Disclaimer: The overview that follows is a generic summary in relation to which IBC make no representations or warranties. It is not advice, should not be treated as such. For any legal advice or to know more about relevant legislation applied to you, please, contact us.

Tax Residence & Liability to Income Tax Portugal:

  • Resident legal persons have their registered office or effective management in Portugal, and are generally subject to the same tax for Portuguese companies on their net profits worldwide.

  • Non-resident entities with a permanent establishment in Portugal are subject to IRC on the net profit of that establishment, but not otherwise (net profits distributed by the permanent establishment are not subject to additional taxation).

  • A non-resident company is considered to have a permanent establishment in Portugal if it has a fixed establishment in the country (branch, office or shipyard) or acts through a resident dependent agent. Non-resident entities that do not have a permanent establishment in Portugal are only taxed on income from Portugal.

Compliance and Deadlines:

  • For IRS purposes, the tax year corresponds to the calendar year, with the deadline for submitting the annual return being June 30, extendable to December 31. If there is foreign income the deadline for paying income tax is August 31.

  • Couples married and cohabiting partners also have the possibility to file a joint IRS declaration, unless one of the spouses is not a resident. You only have to submit a declaration if you own a property in Portugal or have a Portuguese source of income. Filing a joint tax return may be beneficial in a situation where the couple’s total income benefits from a lower tax rate when divided by two.

Taxable Profits Calculation:

Portuguese accounting standards follow International Financial Reporting Standards (IFRS) closely and EU Directives apply to intra-community business transactions.

Deductibility of Losses

This tax can be carried forward during 5 years, but is limited 70% of taxable profits.

Exceptions to the Deductibility of Costs

  • Interest on shareholder loans that exceeds by more than 1.2 percentage points the 12 month Euro Interbank Offered Rate;
  • Expenses that are titled by documents that do not contain a valid taxpayer id number;
  • Penalties and fines;
  • Corporation tax and surtaxes;
  • Depreciation of private vehicles having a price in excess of €25,000 or €50,000, depending on the purchase date and the type of vehicle, as well as other expenses of a deemed luxury nature;
  • Goodwill, with the odd exception;
  • Provisions, with the exception of those for debt litigation, contractual guaranties granted to clients, remedies for environmental damages and mandatory provisions by banks and insurance companies;
  • Interest in excess of €1 million or of 30% of EBIDTA, whichever the greater, except in the case of financial and insurance institutions;
  • The writing off of bad credits that are less than 6 months old and of bad credits for which no recovery proceedings have been initiated, which are otherwise tax deductible within limits, namely 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.

Depreciation Rates

The maximum rates of depreciation are set by law and tax deductions.

Maximum annual rates: 5% for industrial buildings; 12.5% to 25% for office equipment; 20% for electronic equipment and 33.33% for computers and software.

Simplified Regime for Small Businesses

Some business may opt for “simplified accounting regime”, under which they will be taxed on a deemed profit calculated as a pre-defined percentage of sales that varies between 4% and 100%, in accordance with the type of business. During the first financial year this percentage is reduced by 50%, and, during the second, by 25%.

Corporation Tax Payment and Payments on Account

Generally, Corporation tax in respect of the previous financial year is payable in the 5th month of the new financial year. However, by default a resident business is required to make payments on account of the tax in respect of the current financial year, payable in the 7th, 9th and 12th months of the current financial year.

The payable amounts for a business having an annual turnover of less than €0.5m are 80% of the tax assessed in respect of the previous financial year, or 95% if the turnover is higher, except that the payment due by the 12th month may be skipped in the event the current year’s tax amount is expected not to warrant it. Then, by the 5th month of the new financial year the business either pays the excess tax due or gets reimbursed for any excess payment made.

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