Madeira tax system - taxation of Portuguese companies and individuals: VAT, income tax and capital gains

Portuguese tax residents pay tax on their worldwide income, non-residents pay tax on their income from sources in Portugal.

Non-residents pay tax at the rate of 25% on their remuneration.

Income tax is paid at progressive rates:

• income up to 7,112 EUR - 14.5%;
• income from 7,112 to 10,732 EUR - 23%;
• income from 10,732 to 20,322 EUR - 28.5%;
• income from 20,322 to 25,075 EUR - 35%;
• income from 25,075 to 36,967 EUR - 37%;
• income from 36,967 to 80,882 EUR - 45%;
• income over 80,882 EUR - 48%.

Taxpayers with income over 80 000 EUR pay additional solidarity tax at a rate from 2.5% to 5%.

Investment income is taxed at a rate of 28%; there is an option to pay tax at progressive rates. If the bank account or investment is in a jurisdiction which Portugal has classified as a tax haven, the higher tax rate of 35% applies.

Capital gains, in general, are taxed at a rate of 28%.

50% of capital gains on the sale of real estate are included in taxable income, taxed at progressive rates. There is an exemption for the principal dwelling.

Non-residents pay tax on 100% of profits from the sale of Portuguese assets at the rate of 28%.

Special preferential tax treatment may be granted under certain conditions to persons who have moved to Portugal. Their remuneration for work in a number of industries may be taxed at a rate of 20% and their foreign income is exempt from taxation.

Income tax is paid on a company's worldwide income.

For foreign permanent establishments, an optional exemption can be applied if certain conditions are met.

The standard tax rate is 21%. In some regions and for small businesses for part of the income the rate may be lower.

State additional tax is levied at a rate of 3% to 9% on profits in excess of certain amounts, as well as additional taxes at the level of municipalities - up to 1.5%. Some regions also charge an additional regional tax.

For some expenses, companies have to pay tax calculated as a percentage of such expenses (this applies to hospitality expenses, undocumented expenses, etc.).

Dividends received are exempt from taxation if the conditions for the substantial participation exemption are met: participation of at least 10%, ownership for at least 1 year, the company is not from a blacklisted country, is subject to income tax as specified in the EU directive on subsidiaries and parent companies or income tax at a rate not lower than 60% of Portuguese tax and certain other conditions.

Capital gains are generally taxed at ordinary tax rates.

Gains from the sale of shares may be exempt from taxation if the conditions for the substantial participation exemption are met: participation of at least 10%, ownership for at least 1 year, the company is not from a blacklisted country and some other conditions.

A foreign company is considered controlled if a resident owns directly or indirectly at least 25% of its capital, voting rights or rights to income and assets, its profits are taxed at a rate lower than half of the Portuguese income tax or the company is from a "black" list country.

The CFC rules may not apply to companies from EU or EEA countries if there are real economic reasons for setting up the company and it is engaged in relevant commercial activities.

The CFC rules shall also not apply if passive income of the company does not exceed 25%.

Passive income includes not only interest, dividends, profits from the sale of securities, etc., but also profits from trading operations with related parties.

The withholding tax on dividends and interest is 25%.

The rate goes up to 35% if the recipient is from a blacklisted country. Dividends, in general, may be exempt from taxation if the recipient is from a SIDN country with Portugal or from an EU, EEA member country, is taxed in the country of residence at a tax rate of at least 60% of the Portuguese tax, owns at least 10% of the Portuguese company for at least one year.

If royalties are paid, the tax is levied at the rate of 25%.

Tax may be withheld on certain other payments of income.

Withholding taxes are reduced based on applicable double taxation treaties and EU directives.

The standard VAT rate is 23%.

Reduced rates of 13% and 6% are applied to some goods and services.

Social contributions, including pension contributions, contributions to support the unemployed and families, are paid by employees at the rate of 11% and by employers at 23.75% for workers' compensation.

Employers must also buy occupational accident insurance, premium amounts vary by industry.

Annual property tax is generally levied at rates of 0.8% in rural areas and 0.3% to 0.45% in cities.

In addition, there is an additional municipal property tax on land for construction and residential properties.

Rates vary depending on the category of owner and the value of the property.

When transferring property in Portugal, a municipal tax is levied at rates of up to 6.5% on urban property, 5% on rural property, and 10% if the purchaser is a company from a blacklisted country.

Stamp duties are paid on various transactions and documents.

The rates vary greatly depending on the transaction.

There are no exchange controls in Portugal.

Portugal has concluded 79 Double Tax Treaties (DTC) and 16 Tax Information Exchange Agreements (TIEA) with the following jurisdictions:

79 DTCs: Algeria, Andorra, Austria, Bahrain, Barbados, Belgium, Brazil, Bulgaria, Canada, Cape Verde, Chile, China, Colombia, Croatia, Cuba, Cyprus, Czech Republic, Côte d'Ivoire, Denmark, Estonia, Ethiopia, Finland, France, Germany, Greece, Guinea-Bissau, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, South Korea, Kuwait, Latvia, Lithuania, Luxembourg, Macao, Malta, Mexico, Moldova, Montenegro, Morocco, Mozambique, Netherlands, Norway, Pakistan, Panama, Peru, Poland, Qatar, Romania, Russia, San Marino, Saudi Arabia, Senegal, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, São Tomé and Príncipe, Timor-Leste, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela, Vietnam.

16 TIEAs: Andorra, Anguilla, Antigua and Barbuda, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Gibraltar, Guernsey, Isle of Man, Jersey, Liberia, Saint Kitts and Nevis, Saint Lucia, Turks and Caicos Islands.

In addition, Portugal has signed and ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The Multilateral Convention entered into force for Portugal on June 1, 2020.