Establishing your business in Portugal

Why do business in Portugal?

Portugal is not the first country many think of as a European business hub, but the authorities are trying to change this. Portugal offers a wide array of tax incentives for businesses and skilled employees alike, ensuring that it is steadily building its reputation.

Overheads and trade costs are low in Portugal, while the profit potential is high due to access to a range of nations. Portugal still enjoys good trading relations with its former colonies of Angola, Brazil, Angola and Mozambique, while the nation is also an early adopter of technology and English is widely spoken.

Territory data

How to set up payroll in Portugal

Portugal’s economy has seen some tough times but is steadily bouncing back. This means that the country is welcoming to foreign businesses, especially investors. The authorities in Portugal make setting up payroll as simple as possible, to create plentiful employment opportunities for locals.

Portugal offers tax breaks to businesses, with a company tax of just 21%. However, you will need to pay 23.75% of any employee’s salary as a social security tax. The good news is, basic salaries in Portugal are comparatively low, especially compared to most countries in Western Europe. The average salary is around €21,000 PA, and the minimum wage is €740.83 per month.

In addition to social security taxes (employees pay an additional 11% on top of your contribution of 23.75%), employees must pay income tax. This is withheld by the employer and supplied to the Portuguese tax office. There are seven rates of income tax in Portugal.

• Salary of €7,111 or lower – 14.5% tax rate
• Salary of €7,112 – €10,371 – 23% tax rate
• Salary of €10,372 – €20,321 – 28.5% tax rate
• Salary of €20,322 – €25,074 – 35% tax rate
• Salary of €25,075 – €36,966 – 37.5% tax rate
• Salary of € 36,967 – €80,881 – 45% tax rate
• Salary of €80,882 or above – 48% tax rate

These individual income taxes seem high. Portugal is keen to attract highly skilled employees from other nations, though. This has led to the non-habitual tax regime. Immigrants to Portugal that qualify for this scheme will see their income tax capped at 20% (10% for any overseas pension income), regardless of salary.

Portuguese employment law and HR considerations

As Portuguese employers pay 23.75% of an employer’s salary in social security taxes, mandatory benefits are comparatively limited. An employer will need to make payments into a worker’s compensation insurance package and allow 30 calendar days of holiday. Holiday entitlement is taken very seriously in Portugal, so you must allow employees to take their time off. 

The working week of employees in Portugal is protected by law. Employees must not be asked to work more than 8 hours per day without an agreement, and never more than 60 hours per week. A rest break of at least 11 hours between shifts is also inscribed in law, while very few Portuguese people work on a Sunday. Overtime is payable at a rate of an additional 25% of an hourly rate for the first hour and 37% our hour after this. If asking an employee to work a Saturday or public holiday, expect to pay time-and-a-half.

Meal allowances are also written into the contract of many employees in Portugal. Additional discounts and subsidiary programs are optional. Further benefits are also discretionary, though a private healthcare policy will make you an appealing employer. While Portugal has a public health service, many nationals do not consider it up to the standards of other European nations. 

Sick pay is considered the responsibility of the government and is financed by social security payments. Portuguese employees are entitled to a minimum of 4 sick days per year. Social security also finances parental leave. New mothers are entitled to 120 days of leave, paid by the state. New fathers, meanwhile, are entitled to 20 mandatory days of paternity leave. A further 5 are optional, covered by social security. Once mandatory parental leave has expired, parents can negotiate as to who requests further leave.

Naturally, as an employer, you will be expected to offer other forms of leave. Bereavement, family emergencies, weddings and requests for study leave should be all honoured. Also, flexible working hours are greatly appreciated. As a nation, Portugal is locked in a cultural battle between family values and business responsibilities. An employer that allows employees to marry these ideals will be considered desirable.

Setting up a subsidiary entity in Portugal

It is comparatively simple to set up a branch of your business in Portugal if this is your preference. You will just need to prove that the parent business remains in good standing and arrange all necessary tax reporting and filing to the Portuguese Tax Office. The UK and Portugal have a double taxation treaty in force, so a British business will not see any global profits taxed twice.

The corporate tax rate for a private limited company in Portugal is comparatively low at 21%. This makes a limited liability company an appealing option. You will only need to pay these local taxes, and there is little red tape. A private limited company does not need to appoint a board of directors, for example. As always, a private limited company will not pass any debts or legal difficulties to a parent business.

The process of opening a private limited company in Portugal is:

• Naming the company (you can share the name of an existing British business, as long as this will not create marketplace confusion)
• Draw up the Articles of Association
• Open a business account with a Portuguese bank
• Register for VAT payments (between 18-23%), an individual tax number and a business tax number for social security tax repayments
• Apply for a business license
• Register the business with Conservatorias de Registo Comercial

Alternatively, you could purchase a shelf company. These are ready-made businesses that are awaiting ownership. You will not be able to choose the name of this business. Some of the administration may already have been completed though.  

Country nuances

Any business venture in Portugal requires at least one director. If you wish to operate a public company (known as a Sociedade Anónima, or SA), you must have at least five directors. A private limited company (Sociedade por Quotas, or LDA) can have just one director. 

It is not essential that a director is a resident of Portugal. You’ll need a Portuguese bank account though, and at least one staff member must act as an agent and go-between between bank and business. Any non-resident associated with a Portuguese business will also need a tax number in the country.

Doing business can seem a little alien at first, as Portuguese nationals have some customs that seem odd. The concept of punctuality is one of these. In Portugal, timekeeping is not seen as a big issue – especially in the south. The host of a meeting will be expected to arrive on time, but it is considered good manners for everybody else to be five minutes late. Anything up to twenty minutes is deemed acceptable, though.

This laxness surrounding time can also extend to scheduling. You may need to be precise when asking for a meeting. An associate may say, “let’s meet in the afternoon”, but this could be any time between lunch and 6 pm. Do not mistake this for apathy, though. It is important to attend a meeting in Portugal in formal business wear – ideally following the latest fashion trends. Your attire will be noticed and assessed.

Finally, be aware that gift-giving is common between clients and suppliers in Portugal. You may be expected to bring something from your own country, such as a fine bottle of wine (never flowers). If you are presented with a gift, open it and acknowledge gratitude at once, and follow up with a thank you note. While Portugal has strict anti-corruption laws, refusing a gift is seen as highly offensive. This practice is considered a mark of respect between business partners, not an attempt at bribery.