Main taxes in Portugal & the Social Security contribution system

Corporate Income Tax is a tax levied on profits derived by both resident and non-resident entities.

Tax rates

• ● Standard 21% rate;
• ● Municipal surtax ("derrama municipal") up to 1.5% levied on taxable profits (depending on the municipality of the activities);
• ● State surtax ("derrama estadual") of 3% on taxable profits exceeding €1.5 million up to €7.5 million, 5% on taxable profits exceeding €7.5 million up to 35 million and 9% on taxable profits exceeding €35 million.

Exemptions
CIT exemptions available for the Portuguese State, Autonomous Regions, local municipalities, social security entities and capitalization funds, amongst others.

CIT Returns

• ● CIT exemptions available for the Portuguese State, Autonomous Regions, local municipalities, social security entities and capitalization funds, amongst others.
• ● Annual CIT return, to be submitted until May 31 of the following year
• ● Other reporting obligations (acquisition/disposal of securities, withholding tax on income paid, etc.)

Corporate Income Tax

1. Taxable Entities

• Corporate tax (CIT) is a tax levied on profits derived by both resident and non-resident entities. The mere holding of assets does not give rise to CIT taxation.


• Taxable resident entities are companies and other corporate bodies whose main activity is commercial, industrial or agricultural and with head office or effective place of management in Portuguese territory. Resident entities are generally subject to taxation on worldwide profits.
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• Non-resident entities with a permanent establishment in Portugal are also subject to corporate tax on the profit attributable to those permanent establishments.


• In broad terms, a non-resident company is deemed to have a permanent establishment in Portugal if it holds a fixed place of business through which its activity is carried on. This may be the case when the non-residents have a local branch, office, building site or construction project or act through dependent agents.


• Non-resident entities (i.e. companies and other body corporates with no permanent establishment in Portugal) are only taxed on Portuguese-sourced income.

• 2. Rates
• Portuguese CIT is levied at a 21% rate, to which may be added a municipal surtax (“derrama municipal”) up to 1.5% levied on taxable profits (depending on the municipality of the activities), as well as a state surtax (“derrama estadual”) of 3% on taxable profits exceeding € 1,500,000 up to 7.5 million, 5% on taxable profits exceeding €7,500,000 up to 35 million and 9% on taxable profits exceeding €35,000,000.


• The state surtax is levied through an additional payment on account (an advance payment mechanism). A tax rate of 2.5% is applicable to the taxable profit ranging between €1,500,000 and €7,500,000; a tax rate of 4.5% is applicable to the taxable profit ranging between €7,500,000 and €35,000,000; and a tax rate of 8.5% is applicable to the taxable profit exceeding €35,000,000. The Surtax is imposed before any loss carry forward, and computed and payable at individual level (also for companies taxed under group taxation).


• A special reduced CIT rate is available for SME, i.e. companies with a turnover below €50 million between other criteria as defined in the Decree-Law 372/2007 of 6 November. For these companies, taxable profits until € 25,000 are subject to a reduced rate of 17%. The remaining taxable profits above such an amount are subject to the standard CIT rate.


• Companies with head office or place of effective management in the Autonomous Region of Azores benefit from a reduced 14,7% CIT rate and 11,9% for the taxable profits earned until € 25.000 (only for SME). A regional surtax of 2,4% on taxable profits exceeding € 1,500,000 up to 7.5 million, 4% on taxable profits exceeding € 7,500,000 up to 35 million and 7,2% on taxable profits exceeding € 35,000,000.


• Companies with head office or place of effective management in the Autonomous Region of Madeira benefit from a reduced 14,7% CIT rate and 11,9% for the taxable profits earned until € 25.000 (only for SME). A regional surtax of 2,1% on taxable profits exceeding € 1,500,000 up to 7.5 million, 3,5% on taxable profits exceeding € 7,500,000 up to 35 million and 6,3% on taxable profits exceeding € 35,000,000.


• For companies with licence to operate in the Madeira International Business Centre it is applicable a reduced CIT rate of 5%, subject to requirements such as a thresholds on taxable income or job creation/maintenance.

• 3. Determination of taxable income


• 3.1 General Rule
  Portuguese resident companies and local permanent establishments of foreign entities are taxable on their taxable income, determined in accordance with accounting standards and subject to the Portuguese CIT Code provisions.


• From 2010 onwards, the Portuguese accounting standards (generally accepted accounting principles – GAAP) follow closely the International Financial Reporting Standards (IFRS).


• Accounting and tax periods coincide with the calendar year.


• 3.2 Expenses & Non-deductible items
  Expenses related to the business activity are generally deductible for CIT purposes, insofar such expenses are addressed to obtain or guarantee taxable income.
  There are some exceptions to the general rule, namely:


• (i) interests paid in shareholder loans,
• (ii) expenses documented by invoices or other documents without a valid taxpayer number,
• (iii) penalties or fines paid,
• (iv) CIT and surtaxes,
• (v) depreciation of the acquisition cost of private vehicles and other luxury related expenses,
• (vi) whatever payments made to individuals and companies domiciled in listed low tax jurisdictions.


• 3.3 Depreciation and amortization
• The acquisition or production cost of certain assets is tax deductible in accordance with their expected useful life. Depreciation is generally computed through the application of the straight-line method, although taxpayers may elect to apply the declining-balance method. Declining-balance method cannot be applied to building properties, passenger vehicles for private use or furniture, amongst others.


• The depreciation rates are established by law and deductions above such rate are not recognized for tax purposes. Taxpayers may also opt to apply a depreciation rate representing 50% of the general rates.
  Depreciation Rates vary accordingly the type of asset to be depreciated, for example, from 2% for commercial buildings up to 33,33% for computers and software.


• Goodwill related with some industrial property elements and with the concentration of business activities, may also be depreciated with some limitations as, for example, acquisitions made to companies domiciled in listed low tax jurisdictions and to related parties.


• 3.4 Provisions
  As a general rule, provisions constituted by a Portuguese company are not tax deductible, unless they are related to:


• (i) Pending judicial litigations, when concerning bad and doubtful debts;
• (ii) Warranties granted to clients foreseen in agreements for the supply of goods or services;
• (iii) Mandatory technical provisions, constituted in accordance with the Insurance Portuguese Institute and/or Bank of Portugal rules;
• (iv) Remedy of environmental damages.


• 3.5 Interest barrier rule
  The Portuguese CIT Code foresees an interest barrier rule which limits the deductibility of net financial expenses to the higher of the following:


• (i) € 1,000,000; or
• (ii) 30% of EBITDA (operating profits before interests, taxes, depreciations and amortizations).

This means that net financial expenses up to € 1,000,000 will be deductible in all cases.


• 3.6 Bad Debts
  The costs with impairment losses derived from doubtful debts are tax deductible when an insolvency or recovery procedure has been submitted or when credits have been judicially claimed.
  Only impairment losses derived from debts outstanding for more than six months are qualified as tax deductible within the following limits on the amount in debt:


• (i) From 6 to 12 months: 25%;
• (ii) From 12 to 18 months: 50%;
(iii) From 18 to 24 months: 75%; and
• (iv) More than 24 months: 100%.


• 3.7 Autonomous taxation
  In addition to the general CIT rate, autonomous taxation is applied on certain expenses of CIT taxpayers, for example, non-documented expenses (50%, or 70% if taxpayer is CIT exempt), expenses with passenger vehicles (excluding electric vehicles) with an acquisition cost between an amount below € 25,000 and above € 35,000, 10% up to 35%, representation expenses (10%), among others items.
  The rates are increased by 10 basis points if the taxpayer assesses tax losses in the year when expenses are incurred. Autonomous taxation is paid even if no CIT is due.

• 4. Social security contributions
• The Portuguese social security system is financed by contributions of both employers and employees. Employers are required to contribute 23.75% for employment contracts and employee contribute with 11%. This contribution has no ceiling.


• Companies also must make contributions for the members of their corporate boards. The employer contribution is deductible for corporate tax purposes.


• There are situations with potentially applicable exemptions or reductions, for board members or self-employed persons, for example.

• 5. Tax losses
• Tax losses may be carried forward for a determined period, under certain rules and/or limitations.

• 6. Dividends and capital gains
• Resident companies are subject to corporate income tax on their worldwide income and capital gains.
  


• Domestic and foreign-source dividends derived by a resident company are exempt if the following conditions are met:
• (i)10% minimum shareholding on the company distributing the dividends;
• (ii) one year holding period (may be satisfied after the income is derived);
• (iii) source of dividends is not geographically limited (except for dividends received from blacklisted jurisdictions);
• (iv) the company distributing the dividends is subject and not exempt to a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate (if this last condition is not met other alternative requirements may apply).


• A credit for the underlying tax will be available where one or more of the conditions for the participation exemption are not met.


• As a general rule, capital gains derived by Portuguese resident corporate entities are included in the taxable profits and subject to the general CIT rate. Likewise, capital losses may be deduced to the taxable profits.


• Mergers, demergers, transfers of assets, exchanges of shares and transfers of residence may benefit from a tax relief (tax neutrality).

• 7. International doble taxation
• Portugal employs two methods to avoid double taxation of foreign-source income, i.e. the exemption and ordinary tax credit methods.


• When a resident company derives business profits through a permanent establishment abroad a Portuguese company may opt for exemption method under certain circumstances and only to permanent establishment in a country with a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate.


• Domestic-source income derived by non-residents without a permanent establishment in Portugal is generally subject to a final withholding tax levied on the gross amount.


• Dividends paid by a Portuguese company to its resident or non-resident shareholders are subject to a 25% flat withholding tax rate, unless an exemption for dividends paid by Portuguese resident entities is also applicable.


• To qualify for the withholding tax exemption for dividend payments, the main criteria are the following:
• (i)10% minimum shareholding on the Portuguese company distributing the dividends;


• (ii) one-year holding period (may be satisfied after the income is paid);


• (iii) resident of shareholder is geographically limited to shareholders resident in a EU Member State, EEA (excluding those that do not exchange tax information with Portugal) or jurisdictions with which Portugal has signed a Double Taxation Agreement with exchange of information mechanism; and


• (iv) the company receiving the dividends should be subject and not exempt to a tax comparable to the Portuguese CIT at a rate not below 60% of the Portuguese CIT rate.

A credit for the underlying tax will be available where one or more of the conditions for the participation exemption are not met.

As a general rule, capital gains derived by Portuguese resident corporate entities are included in the taxable profits and subject to the general CIT rate. Likewise, capital losses may be deduced to the taxable profits.

Mergers, demergers, transfers of assets, exchanges of shares and transfers of residence may benefit from a tax relief (tax neutrality).

In case profits are distributed to a corporate entity resident in a blacklisted jurisdiction, a 35% flat withholding tax rate will apply.

Source: AICEP Portugal | IBC Madeira

Personal income tax applies to the income of citizens resident in Portuguese territory and non-residents who earn income in Portugal.

Tax rates

• ● Progressive tax rates varying from 0% up to 48%.
• ● Solidarity tax may be applicable at 2.5% or 5%, depending on the taxable income

Exemptions
Limited exemptions and reduced rates may be available under special regimes (e.g., payments from insurance companies under certain conditions and non-habitual residents).

PIT Returns

• ● Annual PIT return, to be submitted from 1 April to 30 June of the year following the year to which the tax corresponds. Deadline may be extended to 31 December in case foreign-income is earned.

Taxable persons

1. Residents and non-residents

• Residents in Portugal are taxed on their worldwide income at progressive rates varying from 0% to 48%.


• Non-residents are liable to income tax only on Portuguese-source income, which includes not only that portion of remuneration that can be allocated to the activity carried out in Portugal but also remuneration that is borne by a Portuguese company or permanent establishment.


• Non-residents are taxed at a flat rate of 25% on their taxable remuneration.

A person is deemed to be resident in Portugal whenever spends more than 183 days, consecutive or not, in Portugal in any 12-month period starting or ending the fiscal year concerned. A person is also deemed to be resident in Portugal if a dwelling is maintained at any time of a certain 12-month period, indicating the existence of habitual residence in Portugal.

Please see point 5 below for special non-habitual residents’ regime.

Taxable income

1. Employment income, pensions and director's fees
PIT applies on the earned income of employed individuals, pensions and directors’ fees.

• Employment income
  Employment income includes all payments in connection with work carried out, such as salary, bonuses, commissions, tax reimbursements, redundancy payments, pensions, allowances (e.g., cost-of-living and housing allowances), and benefits in kind (e.g., company cars), regardless of where the payment originates.


• Domestic and foreign travel allowances, as well as mileage and lunch allowances in excess of those permitted to employees of State departments are also taxable as employment income.


• Employment income
• Employment income includes all payments in connection with work carried out, such as salary, bonuses, commissions, tax reimbursements, redundancy payments, pensions, allowances (e.g., cost-of-living and housing allowances), and benefits in kind (e.g., company cars), regardless of where the payment originates.


• Domestic and foreign travel allowances, as well as mileage and lunch allowances in excess of those permitted to employees of State departments are also taxable as employment income.


• Pension funds
• The first €4,104 of pension income is exempt from tax.


• Directors’ salaries
• Salaries paid to directors have the same tax treatment as employment income.

2. Entrepreneurial and self-employment income

• IRS taxable income includes all earned income of a self-employed individual and entrepreneurial income (including rental income upon option). Such income may be taxed either in accordance with a simplified regime or on statutory accounting.


• The simplified regime will apply only to taxpayers who, not having opted for statutory accounting, have a turnover or a gross business and self-employment income lower than €200,000 in the previous year. Business and professional income is taxed at the progressive IRS rates.

3. Investment income

• Dividends and interest (bank interest, shareholder loans, from public company bonds, bills or other paper, as well as interest on public debt) are liable to taxation at a flat rate of 28%.


• However, the taxpayer may elect to include such items in taxable income in the tax return, being taxed at marginal tax rates that vary between 14.50% and 48%.


• If the taxpayer opts to disclose the dividends on his tax return, only 50% will be liable to taxation at marginal rates in force, if the paying company is tax resident in an EU country, but all the investment income (as well as capital gains shall be added to the taxable income).


• Investment income paid by non-resident entities without a permanent establishment in Portugal, but which are domiciled in a blacklisted jurisdiction, are liable to a tax rate of 35%, either by withholding tax or by the autonomous rate.

4. Rental income

• Rental income is subject to a 28% flat tax rate, but the taxpayer may opt to add the rents obtained to the respective taxable income in the tax return. If the taxpayer makes such election, the income shall be taxed at the progressive tax rates, with a credit given for the tax withheld. Rental income obtained by non-residents is taxed at a flat rate of 28%. Maintenance, repair expenses, municipal property tax and stamp tax may be deducted from gross rental income, if actually incurred and provided it is properly documented.

5. Capital Gains

• Rental income is subject to a 28% flat tax rate, but the taxpayer may opt to add the rents obtained to the respective taxable income in the tax return. If the taxpayer makes such election, the income shall be taxed at the progressive tax rates, with a credit given for the tax withheld. Rental income obtained by non-residents is taxed at a flat rate of 28%. Maintenance, repair expenses, municipal property tax and stamp tax may be deducted from gross rental income, if actually incurred and provided it is properly documented.


• General rule
• As a general rule, capital gains are subject to tax at a flat rate of 28%. Only 50% of capital gains arising on the sale of shares held on micro and small companies not listed in the stock exchange will be subject to taxation.


• No withholding tax applies on capital gains and capital losses may offset capital gains only.


• Capital gains by non-residents
• Capital gains earned by nonresidents that are not borne by a permanent establishment in Portugal are fully taxable at a flat rate of 28%. An exemption is awarded to capital gains obtained by non-residents except when one of the following conditions is verified:
• ● The seller is domiciled in a listed low tax jurisdiction;
• ● Capital gains derive from the sale of holdings in resident companies which assets are composed in more tan 50% by real estate located in Portugal.


• Real estate capital gains
• Fifty percent of capital gains arising from the sale of real estate by tax residents in Portugal is taxed at progressive tax rates varying from 14.50% to 48%.


• The gain may be wholly or partially exempt if the property being sold is the taxpayer's primary residence and the sale proceeds, reduced by the value of any outstanding loans relating to the purchase of the property being sold, are reinvested in the acquisition, improvement or construction of another primary residence in Portugal or within the European Union within 36 months from the sale or in the period of 24 months previous to the sale.

Source: AICEP Portugal

IMT is levied on the transfer for consideration of real estate located in the Portuguese territory.

1. Tax basis
IMT is levied on the transfer for consideration of real estate located in the Portuguese territory. Such transfers may also be subject to Stamp Tax. IMT is due by the purchaser and levied on the purchase price or on the VVPT, whichever is higher.

IMT extends the taxable basis to several types of legal acts which grant an economic result similar to the transfer of the ownership over a real estate, such as:

• ● The assignment of promissory agreements ensued by the utilization of the property;
• ● Lease agreements for more than 30 years;
• ● The acquisition of 75% or more of the share capital of a company owning real estate located in Portugal;
• ● The assignment of promissory agreements which contains clauses under the terms of which the purchaser may transfer his contractual position to third parties;
• ● The assignment of contractual position by the purchaser in promissory agreements;
• ● Irrevocable power of attorneys granted by the promissory purchaser to third parties.

2. Rates
Applicable rates are the following:

• ● Rural property - 5%;
• ● Urban property for residence - from 0% up to 8%;
• ● Urban property used for purposes other than residential and other acquisitions: 6.5%;
• ● Urban and rural property acquired by a resident in a blacklisted jurisdiction: 10%.

3. Payment
IMT is assessed by the central tax services based on the information filed by the taxpayer, in a local tax service or by internet. It should be assessed before the transfer.
IMT must be paid when the tax is assessed or in the following business day. It is valid for 2 years. Whenever the transfer is executed by an agreement signed outside the Portuguese territory, IMT should be paid during the following month. When an exemption lapses, taxpayer must request IMI’s assessment in the following 30 days to the local tax services of the property and must pay the tax in the same deadline.

4. Exemptions

• 4.1 Urban property subject to rehabilitation
  An IMT exemption is applicable to urban properties whenever the rehabilitation of the building begins within three years from the acquisition date. Rehabilitation should be certified by the municipality by the end of the works (or by the Residence and Urban Rehabilitation Institute, when applicable). Such municipality must communicate to the respective local service the exemption within 60 days. In the following 15 days, the local tax service must cancel previous tax assessment and refund the IMT paid.
  An additional IMT exemption is also foreseen for the first acquisition of an urban property following its rehabilitation, to be exclusively used as a place of residence, when located in a special urban rehabilitation zone. The beginning and the conclusion of the construction works must be certificated by the municipality. The exemption and relevant conditions are approved by the municipal assembly.

4. Exemptions

• 4.1 Urban property subject to rehabilitation
  ● An IMT exemption is applicable to urban properties whenever the rehabilitation of the building begins within three years from the acquisition date. Rehabilitation should be certified by the municipality by the end of the works (or by the Residence and Urban Rehabilitation Institute, when applicable). Such municipality must communicate to the respective local service the exemption within 60 days. In the following 15 days, the local tax service must cancel previous tax assessment and refund the IMT paid.
  ● An additional IMT exemption is also foreseen for the first acquisition of an urban property following its rehabilitation, to be exclusively used as a place of residence, when located in a special urban rehabilitation zone. The beginning and the conclusion of the construction works must be certificated by the municipality. The exemption and relevant conditions are approved by the municipal assembly.


• 4.2 Restructuring operations (such as mergers and demergers)
  ● Restructuring operations based in sound economic reasons may benefit from an exemption from IMT, Stamp Tax and legal fees.


• 4.3 Other exemptions
  ● Acquisition of properties for resale by real estate companies;
• ● Acquisition of buildings individually classified as of national/public/ municipal interest.

Source: AICEP Portugal

IMI is computed over the property tax value of urban and rural real estates located in the Portuguese territory.

1. Tax basis
IMI is computed over the property tax value (VPT) of urban and rural real estates located in the Portuguese territory.

The VPT is determined by the Portuguese Tax Authority based on the information given by the taxpayer and by the application of different ratios which depend on the type of the property, its localization, state of conservation and facilities. In last 10 years, urban properties were subject to a general review with effects on 31 December 2012.

Is due by the landlord, the usufructuary or the holder of the surface right of the real estate on 31 December of the year that it concerns.

2. Rates
Applicable rates are the following:

• ● Rural properties: 0.8%;
• ● Urban properties: 0.3% to 0.45%;
• ● Properties held by entities resident in blacklisted jurisdictions: 7.5%.

Each municipality determines, on an annual basis, the applicable IMI rate within the mentioned ranges. Municipalities, by resolution of the municipal assembly, can fix a reduced rate to buildings for permanent residence of the owner, based on the number of dependents therein living. The reduction rate may be up to 20% in the case of one dependent, 40% in the case of two, and 70% in the case of three dependents. The tax rates applicable on urban properties are triplicated when they are empty or tumbledown for more than one year.

3. Payment
IMI is paid in the following year that it concerns, in one, two or three instalments depending on the amount to be paid:

• ● Amounts up to € 100 – 1 instalment in May;
• ● Amounts from € 100 to € 500 inclusive – 2 instalments in May and November;
• ● Amounts exceeding € 500 – 3 instalments in May, August and November.

4. Exemptions
There is a large list of exemptions that includes, amongst others:

• 4.1 Urban property used as a permanent place of residence (owned or rented)
  This exemption should be requested within 60 days from the end of six months deadline following the acquisition of the property or its construction or renovation. Applies to individuals which obtained a taxable income, in the year prior to the acquisition/construction, lower than € 153,300, and is valid for three years.

• 4.2 Urban property subject to rehabilitation
  The exemption applies to urban properties subject of urban rehabilitation, located in urban rehabilitation areas or urban properties built more than 30 years ago, for a period of 3, renewable for a period of 5 years, counted from the date of (ii) issuance of the municipality’s license or (ii) completion of the rehabilitation works, which are intended for lease for permanent abode or main permanent abode.


• AIMI is due by individuals and corporations, as well as by structures or collective entities and undivided inheritances, that are owners, usufructuaries or have the surface right of urban properties located in Portugal.


• Urban properties classified as "trade, industry, or services" and "others" are excluded from AIMI.

The taxable basis corresponds to the sum of the VPT of all the urban properties held by each taxpayer, reported as at 1 January of each year.

• In case of individuals and undivided inheritances a deduction of € 600,000 to the taxable basis is foreseen. Married or living in non-marital partnership taxpayers, who opt to submit a joint tax return, have the right to deduct € 1,200,000 to the sum of the VPT of all the urban properties.

• The applicable rates, after deductions provided, are as follows:
  
• ● 0,7% for individuals and undivided inheritances;
• ● 0,4% for corporations; and
• ● 7,5% for urban properties owned by entities located in tax havens.

In case of individuals, (i) to the taxable amount of more than € 1,000,000 and equal or lower than € 2,000,000 (or the double for married or living in non-marital) a marginal rate of 1% applies, and (ii) to the taxable amount that exceeds € 2,000,000 (or the double for married or living in non-marital), a marginal rate of 1.5% applies.

In the case of urban properties owned by corporations, for the personal use of the shareholders, members of the board or of any administrative bodies, management or supervision, are applicable the rates considered for individuals.

AIMI is assessed by the Portuguese Tax Authorities in June of each year, being the respective payment made in September.

Source: AICEP Portugal