Investors in Portugal must understand how business taxable income in Portugal is calculated and taxed. Portugal offers a transparent yet somewhat complex tax environment. Notwithstanding this, small and medium-sized enterprises (SMEs) and international businesses benefit from the lower taxation whilst benefiting from the country’s strategic location within the European Union.
In this article, we’ll break down Portugal’s corporate income tax (CIT) system, the rates, rules for deductions, regional incentives, and special regimes that affect your company’s bottom line.
Who Pays Corporate Income Tax in Portugal?
Businesses subject to corporate income tax in Portugal fall into two categories:
- Resident companies: Entities with registered offices or effective management in Portugal are taxed on their worldwide income.
- Non-resident companies: Only taxed on income sourced in Portugal. If operating through a permanent establishment (PE) in Portugal, tax applies to profits attributable to that PE.
Corporate Tax Rates in Portugal
Understanding applicable rates is crucial to estimating your business’s taxable income in Portugal:
- Standard CIT rate: 21%
- Municipal Surtax (Derrama Municipal): Up to 1.5% depending on the municipality
- State Surtax (Derrama Estadual):
- 3% for profits between €1.5M and €7.5M
- 5% for profits between €7.5M and €35M
- 9% for profits exceeding €35M
The maximum effective tax rate for large companies can reach 31.5%.
Special Rates for SMEs and Regional Benefits
- SMEs with a turnover under €50M benefit from a 17% rate on the first €25,000 taxable income.
- Autonomous Regions (Azores & Madeira) apply lower rates:
- 14.7% standard rate
- 11.9% on first €25,000 for SMEs
- Madeira International Business Centre (MIBC): The CIT rate is as low as 5% for licensed companies, subject to job creation and investment thresholds.
How Is Business Taxable Income in Portugal Calculated?
Taxable income is based on financial statements prepared under Portuguese GAAP (aligned with IFRS).
Deductible vs Non-Deductible Expenses
- Deductible: All expenses incurred to generate income (e.g., rent, salaries, utilities).
- Non-deductible: Fines, certain interest payments, taxes, and expenses involving low-tax jurisdictions.
Depreciation & Provisions
- Fixed asset depreciation is allowed based on predefined rates (e.g., 33.33% for computers).
- Provisions are only deductible in specific cases, like litigation or environmental risk.
Interest Deduction Limitation
- Net financial expenses are deductible up to €1 million or 30% of EBITDA.
Autonomous Taxation
- Additional taxes on certain expenses (e.g., undocumented expenses taxed at 50%).
Social Security Contributions for Businesses
- Employers: 23.75%
- Employees: 11%
- Board Members: Employer share from 20.3% to 23.75%, depending on the role
These contributions are an additional consideration when calculating total business costs in Portugal.
Carrying Forward Tax Losses
- SMEs: Carry forward losses for 12 years
- Other companies: Carry forward for 5 years
- Annual offset limit: 70% of taxable profit
Dividends, Capital Gains & Exemptions
- Participation Exemption: Available if:
- Holding ≥10% of shares for ≥12 months
- Subsidiary is subject to comparable taxation.
- Reinvestment Relief: Up to 50% exemption if gains are reinvested
Avoiding Double Taxation
Portugal has over 70 tax treaties and offers:
- Exemption method for PEs abroad
- Ordinary tax credit for foreign-source income
- Withholding tax on dividends, interest, and royalties is generally at 25% but is often reduced under treaties or EU directives
Group Taxation & Transfer Pricing
- Group taxation is allowed if the parent owns ≥75% of Portuguese subsidiaries.
- Losses before group formation can be partially offset.
Transfer pricing rules follow the arm’s length principle, and documentation is mandatory for businesses with turnover above €3 million.
Exit Taxation for Relocating Companies
Relocating your company abroad? Be prepared:
- Tax applies to the difference between the transferred assets’ market and book values.
- Payment may be deferred under certain EU conditions.
Final Thoughts
Understanding how business taxable income in Portugal is calculated—and what incentives and deductions apply—can significantly impact your investment strategy. Portugal’s tax regime is pro-business, particularly for SMEs and international companies leveraging the country’s EU access and stable legal framework.
Are you considering setting up your business in Portugal? Speak to a professional tax advisor or business consultant to ensure compliance and take full advantage of available incentives.
The founding of Madeira Corporate Services dates back to 1996. MCS started as a corporate service provider in the Madeira International Business Center and rapidly became a leading management company… Read more
