Portugal

Portugal – an Investor’s guide

Barrocas Sarmento Neves, a Lisbon-based law firm, explain what companies need to know before taking the plunge

left: Manuel P Barrocas;right: Claudia Santos Cruz

Portugal is a member of the European Union (EU) and there are generally no prior consent or registration requirements before investing or trading in Portugal (other than in areas such as defence).There are numerous strategic and commercial benefits in deciding to invest in Portugal, which has in recent years seen a notable increase in opportunities for US and other business. Portuguese foreign direct investment overseas has also grown significantly, reflecting the increased involvement of Portuguese companies in the global market.

Portugal is generally considered to be an open economy without exchange control regulations. The use of authorised financial institutions to act as intermediaries in respect of payments to and receipts from non-residents is deemed a more practical and usual way of doing business rather than imposing stringent legal requirements affecting business.

Summarised below are some of the headline points which should be noted when considering investments or trade with Portugal.

The legal framework

Portugal is a civil law country and most legal provisions can be found in statutory legislation. The most appropriate way for non-EU country companies to initiate business activities in Portugal is through a subsidiary; branch; joint-venture or through distribution, agency and franchising agreements. It is important to note that a US company intending to undertake commercial activities in Portugal for a year or more is required to form at least a registered branch.

Subsidiary and Branch
The major distinction between a subsidiary and a branch relates to the liability of the parent company and the payment of withholding tax on the distribution of dividends.

Subsidiary — a specific corporate vehicle which depends on a parent company either in terms of the parent holding shares in it or through another contractual link. A separate legal company must be incorporated which means the subsidiary is a different entity from its parent with separate liabilities. A subsidiary is usually established using one of the following forms:

• A “sociedade por quotas” — a private limited liability company usually consisting of two partners (individuals and/ or companies) more appropriate for small to medium-sized businesses, requiring a minimum paid-up share capital of €5,000.
• A “sociedade anónima” — a public limited company having at least five shareholders, better suited for medium to largesized businesses, requiring a minimum fully paid up share capital of €50,000.

Branch — in practice an extension of the parent company having no separate legal personality. There is no requirement to form another company and it has no separate liability from its parent, ie; the parent company has unlimited liability for branch operations. There is, however, an advantage in that no withholding tax on the distribution of dividends is levied.

Taxation

IRC (Corporate Income Tax) Companies are subject to a single income tax known as IRC. The following are subject to IRC at the rates indicated*:

Corporate Income Tax (%)

Residents in Portuguese territory

Entities with head offices or effective management in Portugal carrying out a commercial, industrial or agricultural activity	25
Entities with head offices or effective management in Portugal not carrying out a commercial, industrial or agricultural activity	20
Entities included in the simplified taxation regime	20

 

Income earned in Portugal by non-resident entities with a permanent establishment in Portuguese territory

Entities with permanent establishments that are non-resident companies in Portugal carrying out a commercial, industrial or agricultural activity

25

 

A foreign company is deemed to have a permanent establishment whenever it carries out, in whole or in part, its activity in Portugal through a fixed place located in Portuguese territory: a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources located in Portuguese territory.

A building site; a construction; installation or assembly project, or supervisory activities in connection with such a site or project, or an installation or drilling rig or ship used for the exploration or development of natural resources, constitutes a permanent establishment where such a site, project or activity exceeds six months in its duration.

Foreign Tax Relief
Foreign-source income, ie: received in Portugal but originating abroad, net of foreign tax, is taxable in Portugal unless a Double Taxation Treaty (“DTT”) applies. Portugal and the US have signed a DTT which has been in force since 1996. This DTT applies to persons resident in one or both of the Contracting States. The rates which are to be applied by the Portuguese tax authorities on any Portuguese source income paid by a Portuguese entity to an individual or corporate entity tax resident in the US may be summarised as shown in Table 1.

Foreign dividends received by a Portuguese company
Any tax paid by a resident of Portugal on US source income which, according to the DTT, may be taxed in the US, is deductible from Portuguese corporate income subject to certain limitations. For the Portuguese company to benefit from the reduced tax rate, it must control at least 25% of the US company’s voting rights.

Dividends paid by a Portuguese company to foreign entity
Dividends paid by a Portuguese subsidiary to a US parent company are subject to a 5% Portuguese withholding tax rate, provided the foreign entity holds at least 25% of the Portuguese share capital for an uninterrupted period of two years prior to the profit distribution; it is 15% in all other cases.

IRS (Income Tax on Individuals)
Individuals are subject to a single income tax commonly referred to as IRS which applies to Portuguese resident and non-resident taxpayers. Resident taxpayers are subject to Portuguese taxation on their worldwide income including income earned abroad (between 12%–42% for gross income exceeding €60.000); while non-residents are subject only to taxation on their Portuguese source income (generally at the following average flat rates: 25% for employed and self-employed income and capital gains, and 20% for dividends and other investment income).

Individuals are deemed to be tax residents in Portugal if one of the following conditions are met:

• they spend more than 183 days per year (consecutively or not) in Portugal;
• or if they have a house in Portugal which on 31 December of the given tax year appears to be their permanent residence.

Members of a family are deemed to have their residence in Portugal where one of the spouses is a Portuguese resident. IRS is imposed on the following categories/type of income: employment income, self-employed income, investment income, capital gains and pensions (life or temporary annuities).

Certain deductions are permitted up to a certain amount such as: social security contributions, medical expenses, interest and charges on loans for the acquisition or improvement of a residence or lease/tenancy payments made to the owner of the residence, cost of education, amongst others.

Value Added Tax (VAT)

VAT is a tax on consumption and applies to activities relating to the supply of goods and services.

The following are subject to VAT:

• an individual, a company, a collective body who/which independently and regularly engage in the production, commerce or supply of services;
• persons who engage in occasional transactions which qualify as commercial transactions as legally defined (for example the purchase of a building for resale);
• any importer;
• persons who inadvertently mention VAT on invoices or on documents equivalent to invoices — individuals or companies (who independently and regularly engage in the production, commerce or supply of services/engage in occasional transactions which qualify as commercial transactions) who acquire services relating to the hiring of transport supplied in the Portuguese territory by a taxpayer who does not have its headoffice, a place of management or a permanent establishment in the EU;
• individuals or companies (who independently and regularly engage in the production, commerce or supply of services/ engage in occasional transactions which qualify as commercial transactions) who acquire goods or services in Portugal supplied by a taxpayer not having a head-office, place of management or permanent establishment.
• individuals or companies that acquire gas and electricity, under the terms established in the VAT Code, where the seller entity does not have a head-office, place of management or permanent establishment in Portugal on where the transaction was carried out.

A branch and its foreign head office are treated as independent taxpayers and supplies between them are subject to VAT. Foreign companies producing taxable supplies within Portugal must appoint a VAT representative responsible for fulfilling relevant administrative obligations and settling tax payments on their behalf. The general VAT rate, for the transmission of goods and supply of services is 21%. Other rates apply for certain goods and services and in the regions of Madeira and the Azores.

Intellectual property

Portugal is a founding member of the International Union for the Protection of Patents and Trademarks established under the 1883 Convention of Paris and has also signed all subsequent revisions, including the Stockholm Convention which instituted WIPO (World Intellectual Property Organization) based in Geneva.

The following protection is afforded under Portuguese law:

• Patents — 20 years;
• Trademarks — 10 years — indefinitely renewable for further 10-year periods;
• Industrial drawings and models — five years — renewable for further five year periods;
• Business names and logos — 10 years — indefinitely renewable for further 10-year periods.

Employment

Unless the parties to an employment contract expressly choose a different governing law, employment relationships are subject to Portuguese law irrespective of the employee’s nationality.

Examples of important employee rights include:

• The right to oppose unfair dismissal and seek either reinstatement or compensation;
• Restricted and exceptional situations where limited duration employment contracts are allowed which include limitations on overtime practice; and
• The right to a Christmas and holiday allowance every year, each equivalent to one month’s salary.

Redundancies may be based on market, structural or technology grounds, however, relevant trade unions and the Inspectorate General for Employment must be consulted. Employment relationships are often also subject to collective agreements and internal employer policies and regulations.

US citizens performing an independent activity without an employment agreement such has traders, businessmen, independent professionals, amongst others, must be insured compulsorily under a social security scheme on a continuing basis, for several contingencies, namely unemployment, accidents, sickness, invalidity, maternity, retirement, and others. All foreign employees in Portugal (whether employees of a company or directors or members of corporate bodies of a Portuguese or non- Portuguese company, branch or subsidiary) are subject to Portuguese Social Security contributions. The total rate for employee deductions is fixed presently at 34,75% of all remuneration and benefits paid by the employer, 23,75% of which is paid by the employer and 11% by the employee. Taxable income includes the base salary, commission, bonuses, out of hours work, vacation subsidies amongst others.

All non-EU and non-EEA employees must obtain a work permit before entering Portugal.

While we have attempted to ensure the accuracy of the information contained herein, we do not warrant that it is complete or accurate, and we are not legally responsible for errors or omissions. This document is for general information purposes only. Specific legal advice should be sought for all other purposes.

Contacts:
Barrocas Sarmento Neves
Tel: +351 (0) 21 3843300 - Fax: +351 (0) 21 3870265 - E-mail: info@barrocas.com.pt - Website: www.barrocas.com.pt
Manuel P Barrocas, E-mail: mpbarrocas@barrocas.com.pt - Claudia Santos Cruz, E-mail: ccruz@barrocas.com.pt

 

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