The Portuguese Tax System

The Portuguese Tax System2
Index
Introduction
1.6. Income or gains
1.7. Costs or losses
1.8. Deductibility of expenses
1.9. Amortizations and reintegrations
2.1. Tax scales
2.2. Tax incidence
2.5. Rates
3. VAT
3.1. Exemptions
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5.1. Taxpayer
5.2. Incidence
5.3. Property
5.5. Registration/Update
5.6. Rates
6.1. Taxpayer
6.2. Incidence
6.3. Exemptions
6.5. Time limit
7.2. Types of tax incentive
7.3. Supervision
7.5. Other tax incentives
9.2. Annexe II – Stamp duty exemptions
9.3. Annexe III – Legislation referring to tax incentives
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Introduction
The aim of this text is to provide businessmen and women
with a summary of the most relevant aspects of the Portu-
guese Tax System.
For this reason greater emphasis has been placed on some
taxes (e.g. IRC – Corporation Tax) than on others (e.g. IRS
– Personal Income Tax). So far as tax incentives are con-
cerned this work deals only with those which are relevant
to business activities.
This has meant that rigour has, to a certain extent, been
sacrificed in favour of greater simplicity. Accordingly a
more detailed approach, including a direct consultation of
the legislation and/or of the tax authorities will be required
with regard to any concrete questions regarding the Portu-
guese Tax System.
IRC is governed by Decree Law1 (Decreto - Lei (DL)) 442-
B/88 of 30/11, which came into force on 01/01/89. The law
has been amended various times. The most important and
relevant amendments were effected by:
• Decree Law 198/2001 of 03/07
• Law 30-G /2000 of 29/12
• Law 109-B/2001 of 21/02
1.1. Incidence of IRC
a) JURISTIC PERSONS, with their registered office or effec-
tive management in Portugal, i.e.:
1. State-owned corporations and other private
and public sector corporations
b) Entities without a legal personality which have their head
office or effective management in Portugal (i.e. which are
tax resident in Portugal), whose income is not directly subject
to IRS, and other sui generis entities such as unincorporated
companies and associations, and commercial companies and
civil companies in commercial form pending final registration.
c) Entities with or without a legal personality, which do not
have their head office or permanent management in
Portugal (which are deemed to be non-resident entities),
whose income arising in Portugal is not subject to per-
sonal income tax (IRS).
political body that issues them.
Leis (Laws) are passed by Parliament, while the laws introduced by
the Government are termed Decreto-Lei (Decree-Law). Both Laws and
Decree- Laws has the same legal value.
The detailed legislation regarding the implementation of both Laws
and Decree-Laws is termed Decreto Regulamentar (Regulatory Decree)
or Regulamento (Regulation). Only the Government or individual
ministers can issue Decretos Regulamentares. This legislation can be
overruled by Laws or Decree-Laws.
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1.2. Tax base
The tax base of IRC is profit. As defined by the Code, profit is
the difference between the net asset figures at the start and
end of the taxation period, as corrected in accordance with the
law. This concept of profit extends to all increases of assets.
In the case of resident entities, IRC is charged on all in-
come, including income arising out of Portugal. In the
case of non-residents the relevant income is limited to
that arising in Portugal.
Income, which arising directly from an activity, which is sub-
ject to the special gaming tax, is IRC exempt.
1.4. Period
As a general rule, the relevant taxation period is the calendar
year. There are exceptions, which are linked to the specifici-
ties of each case: e.g. commencement of trading, termina-
tion of trading and when a company is being liquidated.
1.5. Calculation of the taxable income
The Code defines taxable income as the “taxable profit”,
which is defined as the net annual results (the difference
between income and gains and costs and losses), plus posi-
tive and negative asset variations during the tax year, which
are not reflected in the results, plus additions and deduc-
tions (tax adjustments).
1.6. Income or gains
The definition enshrined in the law is broad and includes all
income and gains arising from transactions of any nature
and not only those arising from the company’s normal ac-
tivity. For example:
tions, commissions and brokerage fees;
b) Income from land or buildings;
c) Financial income such as interest, dividends,
discounts, fees in the nature of interest, transfers, for-
eign exchange differences and bond issue bonuses;
d) Income from industrial or other analogous income.
e) Supply of services of a scientific or technical nature;
f) Realisation of capital gains;
g) Damages received, whatever the basis thereof;
h) Operating subsidies or subventions.
1.7. Costs or losses
As in the case of income and gains, the legal definition of
costs and losses is broad. The following list is merely by
way of example:
ergy and other general production, conservation and
repair expenses;
licity and goods placement;
invested, discounts, fees, transfers, foreign exchange
differences, costs of credit transactions, debt collec-
tion and of share and bond and other instruments
and reimbursement premiums;
ances, pensions and pension supplements, consump-
tion goods, transport and communications, rents,
contentious matters and insurance, including life
insurance and associated operations, pension fund
contributions and contributions to any schemes sup-
plemental to social security;
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and consultations;
g) Reintegrations and amortizations;
In order to be tax deductible, expenses must:
• Be proved by documents issued in accordance with
the law.
• Be indispensible to the earning of the revenue or for
the maintenance of the productive source.
1.9. Amortizations and reintegrations
the following required are allowable:
a) Regarding tangible fixed assets, as from the date they
are first used;
• From the date they are acquired;
• From the commencement of trading, if later;
Or, in the case of items specifically associated with the
obtaining of revenue or gains, as from the first use for
the said purpose.
There are official accounting definitions of these two com-
ments are to be found in the (POC) Official Accounting Plan.
The Portuguese Accounting Rules follows the EU Directives.
For any doubt please see www.cnc.min-financas.pt where
all the accountancy rules can be find. This site has an Eng-
lish version.
1.9.1 Amortization rates
The rates are to be found in the table, which is a schedule to
Regulatory Decree (DR) 2/90 of 12/01, which was updated sub-
sequently by: DR 16/94 of 23/03 and DR 28/98 of 26/11.
The rates vary between 2% and 33.5% depending on the fixed
assets and the business sector. The most common rate is 20%.
These rates are merely indicative and are the maximum
rates permitted by law. The taxpayer may opt to use them
or to use a rate between these and a minimum equal to
half the rates referred to above.
1.9.2 Calculation of reintegrations and amortizations
The legal rule, with some exceptions, is the straight line method.
Taxpayers may use other methods, such as the double-de-
clining depreciation method, or other methods, provided
that the nature of the business justifies this. The use of a
method other than the general method is subject to the
prior permission of the Tax Authorities.
However, methods other than the general method cannot
be used in respect of the following goods:
• Used assets;
when used by major enterprises, which are public service
operators, or which are intended to be rented out in the
normal course of the business of the enterprise, which
owns them, social facilities and infrastructures.
When fixed assets are subject to wear, which is more rapid
than normal, the depreciation rate may be increased as follows:
• 25% if 2 shift working;
• 50 % if working by more than 2 shifts.
This increase does not apply to buildings and other structures.
The method chosen must always be the same from the be-
ginning until the sale, disposal or destruction of the asset.
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cipal IRC Surcharges and Autonomous Region Rates.
1.10.1. General Rates
This is the normal IRC rate, subject to the following excep-
tions and without prejudice to the addition of the Munici-
pal IRC Surcharge.
Autonomous taxation
establishment in Portugal, whose main business is
commercial, industrial or agricultural
is not commercial, industrial or agricultural 20%
Income of residents and non-residents with a fixed
establishment in Portugal, whose main business is a
commercial, industrial or agricultural activity included
within the Simplified Provisions for the Calculation of
Taxable Profit
Undocumented expenses
industrial or agricultural.
agricultural.
50%
70%
due to persons resident outside of Portugal,
who are subject to a clearly more favourable
tax regime there.
industrial or agricultural activity
whose main business is not a commercial, industrial
or agricultural activity.
motorcycles, which are incurred or borne by
non-exempt taxpayers, whose main business is a
commercial, industrial or agricultural activity.
5%
or mixed use vehicles with an acquisition value of
more than €40,000, which are borne by non-exempt
taxpayers, who have tax losses in the previous two
tax years.
allowances for use of own vehicle, which is not
invoiced to clients, except for the part which is subject
to IRS, and identical costs, when the same are not
deductible and borne by taxpayers with a tax loss
during the tax year to which the costs relate.
5%
1.10.2. Municipal Surcharge
This is a municipal tax, which is imposed by the local
authority for the area in which the head office of the
enterprise is located, or in which it carries on its main
business. In the case of non-residents Law 42/98 of 6/08
permits the imposition of a rate of 1.5% of taxable profit.
1.10.3. Autonomous Regions Rates
In the Azores Autonomous Region the rate is the same as
the national rate, less 30%.
The rate is 22.5% in the Madeira Autonomous Region.
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(DL) 442-A /88 of 30th November. It has been successively
altered since that date. The last major alteration was intro-
duced by Law 30-G/2000 of the 29th of December, which
profoundly amended the original legislation. In addition to
the most recent tax reform, the IRS Code has been altered in
terms of both tax rates and the definition of tax scales, as a
consequence of the economic policy adopted by the various
governments. Normally these alterations are introduced by
the legislation which approves the Annual State Budget.
It is a system, which deals with income in a unitary and
overall manner, which involves the subjection of the various
categories of income to a uniform tax treatment. The aim
of this approach, which involves a single and progressive
tax structure, which personalises income and effects a se-
condary redistribution of income is to make the tax equal
to all taxpayer’s.
2.1. Tax scales
IRS is a progressive tax with seven income scales, up to an
annual maximum of +/-€ 65,000.
It also provides for minimum levels of tax free income (cur-
rently € 1,850) and, according to the size of the dependent
family unit, a minimum living income (which for three de-
pendants, in currently € 6,770.40). Pensioners are treated
on a different basis.
As IRS is a personal incidence tax, it distinguishes betwe-
en the origin of income according to the source thereof:
employment contract, self-employed worker, pensioner,
interest, rents and other income sources, each of which is
treated independently.
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Taxable income is calculated by adding each of the cate-
gories, which can comprise the taxpayer’s income, which
are six in number, and by applying the rate corresponding
tax rate to the income scale. If there is a family unit, and
whatever the tax regime to which the family members are
subject, the income is the sum total of all of the income of
the members of the family unit.
The law provides specific deductions for each category and
deductions, which take the taxpayer’s personal circumstan-
ces into consideration, such as marital status, dependents,
type of activity, etc., etc.
The tax due cannot accordingly be calculated in the abs-
tract, i.e. without reference to a specific case. Tax rates vary
from 10% to a maximum of 42%.
In addition to the taxpayer’s income the tax is also based
on the taxpayer’s habitual residence, or, if the taxpayer is
non-resident, on the fact that part of the taxpayer’s income
arose in Portugal. This rule can be defeated if certain legal
requirements are complied with.
2.4. Tax returns and payment
Tax is settled with the Tax Authorities and is voluntary. Tax
returns are assumed to be truthful and the information sta-
ted may be confirmed by the Tax Authorities.
The time limit for tax returns and payment varies from ca-
tegory to category, although the time limits end between
February and May of the calendar year following the calen-
dar year in which the taxable income was obtained. In the
event of failure the taxpayer is subject to the imposition of
a fine, and the levying of the tax by assessment on the ba-
sis of the taxpayer’s tax record.
2.5. Rates
10%
10.5%
13%
34%
36.5%
40%
42%
workers, who have up to 3 dependents 6,770.40
Amount fixed as “subsistence level” for employed
workers, who have up 3 or 4 dependents 9,027.20
Amount fixed as “subsistence level” for employed
workers, who have 5 or more dependents 12,412.40
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law of the EU VAT Directives.
Value Added Tax (VAT) was introduced by Decree-Law 394-
B/84 of 26/12 and came into force on 1/01/1986.
3.1. Exemptions
conditions detailed hereunder) and according to the strict
meaning thereof (see further ahead), plus some internal
transactions, can be VAT exempt in certain circumstances.
If a transaction is VAT exempt, the supplier does not charge the
tax and cannot deduct the VAT it has paid on its purchases.
3.1.1. VAT exempt internal transactions
There are many exceptions in art. 9 and other articles of the
law. Given the extent of these exemptions, we provide the
following list of examples:
– physicians paramedics, clinics, dispensaries and
similar establishments;
c) Education;
g) Spiritual assistance;
therewith in the common interest when by non-profit
organisations with social objectives;
by public postal services, except for communications
j) Transmissions at face value of postage stamps in
circulation or fiscal stamps and the corresponding
sales commissions;
m) Leasing of land and buildings;
n) Transactions subject to MLTT;
o) Food and drink supplied by employers to their
employees;
its associates;
q) Lottery, bingo games and all other activities that are
levied by the Gambling Tax.
In any specific case, you are advised to consult the VAT
code.
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benefit from various exemptions. Without prejudice to
specific consultation of art. 15, the following is a list of
examples of exemptions:
• Ships aircraft and associated equipment, such as
fishing equipment;
b) Imports of supplies for ships and aircraft used in
international transport;
c) Imports of fish caught by them, which have not been
processed;
e) Imports of cars, tricycles and wheelchairs for the
disabled.
3.1.3. Export exemptions
Exports in the broad sense are exempt from VAT, as VAT is
charged at the destination, in the case of sales within the
EU, or will not be charged because the destination is a third
country, or is not within the community taxation space.
This exemption does not affect the neutrality of the tax or
prevent the importer from recovering the tax paid included
in the purchases made in order to produce the product.
Intra-community trade is subject to its own specific rules.
3.2. Intra Community Trade Provisions Intra community transactions have, since 1993, been
subject to special provisions. Directive 91/680/EEC of 16/12,
which was applied in Portugal by DL 290/92 de 28/12
replaced the former concept of “import” with a
new concept – “intra community transaction”.
Accordingly, import, in the legal sense of the term came to
mean only entries of goods or services from third countries, or
from territories, which are not part of the EU taxation system.
The concept of intra community transaction is broad and is
subject to a series of requirements, i.e.:
a) The seller must be a VAT taxpayer in the EU;
b) The person, who acquires the goods or services,
must also be a taxpayer, in accordance with the law
governing intra community transactions, even if
exempt or with a similar status;
c) The goods must come from an EU country to
Portugal or from Portugal to an EU country.
Intra community transactions are VAT exempt if they
comply with the above requirements and the following
conditions:
a) The buyer is a taxpayer who is registered as subject
to VAT in another EU country;
b) The buyer used its VAT number in the transaction;
c) The transaction is covered by the provisions
governing intra community transactions.
VAT is charged in accordance with the terms and conditions
established by the tax authorities of the country where the
goods or services are received.
3.3. Rates
Rate Portugal Azores and
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4. Stamp Duty
Stamp duty is one of the oldest taxes in Portugal. Its origins
date back to the 17th century. Stamp duty is a tax on a
wide range of economic acts and operations.
Law 150/99 of 11/09 repealed and replaced a series of
legislative measures, which governed stamp duty and
which dated back to 1926 and 1932. DL 287/2003 of
12th November profoundly altered almost all of the taxes
in Portugal, to the extent that it introduced the Municipal
Property Tax (IMI) and Municipal Property Transfer Tax Codes
(IMT), together with some aspects related to the transfer of
assets other than for good or valuable consideration.
Accordingly, almost all the legislation linked to the areas
subject to the new regulations was also amended, and this
included the Stamp Duty regulations.
4.1. Incidence
This tax is levied in relation to a series of legal acts, which are
listed in the Table in Schedule I and II. Given its heterogeneous
nature, it is necessary to consult the Table in order to establish
whether a specific legal act gives rise to a charge to stamp
duty. This can include a wide range of circumstances, such as
tenancy agreements and leases, acts with regard to succession
and gifts, cheques, deposits, prospecting for geological
resources on state-owned land, gaming, loans, interest, and
coastal affreightment contracts inter alia.
The charge to tax is levied on the entities, which have an
economic interest in the act. If there is more than one
interested party, the charge to tax is allocated between
them. In some situations, which may give rise to doubt, the
law establishes an objective presumption as to the identity
of the interested party.
All legal acts, which are subject to VAT, are not simultaneously
subject to Stamp Duty.
The charge to Stamp duty affects acts practiced in Portugal.
The law establishes that the following acts are also subject
to stamp duty:
Portugal in order to take effect;
b) Credit transactions effected and security provided, in
which one of the parties is a resident, or is deemed
to be a resident.
a fixed domicile in Portugal, or which is deemed to
have such a domicile;
d) Insurance, when the risk or item insured, is in Portugal.
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organisations, as long as they are classified as legal persons
that carry out activities of public interest, are exempt from
the payment of stamp duty. This includes the State, the
Autonomous Regions, local authorities and all public sector
organisations (e.g. public institutes), provided they are non-
commercial in nature.
Generally, payment is due when the act, which is subject
to stamp duty, takes place. However, in the case of some
of these acts, the law establishes a different moment when
the said obligation arises.
Stamp duty returns and payments of the tax collected must
generally be made by the official or para-official entities
involved…