The corporation tax rate in Portugal is 21%, applied to the net profit of a business, plus other surtaxes if it’s the case. Portugal has a participation-exemption regime and allows for a credit for foreign tax. Tax incentives only apply to some categories of businesses.
Tax Residence and Liability to Tax Income
Resident entities that may be subject to taxes are corporate bodies having their office address or their effective place of management registered in Portugal, and their taxes are applied to their worldwide net profits.
Entities that are not residents but have a permanent company in Portugal are subjects to Portugal corporation tax applied to their net profit, but not otherwise. A non-resident business is considered to have a permanent establishment in Portugal if it has a certain place of business in the country or is using a resident dependent agent. Non-resident entities that have no permanent establishment in Portugal are only subjects to the tax on Portugal-sourced income.
Compliance and Deadlines
The annual corporation tax return needs to be completed before the end of the 5th month following the financial year-end (31st of December). They also have to report the VAT returns and withheld income tax and social security contributions.
Taxable Profits Calculation
Portuguese accounting standards are based on the International Financial Reporting Standards and EU Directives are used to intra-community business affairs.
Deductibility of losses
Tax deductibility of losses can be carried forward for 5 years, but only for 70% of taxable profits.
Exceptions to the deductibility of costs:
- Interest on shareholder loans that surpass by more than 1.2% the 12 month Euro Interbank Offered Rate
- Expenses that are named by documents that don’t have a valid taxpayer id
- Penalties and fines
- Corporation taxes and surtaxes
- Depreciation of personal vehicles that are worth more than €25,000 or €50,000, considering the purchase date and the vehicle type and other similar expenses
- Provisions, except the ones for debt litigation, contractual guarantees given by clients, remedies for environmental harm and mandatory provisions by banks and insurance companies
- Interest in excess of €1 million or of 30% of EBIDTA, depending which is greater, (exception for this are the financial and insurance institutions)
- The writing off of bad credits that are not older than 6 months and of bad credits for which no recovery proceedings have been started, which are usually tax-deductible in certain limits, 25% for those between 6 and 12 months old, 50% if 12 to 18 months, 75% if 18 to 24 months and 100% if older than 24 months.
Maximum annual rates for depreciation are 5% for industrial buildings; 12.5% to 25% for office articles; 20% for electronic goods and 33.33% for computers and software.
Simplified Regime for Small Businesses
Companies with an annual turnover under €200,000 and a balance sheet less than €500,000 can use a “simplified accounting regime”, meaning that they will be taxed on a deemed profit calculated as a pre-defined percentage of sales that is between 4% and 75%, depending on the type of business. In the first financial year this percentage will be reduced by 50%, and in the second, by 25%.
Corporation Tax rates in Continental Portugal
The Standard Rates
The corporation tax rate is 21%, plus other surtaxes like the municipal surtax that is between 0% and 1.5%, and a State surtax that is calculated based on the profits.
Corporation Tax Payment and Payments on Account
The corporation tax for the previous financial year needs to be paid until the 5th month of the new financial year. Resident business needs to make payments on account of the tax for the current financial year, payable in the 7th, 9th and 12th months during the current year. The payable amounts for a firm that has a turnover of less than €0.5m are 80% of the tax from the previous financial year, or 95% if the turnover is more.
Capital gains are taxable profits and capital losses can be deducted therefrom, but a 50% relief can be gained where the disposal proceeds are reinvested in the preceding financial year or up until the end of the second subsequent financial year in the acquisition.
Special Rates for SMEs
A corporation tax rate of 17% is charged on the first €15,000 of profits. Businesses that have a turnover under €50 million and profits that surpass this threshold will be subjects to the standard rate.
Autonomous Taxation of Expenses and Payments
Certain expenses and payments made by companies are liable to autonomous taxation at the following rates, even if no corporation tax is due, and aggravated by 10% in the event a tax loss is assessed for the year in which they occur:
- Non-documented expenses, at 50%
- Expenses for non-electric passenger cars at 10% (if the price is less then €25,000) to 35% (if the price is equal or more than €35,000)
- Entertaining and other alike expenses at 10%
- Payments are given to residents of blacklisted jurisdictions at 35% (individual beneficiary) or 55% (corporate beneficiary)
- Travel expenses at 5%
- Dividends are given to a holding entity that is free from corporation tax and had the shareholding for no more than one year, at 25%
- Excess compensation or bonuses are given to directors or managers.