonresidents subject to a clearly more favorable tax regime are not de ductible for tax purposes, and the payers are subject to a stand-alone tax rate of 35% (55% for entities partially or fully exempt from IRC or not principally engaged in commercial, industrial or agricul­tural activities). However, these payments may be deducted and are not subject to stand-alone taxation if the payer establishes the following:

  • The payments were made in real transactions.
  • The payments are normal.
  • The amounts of the payments are not unreasonable.

The nondeductibility of payments to nonresidents subject to a clearly more favorable tax regime also applies if the payments are made indirectly to those entities; that is, the payer knew or should have known of the final destination of such payments. This is deem ed to occur if special relations exist between the payer and the nonresident entity subject to a clearly more favorable tax re­gime or between the payer and the intermediary that makes the payment to the nonresident entity subject to a clearly more favor­able tax regime.

Related-party transactions. For related-party transactions (trans­actions between parties with a special relationship), the tax author­ities may make adjustments to taxable profit that are necessary to reflect transactions on an arm’s-length basis. The IRC Code con­tains transfer-pricing rules, which are applied on the basis of the OECD guidelines. In addition, recent legislation had provided de tails regarding these rules.

A special relationship is deemed to exist if one entity has the capacity, directly or indirectly, to influence in a decisive manner the management decisions of another entity. This capacity is deem­ed to exist in the following relationships:

  • Between one entity and its shareholders, or their spouses, ascen­dants or descendants, if they possess, directly or indirectly, 20% of the capital or voting rights of the entity
  • Between one entity and the members of its board, administration, management or fiscal bodies, as well as the members’ spouses, ascendants and descendants
  • Between any entities bound by group relations
  • Between any entities bound by dominance relations
  • Between one entity and the other if the first entity’s business activities depend on the other entity as a result of a commercial, financial, professional or legal relationship
  • Between a resident entity and an entity located in a blacklisted territory

The IRC Code provides for Advance Pricing Agreements. It now also provides for Country-by-Country Reporting.

Debt-to-equity rules. The previous thin-capitalization rules con­tained in the IRC Code are abolished, effective from 2013.

A limitation to the deduction of interest expenses (net of inter­est revenues) applies, effective from 2013. The tax deduction for net financial expenses is capped by the higher of the following amounts:

  • EUR1 million
  • 60% of the earnings before interest, taxes, depreciation and amortization (EBITDA)

The 60% threshold will be reduced by 10 percentage points annu­ally until it reaches 30% in 2017. The nondeductible excess, as well as the unused fraction of the 30% threshold, may be carried forward to the following five years.

Effective from 2014, several adjustments are required to deter­mine the relevant EBITDA. These adjustments exclude, among others, several items that are disregarded (not taxed or not de­ductible) for tax purposes and other items specifically stated in the law.

It is possible to consider the EBITDA on a group basis if tax grouping is being applied.

Tax-planning disclosure. Certain tax planning (use of low-tax enti­ties, use of partially or fully exempt entities, use of hybrid instru­ments or entities, use of tax losses or the existence of a limitation or exclusion from responsibility clause for the promoter) must be disclosed to the tax authorities by the entity promoting the plan­ning or by the respective user (in the absence of a locally register­ed promoter). Significant penalties apply for the lack of reporting.

Treaty withholding tax rates

Dividends (%) Interest (%) Royalties (%)
Algeria 10/15 (d) 15 10
Austria 15 (b) 10 5/10 (a)
Belgium 15 (b) 15 10
Brazil 10/15 (d) 15 15
Bulgaria 10/15 (d) 10 10
Canada 10/15 (d) 10 10
Cape Verde 10 10 10
Chile 10/15 (c) 5/10/15 (n) 5/10 (o)
China 10 10 10
Colombia 10 10 10
Cuba 5/10 (j) 10 5
Cyprus 10 10 10
Czech Republic 10/15 (b)(d) 10 10
Denmark 10 (b) 10 10
Estonia 10 (b) 10 10
Finland 10/15 (b)(c) 15 10
France 15 (b) 10/12 (g) 5
Germany 15 (b) 10/15 (e) 10
Greece 15 (b) 15 10
Guinea-Bissau 10 10 10
Hong Kong SAR 5/10 (p) 10 5
Hungary 10/15 (b)(d) 10 10
Iceland 10/15 (d) 10 10
India 10/15 (d) 10 10
Indonesia 10 10 10
Ireland 15 (b) 15 10
Israel 5/10/15 (j)(l) 10 10
Italy 15 (b) 15 12
Japan 5/10 (p) 5/10 (r) 5
Korea (South) 10/15 (d) 15 10
Kuwait 5/10 (p) 10 10
Latvia 10 (b) 10 10
Lithuania 10 (b) 10 10
Luxembourg 15 (b) 10/15 (h) 10
Macau SAR 10 10 10
Malta 10/15 (b)(d) 10 10
Mexico 10 10 10
Moldova 5/10 (j) 10 8
Morocco 10/15 (d) 12 10
Mozambique 10 10 10
Netherlands 10 (b) 10 10
Norway 5/15 (p) 10 10
Pakistan 10/15 (d) 10 10
Panama 10/15 (q) 10 10
Peru 10/15 (u) 10/15 (v) 10/15 (x)
Poland 10/15 (b)(d) 10 10
Qatar 5/10 (y) 10 10
Romania 10/15 (d) 10 10
Russian Federation 10/15 (d) 10 10
Singapore 10 10 10
Slovak Republic 10/15 (b)(d) 10 10
Slovenia 5/15 (b)(j) 10 5
South Africa 10/15 (d) 10 10
Spain 10/15 (b)(c) 15 5
Sweden 10 (b) 10 10
Switzerland 0/5/15 (s) 0/10 (t) 0/5 (t)
Tunisia 15 15 10
Turkey 5/15 (j) 10/15 (k) 10
Ukraine 10/15 (d) 10 10
United Arab
Emirates 5/15 (p) 10 5
United Kingdom 10/15 (b)(c) 10 5
United States 5/15 (i) 10 10
Uruguay 5/10 (j) 10 10
Venezuela 10 10 10/12 (f)
Non-treaty
countries (m)
25 (b) 25 25

 

a) The 10% rate applies if the recipient holds directly more than 50% of the capital of the payer. For other royalties, the rate is 5%.

b) See Section B for details regarding a 0% rate for distributions to parent com­panies in EU member states.

c) The 10% rate applies if the recipient holds directly at least 25% of the capital of the payer. The 15% rate applies to other dividends.

d) The 10% rate applies if, at the date of payment of the dividend, the recipient has owned directly at least 25% of the payer for an uninterrupted period of at least two years. The 15% rate applies to other dividends.

e) The 10% rate applies to interest on loans considered to be of economic or social interest by the Portuguese government. The 15% rate applies to other interest.

f) The rate is 10% for technical assistance fees.

g) The 10% rate applies to interest on bonds issued in France after 1965. The 12% rate applies to other interest payments.

h) The 10% rate applies to interest paid by an enterprise of a contracting state if a financial establishment resident in the other contracting state may deduct such interest. The 15% rate applies to other interest payments.

i) If the beneficial owner of the dividends is a company that owns 25% or more of the capital of the payer, and if, at the date of the distribution of the divi­dends, the participation has been held for at least two years, the withholding tax rate is 5%. For other dividends, the rate is 15%.

j) The 5% rate applies if the recipient holds directly at least 25% of the capital of the payer. The higher rate applies to other dividends.

k) The 10% rate applies to interest on loans with a duration of more than two years. The 15% rate applies in all other cases.

l) The 10% rate applies to dividends paid by a company resident in Israel if the beneficial owner is a company that holds directly at least 25% of the capital of the payer of the dividends and if the dividends are paid out of profits that are subject to tax in Israel at a rate lower than the normal rate of Israeli com­pany tax.

m) See Sections A and B for details.

n) The 5% rate applies to interest on bonds and other titles regularly and sub­stantially traded on a recognized market. The 10% rate applies to interest on loans granted by banks and insurance companies as well as to interest from credit sales of machinery and equipment. The 15% rate applies in all other cases.

o) The 5% rate applies to the leases of equipment. The 10% rate applies in all other cases.

p) The 5% rate applies if the recipient holds directly at least 10% of the capital of the payer. The higher rate applies to other dividends.

q) The 10% rate applies if the recipient holds directly at least 10% of the capital of the payer. The higher rate applies to other dividends.

r) The 5% rate applies if the recipient is a bank resident in the other contracting state.

s) The 0% rate applies if the recipient holds directly at least 25% of the capital of the payer for at least two years and if both companies comply with certain requirements. The 5% rate applies if the recipient holds directly at least 25% of the capital of the payer. The higher rate applies to other dividends.

t) The 0% rate applies if the recipient and the payer are associated companies that comply with certain requirements. The higher rate applies to other inter­est and royalties.

u) The 10% rate applies if the recipient holds directly at least 10% of the capital or of the voting rights of the payer. The 15% rate applies to other dividends.

v) The 10% rate applies if the recipient is a bank resident in the other contract­ing state.

w) The rate is 10% for technical assistance fees associated with copyrights or know-how.

x) The 5% rate applies if the recipient holds directly at least 10% of the capital of the payer or the beneficiary is the state. The 10% rate applies to other dividends.

Portugal has also signed double tax treaties with Barbados, Croatia, Ethiopia, Georgia, San Marino, Senegal and Timor-Leste, but these treaties are not yet in force.