Business Taxation in Portugal
A paper by
José Pedro Magalhães
Table of Contents
Introduction
1. Investing in individual name
1.1 Income Taxation
1.2 - Capital gains
1.3 Inheritance tax
2 - Investment through a Portuguese company
2.1 - Income taxation
2.2 - Taxation on the distribution of profits
(to non-resident shareholders)
2.3 Capital gain taxation
2.4 Inheritance tax
3 – Investment through a non-resident company
3.1 – Income taxation
3.2 - Capital gain taxation
3.3 - Inheritance tax
Comparative schedule
Introduction
This brief
paper analyses from a tax point of view three alternative procedures to set up
a business in Portugal:
1. - in individual name;
2. - Forming a Portuguese limited liability
company (“sociedade comercial por quotas de responsabilidade limitada - Lda.”);
3. - Using a non-resident company.
In the
three instances I will be looking into three different sides of taxation: on
income; on sale of business or shares; on transfer of business or shares due to
death.
Please bear
in mind that only tax considerations are made and in a very brief, limited way.
Matters
such as liability (which is not limited in the event of investment in individual
name) and other legal aspects of the investment are not covered by this paper.
The information
contained in this paper is correct at the time of writing (August 2006).
This paper is
not to be construed as legal advice or basis for decision without further
analysis of the particular situation.
1. Investing in individual name
1.1 Income Taxation
Any profit
made is subject to IRS (individuals' income tax - “Imposto sobre o Rendimento
das pessoas Singulares).
IRS is
divided into different categories according to the source of the income.
In the
event of a business the income is classified as “category B”.
The category
B profit subject to taxation is calculated based either on
a)
the
business accounting books;
b)
Through
a “simplified” system using indicators for each economic sector; in the event
such indicators are not available (the most current situation), by application
of a coefficient of 0.20 to the sales or 0.65 to other type of income in this
category.
The
simplified system is applicable only to businesses that in the previous year
have not exceeded any of the following limits:
a)
sales
volume €149,739.37;
b)
Gross
value of other income in category B €99,759.58.
If any of
those limits is exceeded for more than two years or by more than 25% in one
year, organised accounts become compulsory. You may always opt for organised
accounts.
The rate of
taxation depends on the global income (sum of all IRS categories).
|
Global
Taxable Income |
Rates
- Percentage |
Rates
– Percentage |
|
Euros |
Normal
(A) |
Average
(B) |
|
Up to 4,451 |
10.5 |
10.5 |
|
More than 4,451 up to 6,732 |
13 |
11.3471 |
|
More than 7,732 up to 16,692 |
23.5 |
18.5986 |
|
More than 16,692 up to 38,391 |
34 |
27.3037 |
|
More than 38,391 up to 55,639 |
36.5 |
30.1545 |
|
More than 55,639 up to 60,000 |
40 |
30.8701 |
|
Above 60,000 |
42 |
- |
The value
above €4,451 is divided into two parts: one equal to the limit of the highest
echelon in which it fits to which the average rate (B) of that echelon is
applied; another equal to the excess to which normal rate (A) of the
immediately following echelon is applied.
For
example, considering a Global Taxable Income of €40,000.00 euros the tax to pay
would be €2,878.34 [(€38,391x27.3037%) + (€1,609x36.5%)].
1.2 - Capital gains
The gain
derived from the sale of the business is considered as part of the income and
taxed in the way described above.
1.3 Inheritance tax
The value of
the business is subject to Stamp Duty at 10%, except if the heir is the spouse and/or
a descendant or ascendant of the deceased in which case no tax is due.
2 - Investment through a Portuguese company
2.1 – Company Income taxation
The profit
made every year is subject to IRC - corporate income tax (“Imposto sobre o
Rendimento das pessoas Colectivas”).
The profit
is calculated based either on
c)
the
accounts;
d)
Through
a “simplified” system using indicators for each economic sector; in the event
such indicators are not available (the most current situation), by application
of a coefficient of 0.20 to the sales or 0.45 to other type of income in this
category.
The
simplified system is applicable only to companies that in the previous year
have not exceeded €149,639.37 worth of income and do not opt for the normal
system. If the limit is exceeded for more than two years or by more than 25% in
one year, the normal system becomes compulsory.
The rate of
taxation is 25% in the normal system and 20% in the simplified system.
2.2 - Taxation on the distribution of profits
2.2.1. Non-resident shareholders
In the
event of individual shareholders,
the distribution of profits is subject to IRS (Individuals Income Tax) at a
fixed liberating rate of 20%.
In the event
of corporate shareholders (companies):
There is no taxation if the terms and conditions
of Council Directive 90/435/EEC of 23 July 1990 on the common system of
taxation applicable in the case of parent companies and subsidiaries of
different Member States are met and provided: a) the corporate
shareholder/company holds at least a 20% share in the capital of the Portuguese
subsidiary company; and b) for more than two uninterrupted years before the
date of distribution of profits.
Otherwise,
the distribution of the profits is subject to IRC at a fixed liberating rate of
25%.
In both
instances (individual and corporate shareholders) the tax paid in Portugal is
deductible from tax paid in the United Kingdom under the double-taxation
avoidance agreement between the two countries.
2.2.2.
Resident shareholders
The
distribution of profits to individual shareholders is subject to IRS under
category E. It adds to other taxable income to determine the Global Taxable
Income and the applying rates (as above in 1.1).
The
distribution of profits to corporate shareholders is part of the profit subject
to IRC.
2.3 Capital gain taxation
2.3.1. Non-resident
shareholders
The gain
obtained in the event of sale of shares is subject to taxation
- Under IRS at 10% in the event of
individual shareholders;
- Under IRC at 25% in the event of
corporate shareholders.
2.3.2
Resident shareholders
The gain
obtained by individual shareholders in the event of sale of shares is subject
to IRS. It adds to other taxable income to determine the Global Taxable Income
and the applying rates (as above in 1.1).
The gain
obtained by corporate shareholders in the event of sale of shares is part of
the profit subject to IRC.
2.4 Inheritance tax
This only
applies to individual shareholders.
The value of
the shares is subject to Stamp Duty at 10%, except if the heir is the spouse and/or
a descendant or ascendant of the deceased in which case no tax is due.
3. Investment through a non-resident company
3.1 Income taxation
The company
has to create a Portuguese branch.
Any profit
made by the branch is subject to IRC.
The rate of
taxation is 25%.
3.2 Capital gain taxation
In the
event of sale of business, any gain obtained is subject to taxation under IRC.
The sale of
the shares of the non-resident company is subject to taxation in Portugal only if
more than 50% of the active of the company is formed by real estate assets
located in Portugal.
3.3 Inheritance tax
In the
event of death of the individual shareholders of the non-resident company there
is no taxation as there is no transfer of ownership in Portugal.
Appendix I - Comparative schedule
|
Taxation in Portugal |
individual |
Portuguese Company - individual shareholders |
Portuguese Company - corporate shareholders |
Non-resident
Company |
|
on income |
IRS -
sliding scale up to 42% |
IRC at
25% or 20% (simplified system) |
IRC at
25% or 20% (simplified system) |
IRC at
25% or 20% (simplified system) |
|
on profit
distribution |
Not
applicable |
IRS at 20%
(non-resident) or added to global income (resident) |
IRC at
25%(non-resident) or added to global income (resident) |
Not
applicable |
|
on gain |
IRS - Sliding
scale up to 42% on sale of business |
IRS at 10%
(non-resident) or added to global income (resident) on sale of shares |
IRC at 25%
(non-resident) or added global income (resident) on sale of shares |
IRC at 25%
or 20% on sale of business; no Portuguese taxation on sale of shares, unless
more than 50% of the active of the company is formed by real estate assets
located in Portugal |
|
on inheritance |
Stamp
Duty at 10% on the value of the business unless the heir is the spouse or a
descendant or ascendant of the deceased |
Stamp
Duty at 10% on the value of the shares unless the heir is the spouse or a
descendant or ascendant of the deceased |
Not
applicable |
Not
applicable |
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