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.
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
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.
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.
Setting up in Portugal FAQs
How long does it take to set up a Portuguese entity?
The Portuguese authorities initially make life easy to set up an entity. This could take as little as a fortnight. However, it may be up to 6 weeks before you can make a hire as a Non-Resident Employer (NRE) or 12 weeks as a private limited subsidiary business when the wheels of bureaucracy start to grind.
What is the minimum share capital required to establish an entity in Portugal?
To start a private limited company (Sociedade por Quotas, or LDA) in Portugal, the minimum capital requirement is €5,000. A public company that plans to trade on the stock exchange (Sociedade Anónima, or SA) requires a share capital of at least €50,000.
Can you establish a branch of your company in Portugal?
Yes, Portugal welcomes international businesses opening a branch to trade in the country. For your application to be successful, you will need:
• Certificates of Good Standing and Incorporation, and a copy of the Memorandum & Articles, for the parent business
• A copy of minutes from an AGM or Board of Director’s meeting that resolved to open a branch in Portugal
• A member of the board with Power of Attorney
• A Portuguese national to act as a legal representative
The branch will also need a local bank account and a charted accountant registered to Portugal to act as liaison with the bank. The branch must register with the Tax Office and file annual income tax and VAT reports.
Do you need to set up a local bank account in Portugal?
You need a business account with a local bank to trade in Portugal. This should be set up at the same time as your business.
What is the total cost to hire an employee in Portugal?
Expect to spend a total of around 1.265 times an employee’s annual salary to make a new hire in Portugal.
In Portugal, can employment contracts be terminated at will by the employer?
No, an employee cannot be terminated at will in Portugal. There are three acceptable reasons to terminate a contract in Portugal:
• Collective dismissal due to a business winding up
• Individual redundancy when a role is dissolved
• Dismissal on grounds of suitability or discipline
Any employee must be notified of their dismissal in writing and provided with a reason for the decision. If dismissing an employee on disciplinary grounds, the employee is entitled to a hearing before the termination is finalised.
How much notice is required depends on the contract between the employer and employee. By law, severance pay of 18 days of a base salary is required. Employees in senior positions or with long service may be entitled to more.
What is the standard annual leave entitlement in Portugal?
For their first year of employment, Portuguese employees accrue calendar 2 days of holiday for every month worked. After this, employees are entitled to 30 calendar days of holiday per year. This usually translates as 22 business days. Portugal also celebrates 13 national holidays per year.
What is the standard working week in Portugal?
The standard working week in Portugal is Monday to Friday, from 9 am to 6 pm. Portuguese employees do not take an afternoon siesta, but lunch breaks are typically 90 minutes long rather than the traditional hour. No employee can exceed 8 hours of work per day without an agreement, and Portuguese law caps the working week at 60 hours including overtime.
What are common supplementary employee benefits in Portugal?
Portugal has a state-sponsored national health service, but this is not very highly regarded. As a result, private healthcare and health insurance policies are a hugely popular supplementary benefit that will tempt employees. Additional offers could include subsidised meals, company cars, flexible working hours and health initiatives, such as a cycle to work scheme or discounted gym membership.
What are the main options for setting up Payroll in Portugal?
Your business can handle payroll in a variety of ways in Portugal.
• branch can be set up and arrange payroll. The parent company retains responsibility for legal compliance, while and the branch handles matters of administration and reporting to the tax authorities
• A subsidiary business can be set up, handling payroll in-house or outsourcing to a local specialist business
• You could utilise a Professional Employer Organisation (PEO). This business will handle all elements of recruitment and payroll, taking ownership of legal compliance so you do not need to establish a Portuguese business entity. While this is the costliest option, it’s also the least labour-intensive.
What is the non-habitual tax regime in Portugal?
The non-habitual tax regime is designed to entice highly skilled workers into Portugal. To qualify, employees must have not lived in the country for five years before moving to Portugal, and hold an EU, EEA or Swiss passport or a Golden Visa. A non-habitual tax resident must provide proof of residence in Portugal, though this can be rented accommodation. Homeownership is not a necessity.
Only vocations that are deemed high value will qualify an individual as a non-habitual tax resident. Those that do qualify will see their income tax capped at 20%, regardless of their salary. If the employee is eligible for a lower tax rate, they can opt out of the program.
As of 2020, a non-habitual tax resident will also pay a 10% tax on any pension income that stems for overseas. This was put in place to prevent skilled employees from earning a living elsewhere, then moving to Portugal for a tax-free retirement in the sunshine.
For the non-habitual tax incentive, which industries are defined as high value in Portugal?
The follow vocations are considered high value in Portugal and may qualify an individual as a non-habitual tax resident.
• Auditors and Tax Consultants
• Business Investors
• Computer Programmers and Software Consultants
• Medical Professionals (GPs, Dentists or Psychiatrists)
• Painters and Sculptors
• Performing artists of stage, screen or radio
• Senior Managers and Directors of a Business
• University Lecturers
What work Visa options are available in Portugal?
Employees with citizenship of an EU member state will not need a Visa to work in Portugal. Anybody else will need to apply for a Residence Visa for Employees. This will cost €83, alongside another €72 for a residence permit.
Alternatively, highly skilled employees can apply for an EU Blue Card. This will cost €107, plus €100 for a corresponding residence permit. There may also be admin charges levied.
The employee must have a job offer in writing before applying for a Portuguese Visa, and patience will be required. Portuguese bureaucracy can be a slow-moving monolith.
Another alternative is the Golden Visa. This is a five-year residency and working permit for non-EU nationals. It’s tougher to get, though. To qualify for a Golden Visa, you must meet at least one of the following criteria:
• Transfer at least €1 million into a Portuguese bank account
• Invest €350,000 into science, technology or venture capital, or €250,000 into a Portuguese cultural arts program
• Purchase property in Portugal with a value of at least €500,000 (dropping to €350,000, including the cost of renovations, if the property is more than 30 years old or in an area of urban regeneration)
• Invest at least €350,000 into a business that will create a minimum of five permanent jobs for at least three years, or create a business that offers a minimum of ten new permanent jobs
The holder of a Golden Visa does not need to live in Portugal. They just need to spend a minimum of seven days in the country each calendar year. The Golden Visa is initially issued for one year and can be renewed twice for 24 months at a time. After five years of continued Golden Visa ownership, the holder can apply for Portuguese citizenship.