Taxes in Portugal: All you need to know about taxes

Portugal is a destination with tax benefits for locals and foreigners, being a place with security, stability and affordable cost of living, so in this article we tell you what you need to know about taxes in Portugal. Here we explain the incentives that Portugal offers to emerging technology companies, start-ups, and what taxes are payable depending on whether you are a natural or legal person in this Western European country. 

Taxes for individuals or natural persons in Portugal

The tax system in Portugal includes various types of both direct and indirect taxes that residents and workers have to pay. Here are the main taxes and their percentages.

Personal Income Tax (IRS)

Personal Income Tax, or IRS, is one of the main taxes payable by residents in Portugal. This tax is progressive, which means that as the level of income increases, so does the percentage of tax payable. The percentages vary according to annual income brackets, and are currently divided as follows:

• Income up to €7,479 ($7,792.33): 14.5%
• Income from €7,480 ($7,793.37) to €11,284 ($11,756.74): 23%
• Income from €11,285 ($11,757.78) to €15,992 ($16,661.98): 26.5%
• Income from €15,993 ($16,663.02) to €20,700 ($21,567.22): 28.5%
• Income from €20,701 ($21,568.26) to €26,355 ($27,438.29): 35%
• Income from €26,356 ($27,439.34) to €38,632 ($40,250.47): 37%
• Income from €38,633 ($40,251.51) to €50,483 ($52,597.96): 45%
• Income over €50,484 ($52,599.01): 48%

€50,484 ($52,599.01) will be subject to the higher rate, although the total percentage will depend on the combination of income, deductions and exemptions that apply in each case.

Example: If a person has an annual income of €30,000 ($31,256.84), they’ll pay different tax rates depending on the brackets, resulting in an effective rate of less than 37% (their maximum rate). This method ensures that those with lower incomes pay a lower effective rate.

Extraordinary solidarity contribution in Portugal

For those with an income of more than €80,000 ($83,351.57) per year, an Extraordinary Solidarity Contribution applies. This is an additional tax that’s calculated on the part of the income above this threshold, and is intended to redistribute income to higher income taxpayers. The rates are:

• Income from €80,000 ($83,351.57) to €250,000 ($260,473.65): 2.5%
• Income over €250,000 ($260,473.65): 5%

This contribution is in addition to the IRS and is calculated only on the tranche exceeding €80,000 ($83,351.57).

Value Added Tax (VAT)

VAT is an indirect tax levied on most goods and services in Portugal. This tax is similar to VAT in other European countries and is applied at different rates, depending on the category of products or services:

• Normal rate: 23 % for most products and services.
• Intermediate rate: 13% (applies to specific foodstuffs and certain services)
• Reduced rate: 6% (applies to basic necessities, such as basic foodstuffs, medicines, and public transport)

For example, while a household appliance would be taxed at 23% VAT, a basic product such as bread would only be taxed at 6%.

Property tax (IMI) in Portugal

Municipal Property Tax (IMI) is a tax payable by all property owners in Portugal. This tax is based on the rateable value of the property and the rate varies depending on the municipality. IMI rates typically range from 0.3% to 0.8% for residential properties and are calculated annually.

• Properties in urban areas: 0.3% – 0.45%
• Properties in rural areas: 0.8%

In addition, there’s an additional tax for those owning luxury real estate, known as the Municipal Tax on High-End Properties (AIMI), applicable to properties worth more than €600,000 ($625,136.75). This additional tax varies between 0.7% and 1.5%.

Inheritance and donation tax in Portugal

Portugal doesn’t impose a general inheritance or gift tax for direct heirs, such as children, spouses or parents. However, there’s a 10% tax on the value of inheritances or gifts made to beneficiaries other than immediate family members. This tax only applies if the transfer of goods takes place within Portugal.

Example: If a person receives an inheritance from a distant relative, such as an uncle, the value of the assets received would be subject to 10% tax.

Car Tax (ISV) in Portugal

Vehicle tax (ISV) is levied on the purchase of new vehicles and the import of used vehicles in Portugal. This tax is based on vehicle type, engine capacity and CO₂ emissions. For reference, vehicles with higher CO₂ emissions and larger engines are subject to higher tariffs.

Alongside the ISV, vehicle owners must also pay the Paying vehicle circulation tax (IUC), which is an annual tax that varies according to the vehicle’s age, fuel type and CO₂ emissions.

Other taxes in Portugal

Portugal has other taxes that apply to certain specific cases. Here are some notable examples:

• Petroleum and Energy Products Tax (ISP): A tax on the consumption of fossil fuels, applicable to petrol, diesel and other fuels.
• Alcohol and Tobacco Tax: This tax is levied on the consumption of alcoholic beverages and tobacco products, and is in line with European Union regulations on excise duties.

Taxes for legal persons or companies in Portugal

Companies operating in Portugal must comply with various tax obligations covering both direct and indirect taxes. We describe the main taxes that legal entities have to pay in the country, with the corresponding percentages and examples to illustrate how they work.

Corporate income tax (CIT) in Portugal

Corporate income tax is the main tax payable by companies in Portugal on their profits. This tax is levied on the profits of legal entities and is subject to a base tax rate, although there are different rates depending on the size of the company and the region where it operates.

1. General tax rate: 21 % of the company’s net profits.
2. Reduction for small and medium-sized enterprises (SMEs): SMEs with an annual turnover of up to €50,000 ($52,094.73) can benefit from a reduced rate of 17% for the first €25,000 ($26,047.36) of profits.
3. Autonomous regions of Madeira and the Azores: In these regions, companies benefit from lower tax rates to encourage economic activity. The CIT rate can be reduced to 11.9% in Madeira and 16.8% in the Azores.

Example: A Lisbon-based company making an annual profit of €60,000 ($62,513.67) will pay 21% on the entire profit, equivalent to €12,600 ($13,127.87) in tax. If the same company operates in Madeira, it would pay 11.9%, reducing its tax liability to €7,140 ($7,439.13).

Municipal tax rebate in Portugal

In addition to CIT, companies in Portugal must also pay a local tax known as Municipal Tax. This tax is administered by each municipality and is levied on the net profit of companies operating in that jurisdiction. Its rate varies between 0% and 1.5%, depending on the activity and location of the company.

Example: If a company in Lisbon makes €100,000 ($104,189.95) in profit, the municipal tax rate will be 1.5%, which adds an additional €1,500 ($1,562.84) to the taxes to be paid. This tax doesn’t apply to all regions of Portugal.

State tax rebate in Portugal

Portugal also applies a State Tax to companies that earn high levels of revenue. This tax is progressive and is levied on the net profits of companies above certain thresholds. The rates are as follows:

• Profits from €1,500,000 ($1,562,841.87) to €7,500,000 ($7,814,209.35): Additional 3%.
• Profits from €7,500,000 ($7,814,209.35) to €35,000,000 ($36,466,310.30): Additional 5%.
• Profits in excess of €35,000,000 ($36,466,310.30): Additional 9%.

This additional tax seeks to spread the tax burden more evenly across companies of different sizes, ensuring that those with higher profits contribute proportionately.

VAT (Value Added Tax) in Portugal

VAT is an indirect tax that businesses must charge their customers for the sale of goods and services. Companies are obliged to register, declare and pay this tax on a regular basis. The current VAT rates in Portugal are:

• General rate: 23 % for most products and services.
• Intermediate rate: 13% (applicable to certain specific foods and services).
• Reduced rate: 6% (applicable to essential goods such as basic foodstuffs and medicines).

Businesses are responsible for collecting VAT from their customers and remitting these funds to the government. VAT is a tax that can be deducted in certain cases, allowing businesses to recover VAT paid on their purchases of goods and services necessary for their business activity.

Example: A company that sells household appliances applies a VAT rate of 23% on each sale. If he sells a washing machine for €500 ($520.95), the customer will pay a total of €615 ($640.77), of which €115 ($119.82) is VAT. €115 ($119.82) to the tax authorities in its monthly or quarterly VAT return.

Stamp Duty in Portugal

Stamp duty in Portugal is levied on specific transactions carried out by companies, such as financing, loans and insurance contracts, among others. The rates of this tax vary according to the type of transaction, and some common examples include:

• Loans: 0.5% of the value of the loan.
• Lease contracts: 10% of the annual value of the contract.
• Bank and commercial guarantees: 0.04% per month on the guaranteed value.

Example: If a company obtains a bank loan of €100,000 ($104,189.46), it will have to pay a stamp duty of 0.5%, which is equivalent to €500 ($520.95).

Property tax (IMI) in Portugal

The Real Estate Tax (IMI) is applicable to companies owning property in Portugal. The IMI rate varies between 0.3% and 0.8% of the rateable value of the property and depends on the municipality where the property is located.

For luxury properties, the High End Municipal Property Tax (AIMI), which applies to properties worth more than €600,000 ($625,136.75), is also levied at additional rates of between 0.7% and 1.5%.

Example: A company owning an office valued at €1,000,000 ($1,041,894.58) could pay IMI of 0.5%, i.e. €5,000 ($5,209.47)per year, plus AIMI if applicable.

Tax on Petroleum and Energy Products (ISP) in Portugal

Companies consuming fossil fuels are subject to the Tax on Petroleum and Energy Products (ISP). This tax is levied on products such as petrol, diesel, natural gas and electricity depending on the quantities consumed. The fees vary according to fuel type and are designed to encourage the use of cleaner energy and reduce dependence on fossil fuels.

Example: A transport company using a fleet of diesel vehicles will pay ISP based on the amount of fuel consumed, which can significantly affect its operating costs.

Tax benefits in Portugal

Portugal offers a series of tax incentives aimed at attracting foreign investment and talent to the country. Some of these benefits are aimed at companies and others at individuals who decide to take up residence in Portugal. Here we highlight the main tax benefits available.

Non-Habitual Residents Regime (NHR) in Portuguese taxation

The Non-Habitual Residents Regime (NHR) is one of the most attractive programmes for individuals and companies wishing to establish themselves in Portugal. This regime allows persons moving to Portugal to enjoy tax benefits for a period of up to 10 years. In general terms, the NHR scheme offers:

• Exemption from taxation on foreign income, such as dividends, interest and rents, under certain conditions.
• Reduced rate of 20% on employment income and high value-added activities carried out in Portugal, such as technology, science and innovation.

This benefit is ideal for entrepreneurs and professionals in specialised sectors who wish to reduce their tax burden while residing in the country.

Incentives for technology investment and development in taxation in Colombia

To encourage innovation, Portugal offers tax credits to companies that invest in research and development (R&D). Through the System of Tax Incentives for Business Research and Development (SIFIDE), companies can deduct part of their R&D investments from corporate income tax. This includes a tax credit of up to 82.5% of R&D expenditures, which is an attractive incentive for companies in innovative sectors.

Free Zones of Madeira and Azores on taxation in Portugal

The autonomous regions of Madeira and the Azores offer tax benefits to companies operating within their free zones. These incentives include:

• Reduced CRI rates, which can be as low as 5%.
• Exemptions or reductions in other taxes, such as stamp duty and social contributions.

These incentives are intended to encourage economic activity in these regions and attract foreign investment.

Tax subsidies for Start-ups and SMEs in Portugal

Portugal has several support programmes for start-ups and SMEs, including subsidies and tax benefits for companies in key sectors, such as technology, tourism and energy. The country also has an ecosystem of incubators and accelerators that help entrepreneurs launch and grow their businesses in Portugal.

Frequently Asked Questions about taxes in Portugal

For those planning to set up in Portugal, whether as individuals or legal entities, the following frequently asked questions provide clarity on specific aspects of Portuguese taxation:

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