With sources reporting almost €3billion of foreign investment in Portugal for 2021, it goes without saying there is significant interest in this Western European country attracting all sorts of companies, from large tech companies to restaurateurs showcasing their cooking talent for our taste buds to indulge!
In 2021 Lisbon welcomed more than 40,000 attendees at the Web Summit, as host of this highly esteemed annual technology conference – it is no surprise that Portugal has been labelled the new European Tech hub. The tech industry, like many other fields, has seen the powerful potential Portugal has to offer, and we have seen large companies like Amazon and Google take advantage of this by setting up companies in Portugal.
In addition, Portugal has also become a large tourist attraction with many coming to experience the food and wine that Portugal is very well known for.
What makes Portugal a great place to incorporate a company?
In addition to the increased international commercial interest, Portugal has an extensive network of double taxation treaties with various other jurisdictions around the world (with more than 70 agreements in place). This enables cooperation regarding taxation between respective jurisdictions and the smooth enforcement of respective tax laws.
Portugal is also part of the European Union and therefore has free access to the European market.
English is widely spoken in Portugal making it seamless for business to be conducted with local employees or partners and even more importantly, making it easy to perform international business activities.
Another beneficial aspect relates to inbound and outbound distributions made. Under the participation exemption; dividends and capital gains may be exempt from taxes provided certain criteria are met.
The criteria is summarised as follows:
- Hold the shares for a consecutive period of one year;
- Hold directly/indirectly 10% of the shares/voting rights;
- Subsidiary is not resident in a Portugal black-listed tax jurisdiction; and
- The subsidiary is not exempt from corporate income tax or has a tax rate of at least 60% of the standard Portuguese corporate income tax rate (12.6% calculated as 21%×60%).
Portugal, undoubtedly, ticks many of the key characteristics as an ideal location for a holding or operating company, to be established and maintained.
What type of company can be formed in Portugal?
Portugal has three types of company that can be incorporated, and it is important to understand the differences, as the substance criteria vary widely, as well as the implications in relation to corporate income tax.
Companies may be incorporated through; Portugal mainland, the island of Madeira, or the International Business Centre of Madeira (also based on the island of Madeira).
What corporate income tax rates are applicable for these types of company?
The corporate income tax rates are summarised below for the three types of company:
|Portuguese Mainland Company||Madeira Company||International Business Centre of Madeira Company (for international activity)|
|First €25,000 of taxable income||17%||11.9%||5%|
|Taxable income above €25,000||21%||14.7%||5%|
What substance criteria are applicable?
Although Madeira and Portugal do not have specific substance requirements to comply with, to take advantage of its double taxation treaty network, as mentioned above, substance does need to be maintained.
Detailed below are some examples of how this may be achieved:
- Maintaining an open and active bank account;
- A registered office address and/or premises for the exclusive use of the company;
- A qualified director and/or permanent employee;
- Making important business decisions in Portugal and evidencing these through minutes of board meetings; and/or
- Ensuring sufficient commercial activity occurs in Portugal for the related business.
Specific substance criteria required for the International Business of Madeira (IBCM) are as follows:
- Following the incorporation of the company:
- Within the first 6 months of activity, the IBCM company must hire at least, one worker, and undertake a minimum investment of €75,000 in fixed assets, within the first 2 years of activity. OR;
- If it hires six employees, during the first 6 months of activity, it will be exempt from undertaking the minimum investment of €75,000.
- On an ongoing basis, the company must have at least one full time employee on its payroll, paying Portuguese personal income tax and social security. This employee can be the Director or a Board Member of the IBCM company.
Additional information and assistance from Dixcart
Dixcart can assist you in advising how additional substance may be maintained as well as providing advice on how a double taxation agreement for the respective jurisdiction is applicable in Portugal.
In addition, Dixcart has extensive experience in the incorporation of companies and we look forward to working with you as a client in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.