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Taxation in Portugal
 
 
 

Business Taxation

Companies doing business in Portugal are subject to a number of taxes, including corporate income tax, municipal tax, various withholding taxes, value added tax, social security contributions, stamp tax and real estate tax.

Taxable Income and Rates

The standard corporate tax rate in 2007 is 25%. In addition, the municipal surcharge is a local tax that is charged up to 1.5% of taxable profits, thus giving rise to a maximum possible effective tax rate of 26.5%. Corporate tax applies to companies and other corporate entities, including public enterprises, co-operatives and non-profit-making organisations.

Branches of foreign companies in Portugal are subject to the same tax regime as resident entities.
Companies with registered or effective headquarters or permanent establishments in the semi-autonomous regions of the Azores and Madeira benefit from tax reductions.

Taxable Income Defined
Corporate income tax is imposed on the worldwide profits of resident entities and Portugal-source income of non-resident entities. Under Portugal’s participation exemption, dividends received by a resident company from a Portuguese resident are exempt from tax provided the recipient is not considered a transparent entity and has held directly at least 10% of the capital of the payor company (or the acquisition value of the participation is at least €20m) for one year before the distribution takes place.

Deductions
A wide range of business expenses may be deducted in calculating the profits of a business. However, to be deductible, the expenses must be necessary for the purpose of producing taxable income and must be substantiated.

Examples of deductible expenses are as follows:

• Expenses related to the production or purchase of goods or services, such as materials, labour, energy and other manufacturing, conservation and repair costs;
• Financial expenses, such as loan interest, discounts given, brokers’ fees, differences in exchange rates, etc.;
• Taxes (except for the corporate income tax and municipal surcharge) and social security contributions;
• Amortisation and depreciation allowances;
• Provisions; and
• Capital losses.

Companies investing in research and development (R&D) can deduct from their taxable base an amount corresponding to 20% of the expenses incurred during the taxable period. This percentage is increased to 50% of the expenses exceeding the average investment amount in the previous two taxable periods, but limited to €750,000.


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