The Portuguese tax system comprises a number of taxes, namely personal and corporation income taxes, consumer tax (VAT) and local taxes.
As we have seen, Social Security contributions are also mandatory.
The most important taxes in Portugal are:
1 Corporation Income Tax ("IRC"), with rates from 20% to 25 %;
2 Personal Income Tax ("IRS") with rates from 10.5 % to 42 %;
3 Value Added Tax ("IVA") with rates from 5% to 21%;
4 Real Estate Sales Tax ("IMT") with rates from 0% to 8%;
5 Real Estate Municipal Tax ("IMI") with rates from 0.2% to 2%;
6 Stamp Duty ("IS") with rates from 0.04% to 25%;
7 Municipal Surcharge on Corporation Income ("Derrama") with a rate up to 1.5 %; Page 33
Corporate tax (IRC) applies to corporations and other legal entities with their registered office or an effective place of management in Portugal that carry out commercial, industrial or agricultural activities. These entities are resident in Portugal.
Legal entities that do not have their registered offices or effective place of management in Portugal are also subject to IRC in two situations:
i) When those entities have a branch or a permanent establishment in Portugal5, the income resulting of the activity of that branch is subject to tax in Portugal;
ii) When those entities earn any sort of income considered by law to be income obtained in Portuguese territory.
These entities are subject to tax regarding all income and capital gains obtained during the tax year (generally matching the calendar year), including income or capital gains obtained in other countries as a result of activities carried out by the resident corporations or by the permanent establishment.
IRC is based on the principle that tax is levied on real profits and therefore the income subject to tax will be the result of the accounting profits adjusted in compliance with cost deduction rules ("Organized Accounting Method")6. Consequently the profit subject to tax will be:
Net profit is subject to a 25 % tax rate.
Subsequently, the taxpayer is also entitled to deduct certain amounts such as:
i) tax credit (international double taxation);
ii) tax benefits;
iii) amounts withheld (in certain conditions); Page 34
Each income or capital gain obtained in Portugal will be subject to corporate income tax at a rate of 25% (except income subject to specific tax rates). In this case, a cash basis is used, rather than the normal accrual basis as for residents and permanently established entities - i.e. tax is paid upon receipt of income.
[FIGURE IS NOT INCLUDED]
|Royalties and technical assistance||15%|
|Income derived from the use or lease of agricultural or industrial equipment||15%|
|Government bonds, and other capital income||20%|
|Commissions for the inter-mediation of contracts and income obtained in the provision of services||15%|
The System of Tax Reserves for Investments consists in a deduction of 20% on the amount due as corporate income tax. The amount deducted must be put in an account and invested during the following two years in fixed assets or in R&D.
Portuguese law establishes that certain Investment Projectscan benefit from tax incentives, determined by contract, within a period of 10 years. Such projects can benefit from the following various tax incentives: Page 35
Tax credit of 5% to 20% of the amount invested in the project, deductible for corporate income tax purposes.
Exemption or reduction on Property Transfer Tax and Municipal Real Estate Tax due for all property used in the implementation of the investment project.
Exemption from or reduction of Stamp Duty due for all acts or contracts necessary to the implementation of the investment project.
This regime applies to investment projects begun before December 31, 2010. The investment project must be made in certain business sectors such as IT and related activities.
These tax incentives cannot be granted simultaneously with other tax benefits of the same nature that could be granted to the same investment project.
In Portugal there are also tax incentives for projects that Create New Jobs for long-term unemployed workers and young people looking for their first job.
Expenses on Research and Development are strongly supported through a tax benefit regime applicable to corporations liable to income tax. In order to benefit from this regime the main activity of the corporation must be a commercial, industrial or agricultural activity.
This regime consists of a tax credit to investment in R&D. About 20% of qualifying expenses can be deducted on the amount due as corporate income tax. Expenses not deducted due to insufficient taxable profit can be carried forward during the following six years.
Non-residents without a permanent establishment are, when complying with certain criteria, exempt from tax on capital gains resulting from sale or purchase of stocks.
Municipal Surcharge is levied in addition to corporate income tax up to a maximum rate of 1,5% on the taxable income.
Rates vary from municipality to municipality. The decision on the rate applicable for each year has to be taken the year before by the appropriate municipal assembly. Page 36
As a member of the EU, Portugal is governed by the provisions of the EU's Parent-Subsidiary Directive, whose effect is that, where a Portuguese holding company controls at least 15% of the stock of an EU subsidiary for a minimum period of 24 months, any dividends remitted by the EU subsidiary to the Portuguese holding company are free of withholding taxes.
Where the provisions of this directive do not apply, Portuguese holding companies can rely on an extensive network of double taxation treaties7.
[FIGURE IS NOT INCLUDED]
Income received by Portuguese holding companies from foreign subsidiaries is subject to the standard rate of IRC. However dividend income can be exempt under the terms of the EU Parent-Subsidiary directive:
- The foreign subsidiary must be a corporate body as per the definition set out in the EU Parent-Subsidiary directive.