Introduction
Portugal is an Iberian Peninsula country, bordered by the Atlantic to the west and south and Spain to the north and east and, in addition to its continental landmass, also comprises the archipelagos of the Azores and Madeira.
Portugal has been a member of the European Union since 1986 and was a founding member of NATO in 1949. It has been a member of the United Nations since 1955. Euro is the current official Portuguese currency. It has been circulated throughout the country since 2002.
Portuguese is the official language of Portugal.
1. Government and politics
Portugal is a democratic republic ruled by the Constitution of 1976 with Lisbon, the nation’s largest city, as its capital. The four main governing components are President of the Republic, the Parliament known as Assembly of the Republic, the Government headed by a Prime Minister and the courts. The constitution grants the division or separation of powers among legislative, executive and judicial branches. Portugal has no state religion, making it a secular state.
The president, who is elected to a five year term, has a supervising non-executive role. The current President is Aníbal Cavaco Silva. The Parliament is a chamber composed of 230 deputies elected in four-year terms. The government is headed by the Prime Minister (currently Pedro Manuel Mamede Passos Coelho) who chooses the Council of Ministers, comprising all the ministers and state secretaries.
The national and regional governments (those of Azores and Madeira autonomous regions), and the Portuguese parliament, are dominated by two political parties, the Socialist Party and the Social Democratic Party.
2. Courts
The courts are organized in several categories comprising the judicial, administrative, and fiscal branches. The supreme courts are courts of last appeal. A 13-member constitutional court oversees the constitutionality of the laws.
3. Foreign investment
3.1. Foreign investment incentives and restrictions
Portugal welcomes foreign investment. Many Portuguese companies are eager to form joint ventures with foreign companies that are willing to provide technical expertise, modern management methods and access to new markets.
There are no distinctions between domestic and foreign investment and no sectors are barred from foreign investment. However, companies may operate in certain sectors, such as postal services and treatment and distribution of water, only through the concession of a management contract.
Foreign investors should contact the AICEP (Agência para o Investimento e Comércio Externo de Portugal), which provides assistance and support to international investment that is likely to strengthen the Portuguese economy. Incentives offered to investors depend on factors such as the size of the investment and the creation of jobs. Portugal also has free trade zones in Madeiraand the Azores that offer tax benefits.
3.2. Exchange controls
There are no exchange controls in Portugal. Portugal does not restrict currency holdings by residents or non residents, nor does it limit the foreign exchange supply. Residents and non residents are free to hold deposits in any currency with Portuguese banks. There are no official guarantees against inconvertibility.
4. Choice of business entity
4.1. Principal forms of doing business
The Commercial Companies Code provides the legal framework for corporations. Three organisational forms are of particular interest to foreigners seeking to establish a company inPortugal: the private limited liability or “quota” company (sociedade por quotas de responsabilidade limitada), the SA corporation (sociedade anónima) and the Societas Europaea (the SE, a company form designed for large European companies operating in several countries).
Companies operating as an SA or a “quota” company may choose to adopt the legal status of a Portuguese “pure” holding company (SGPS). Only an SA may be a publicly traded company.
4.2. Establishing a branch
Foreign companies are free to set up branches, agencies and representative offices. There is no minimum capital requirement for a branch. Apart from the differences in internal structure and organization, a branch operates much like a corporation in its dealings with third parties. The activities of certain types of branches, in particular banks and other financial institutions, are subject to specific regulations.
4.3 Setting up a company
Companies registering as corporations or limited companies do so through a Business Formalities Centre (CFE). These exist in major cities throughout Portugal.
The following steps are required to set up a company:
- Request a Validation Certificate for the official signature or collective denomination of the company and a Collective Persons Provisional Identity Card (from the National Registry of Collective Persons);
- Sign the deed of incorporation at the notary located at the CFE;
- Obtain a Start of Activity Declaration from the Directorate General of Taxation;
- Register with the Company Registry, post official notices on the public website and register with the National Registry of Collective Persons at the Company Registry support office located at the centre. This office will send all the documentation to the branch of the Company Register where the company has its registered office and will request payment of the fees for the publication of the required official notices; and
- Obtain social security registration.
5. Business regulations
5.1 Registration and licensing
Industrial companies must obtain an operating license. Depending on business activity, an environmental-impact statement or assessment also may be needed. Several other registrations and permits, such as a building permit from the local municipality, may be required.
Commercial establishments require an operating license issued by the local authorities. Large retail operations need a special permit issued by the Ministry of the Economy. Tourism facilities also require a specific license.
Licensing agreements should be drawn up in accordance with the EU regulation on the transfer of technology, which applies to agreements on the licensing of patents, know-how and software copyrights, as well as agreements combining any of these elements. EU rules on horizontal and vertical restraints and tie-in clauses also apply.
There are no special controls on agreements between a Portuguese company and its foreign parent. Royalty contracts tend to follow international standards of a maximum of 5% of sales and a limit of five to 10 years. The royalty may be higher for the technology sector.
6. Business taxation
Companies doing business in Portugal are subject to a number of taxes, including corporate income tax, municipal tax, various withholding taxes, value added tax (VAT), social security contributions, stamp tax and real estate tax.
6.1. Taxable income and rates
The standard corporate tax rate in 2015 is 21%; the rate of 12.5% is imposed on the first EUR 12,500. In addition, a municipal surcharge is a local tax that is charged up to 1.5% of taxable profits, giving rise to a maximum possible effective tax rate of 26.5%. Corporate tax applies to companies and other corporate entities, including public enterprises, co-operatives and non-profit organizations.
Branches of foreign companies in Portugal are subject to the same tax regime as resident entities.
Companies with registered or effective headquarters or permanent establishments in the semiautonomous regions of the Azores and Madeira benefit from tax reductions.
7. Property Purchases
7.1. Real Estate Transfer Tax (“IMT”) and Stamp Tax
Property purchases are generally subject to IMTat a rate of 6.5% on urban property or land for construction and 5% on rural property, levied on the respective price or tax registered value, whichever is higher. In the case of residential property, there is a reduction in the applicable rate which may vary between 0% and 6%. The applicable IMTrate is always 8% whenever the purchaser is resident in a country, territory or region benefiting from clearly more favourable fiscal regulations.
Stamp Tax at 0.8% is also payable on property purchases, levied on the same amount subject to IMTunless exemption from the applicable VAT has been waived, in which case Stamp Tax is not due, although IMT continues to apply.
8. Property Ownership
8.1. Property Tax (“IMI”)
IMIis an annual tax levied on a property’s taxable value and is payable by property owners on 31 December of each year. IMIis generally paid in two instalments (April and September).IMIrates currently vary between 0.2% and 0.4% for urban property and land for construction, except for property which has not been valued yet under the terms of the IMICode, upon which rates of between 0.4% and 0.7% are charged. The rate on rural property is 0.8%. These rates are annually increased to twice their amount in the case of urban property which has been left vacant for more than a year and three times for buildings in a state of ruin.
9. Turnover and other indirect taxes and duties
VAT (value added tax) is levied on the supply of goods and services in Portugal and on imports. There are three VAT rates: a standard rate of 21%, an intermediate rate of 13% and a reduced rate of 6%.
Excise and other special taxes apply to motor vehicles, petrol, gambling, transport services and mining production, among others. Consumption taxes are levied on tobacco, alcohol, other drinks and petrol.
10. Personal taxation
10.1. Residency
Individuals resident in Portugal are subject to tax on their worldwide income. An individual is resident if he/she spends 183 days or more in a calendar year (either continuously or interrupted) in Portugal or if on 31 December of a calendar year he/she has a residential accommodation that is a permanent residence. Nonresidents are taxable only on Portuguese source income (subject to relief under an applicable tax treaty).
10.2. Taxable income and rates
Portugal has a pay-as-you-earn (PAYE) system of income tax under which employee tax is withheld at source by the employer.
Portugal imposes progressive rates, ranging from 11.08% to 45, 88%, depending on income; exemptions are granted to taxpayers with specific types of income.
A number of deductions (up to specified amounts) are available, including education expenses, life insurance premiums, pension plan contributions and union fees. There are also personal tax credits that depend on marital status, the number of children and income.
11. Taxation of Employee
An employer is obligated to deduct tax at source from an employee and to make additional contributions to social security. The employer’s contribution is 23.75% of the salary and the employee’s contribution is 11% of the salary. The insurance covers pension, unemployment and care insurance.
Social insurance
The social security system funds unemployment pay, pensions, cash benefits for sickness, occupational injury, disability and maternity leave. There is a national health system and the state pays family benefits and guarantees a minimum income for those without employment who are not entitled to unemployment pay. There are contractual and voluntary systems in place to supplement these arrangements.
VAZ SERRA & ASSOCIADOS – Sociedade de Advogados RL