Corporation tax in Portugal is a crucial aspect of doing business in the country. Understanding the rules, rates, and benefits associated with corporation tax is essential for companies operating in Portugal. In this comprehensive guide, we will explore the intricacies of corporation tax in Portugal, providing valuable insights and information to help businesses navigate the complexities of the tax system.
What is Corporation Tax?
Corporation tax, also known as corporate tax or corporate income tax, is a tax imposed on the profits of businesses in Portugal. Resident companies are taxed on their worldwide income, while non-resident companies are only taxed on their Portugal-source income. The tax rate varies depending on the size and nature of the company.
Corporation Tax Rates in Portugal
The standard corporation tax rate in mainland Portugal is 21%. However, different rates apply to specific regions and types of companies. In the Autonomous Region of Madeira and the Autonomous Region of the Azores, the standard rates are 14.7% and 14.7%, respectively.
Reduced Rates for SMEs
Small and medium-sized enterprises (SMEs) and small-medium capitalization (Small Mid Caps) companies enjoy reduced corporation tax rates. The reduced rate of 17% applies to the first EUR 50,000 taxable income for SMEs and Small Mid-Caps. Any income exceeding this threshold is taxed at the standard rate.
Additionally, SMEs and Small mid-cap companies with effective management in inland territories of Portugal’s mainland can benefit from a further reduced rate of 12.5% on the first EUR 50,000 taxable income. The standard rate applies to the excess amount.
Payment of Corporation Tax
Corporation tax in Portugal is payable in the fifth month of the new financial year for the previous financial year. However, businesses must also make payments on account of the tax throughout the current financial year. These payments are made in the current financial year’s seventh, ninth, and twelfth months.
Payment Amounts for Businesses with Annual Turnover Less Than €0.5m
For businesses with an annual turnover of less than €0.5 million, the payable amounts for payments on account are 80% of the tax assessed in the previous financial year. If the turnover exceeds €0.5 million, the payable amount increases to 95%. However, businesses can skip the payment due in the twelfth month if they expect that the current year’s tax amount does not warrant it.
By the fifth month of the new financial year, businesses must either pay any excess tax due or request reimbursement for any excess payments made.
Participation Exemption and Foreign Tax Credit
Portugal offers participation exemption for dividends and capital gains derived from more than 10% participation in other companies, whether Portuguese or foreign. However, certain conditions must be met for this exemption to apply.
Furthermore, a foreign tax credit is granted for taxes paid abroad on profits or the fraction of corporation tax corresponding to foreign taxable income, whichever is lower. The credit is capped at the tax paid abroad under an applicable double taxation agreement.
Capital Gains and Investment Incentives
Capital gains are generally included in taxable profits, while capital losses can be deducted. However, businesses can benefit from a 50% relief on capital gains if the disposal proceeds are reinvested in tangible fixed assets or non-consumable biological assets in the previous or subsequent financial year.
Portugal provides various investment incentives to businesses, which can help reduce their corporation tax liability and promote economic growth. These incentives aim to encourage investment in specific sectors and regions.
Special Rates for SMEs
As mentioned, SMEs and Small Mid Caps enjoy reduced corporation tax rates. The rate is 17% on the first €25,000 of profits for SMEs. If the profits exceed this threshold, they are taxed at the standard rate. In some low-density and interior regions, the initial rate for SMEs can be as low as 12.5%.
Corporation Tax on Madeira Island
As an Autonomous Region of Portugal, Madeira Island has its corporation tax rates. The standard rate in Madeira is 14.7%, which is lower than the mainland Portugal rate. This makes Madeira an attractive location for businesses seeking a favourable tax environment.
Unique Tax Benefits in Madeira
Madeira offers additional tax benefits, such as the Madeira International Business Center (MIBC), to attract foreign investment. The MIBC provides a reduced corporate tax rate of 5% for specific activities and offers other advantages, including exemption from withholding tax on dividends and interest payments.
Conclusion
Corporation tax in Portugal plays a significant role in the country’s fiscal system. Understanding this tax’s rules, rates, and benefits is crucial for businesses operating in Portugal. With its standard rates and reduced rates for SMEs, Portugal provides a competitive tax environment for companies. Additionally, Madeira Island offers further advantages with its lower tax rates and unique tax benefits through the Madeira International Business Center. Businesses can optimize their tax position and contribute to the country’s economic growth by navigating the intricacies of corporation tax in Portugal.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal, financial, or investment advice. Please consult with professionals specialized in Portuguese real estate before making any investment decisions.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
