Portugal maintains a corporate tax rate of 21%, calculated on the net profit of a business, with potential additional surtaxes. The country utilizes a participation-exemption regime and permits businesses to credit foreign taxes. Specific tax incentives also pertain to certain categories of businesses.
Tax residence concept
In Portugal, incorporated companies primarily face corporate tax. However, self-employed sole traders and individuals with interests in partnerships are subject to personal Portuguese income tax on their profits.
The scope of corporate tax in Portugal encompasses various categories of companies, including:
Resident Incorporated Companies: These companies, which are legally established in Portugal, are required to pay corporate tax on their worldwide income.
Resident Unincorporated Companies: Resident unincorporated companies in Portugal must pay corporate tax on any worldwide income that is not subject to personal income tax.
Non-Resident Companies: Non-resident companies registered outside Portugal are required to pay corporate tax specifically on income generated within Portugal that is not subject to personal income tax.
Corporate tax rates in Portugal
Businesses in Portugal face a flat corporate tax rate of 21% on their taxable profits. The standard corporate income tax (CIT) rate stands at 14.7% in both the Autonomous Region of Madeira and the Autonomous Region of the Azores. This rate is applicable not only to the profits of local entities but also to Permanent Establishments (PEs) of foreign entities registered within these regions.
A reduced corporate tax rate of 17% applies to the initial €25,000 of profits for Small and Medium-sized Enterprises (SMEs). SMEs are defined as businesses with a turnover of less than €50 million. Profits exceeding this threshold are subject to the standard corporate tax rate. Notably, in certain low-density and interior regions, this initial rate can be reduced to as low as 12.5%, providing a more favorable tax environment for businesses in those specific areas.
Business Surtaxes in Portugal
Additionally, businesses may encounter surcharges that contribute to their overall corporate tax liability. These surcharges include:
Up to 1.5% Local Surcharge (Derrama): Applied on the profit and charged by the regional municipality.
3% State Surcharge (Derrama Estadual): Imposed on profit falling within the range of €1.5 million to €7.5 million (with a variation of 2.1% in Madeira and the Azores).
5% Surcharge: Applicable to profit falling within the range of €7.5 million to €35 million (with a variation of 3.5% in Madeira and the Azores).
9% Surcharge: Imposed on profit exceeding €35 million (with a variation of 6.3% in Madeira and the Azores).
Corporation Tax Payment
Taxpayers make tax payments in installments, with three payments on account due in July, September, and up to December 15 of the income year. These payments represent 95% of the preceding year’s corporate tax assessment for taxpayers with a turnover exceeding €500,000 (or 80% for turnovers below this amount).
If the corporate tax assessment for the previous year is less than €200, taxpayers are not required to make payments on account. Taxpayers can postpone the third installment by declaring that no further tax is owed for the current year. However, a 4% interest rate applies if this deferral exceeds 20% of the tax that would have otherwise been paid.
Taxpayers settle (or receive) a final installment through self-assessment upon filing the annual tax return in May of the subsequent year.
Autonomous taxation
Businesses incur autonomous taxation at specific rates on certain expenses or payments. This taxation applies even when no corporation tax is owed, and it increases by an additional 10% if a tax loss is determined for the respective fiscal year.
- Representation and Entertainment Expenses: 10%.
- Mileage Allowance: 5%.
- Per Diem Allowance: 5%.
- Non-documented Expenses: 50% (70% for partially or fully exempted taxpayers).
- Company Car Expenses: The rates vary based on the cost of acquisition and the type of vehicle. For example:
- Plug-in hybrid: 2.5% to 15%.
- Vehicle natural gas (VNG): 2.5% to 15%.
- Other: 10% to 35%.
- Fully electric: 10%.
- For vehicles > €62,500: 10% (with specific conditions for plug-in hybrids).
- Dividends Distributed to Exempt Taxpayers for Holdings Held < 1 Year: 23%.
- Expenses Related to Termination of Functions of Managers or BMs: 35%.
- Expenses on Bonuses Exceeding 25% of Annual Salary and EUR 27,500: 35%.
- Amounts Due or Paid to Non-Resident Entities in Favorable Tax Regimes: 35% or 55%, unless proof that the transactions occurred under normal conditions.
Annual Tax Return
Businesses in Portugal must submit the annual corporation tax return before the conclusion of the 5th month following the end of the financial year, typically December 31st.
In addition to the annual tax return, businesses in Portugal must fulfill other periodic reporting obligations. These include submitting Value Added Tax (VAT) returns and reporting withheld income tax and social security contributions.
Social Security Contributions
Social security contributions, known as “Contribuições para a Segurança Social,” are mandatory payments made by employees and employers to fund social security benefits in Portugal. The contributions provide access to healthcare, pensions, unemployment benefits, and other social welfare programs.
Employers also bear the responsibility of contributing to social security on behalf of their employees. The employer’s contribution rate is 23.75% of the employee’s gross salary. This contribution is separate from the employee’s deduction and is paid directly by the employer to support the social security system.
Other Corporate Taxes Portugal
Additional Corporate Taxes generally pertain to additional levies or charges imposed on corporations beyond the standard corporate income tax.
Value Added Tax (VAT)
The Value Added Tax (VAT) regulations in Portugal adhere to the guidelines established by the European Union (EU):
Reduced Rate (6%): This rate is applied to specific goods and services considered essential or falling within categories warranting a lower level of taxation. Examples include certain food items, water, medical supplies, and cultural events.
Intermediate Rate (13%): Goods and services not eligible for the reduced rate but not subject to the standard rate fall into this category. This rate, set at 13%, is typically applied to items such as certain food and beverages, agricultural supplies, and other specified goods and services.
Standard Rate (23%): The general VAT rate in Continental Portugal is 23%, applicable to most goods and services. This encompasses a broad range of products and services not falling under the reduced or intermediate categories.
Property Transfer Tax (IMT)
The Municipal Property Transfer Tax (IMT) is a tax imposed on property transactions, including the acquisition or transfer of real estate in Portugal. This one-time tax is paid by the property buyer and is calculated based on either the purchase price or the property’s market value, whichever is higher. IMT rates vary, ranging from 1% to 8% for residential properties and can reach up to 6.5% for commercial properties.
Municipal Annual Property Tax (IMI)
The Municipal Property Tax (IMI) is an annual tax imposed on the ownership of real estate properties in Portugal. Local municipalities levy this tax, which is based on the taxable value of the property.
The taxable value is determined by the Portuguese tax authority (AT) and considers factors such as the property’s location, type, size, and market value. Rates typically range from 0.3% to 0.45% for urban properties and 0.8% for rural properties. Municipalities have the autonomy to establish their own IMI rates within the legal limits.
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Frequently asked questions on Corporate Income Tax
What is Corporate Income Tax (CIT)?
CIT is a tax impose on the profits of corporations or businesses. It is calculate based on the taxable income generate by the company.
What is the corporate tax rate in Portugal 2023?
Are there any deductions available for businesses?
Many jurisdictions offer deductions or exemptions for certain business expenses, investments, or activities. It’s crucial for businesses to be aware of these to optimize their tax position.
What is the employer tax in Portugal?
Employers in Portugal are require to allocate 23.75% of their employees’ salaries to the social security system.
