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In this document, we will analyze Portugal from an entrepreneurial perspective, taking into account the burdens on entrepreneurs, bureaucratic processes, and the supports and incentives available in this country.

Furthermore, we will compare Portugal with other countries in terms of, for example, tax burden and worker qualifications. These metrics will be useful in understanding whether this country is attractive for entrepreneurship or not.

Portugal from an entrepreneurship perspective:

In fiscal terms:

Taxes that the company must bear:

All companies in Portugal pay at least two taxes:

  • CIT – Corporate Income Tax (IRC in Portuguese):
    • To understand how CIT works, it’s necessary to understand two concepts:
      • Accounting result: it’s the result before taxes found in the company’s income statement (Recognized income in accounting – Recognized expenses in accounting). Corresponds to the accounting profit, when positive.
      • Fiscal result: it’s the result obtained after various corrections and adjustments made to the accounting result. Corresponds to the taxable profit, when positive.
    • The amount of CIT that the company has to pay is calculated as follows:
      1. The company’s accounting result is calculated.
      2. The fiscal result is obtained, based on the accounting result (the necessary adjustments are detailed in this document: modelo 22).
      3. The nominal CIT rates are applied to the company’s fiscal result, if positive (taxable profit). The nominal CIT rates are those defined by law. At the time of writing (May 4, 2024), the general CIT rate in mainland Portugal is 21%. Additionally, there is municipal surtax (a rate that varies by municipality and can reach up to 1.5%) and state surtax (for companies with profits exceeding 1.5 million euros: see values here). Taking all of this into account, the amount of CIT to be paid is determined.
    • It is also very important to calculate the effective corporate income tax rate. This corresponds to the percentage of the company’s profits that are paid to the government. It is calculated by dividing the value of CIT to be paid, calculated previously, by the accounting result. It is the best way to assess the company’s tax burden, since the ratio is calculated in relation to the accounting profit, which better represents the company’s profit for practical purposes than the taxable profit.
  • VAT – Value Added Tax (IVA in Portuguese): is the tax applied to sales or services rendered. It is paid by the consumer, and a balance is made between the VAT paid compared to the VAT received, to calculate whether it is necessary to deliver or receive the difference from the government. In mainland Portugal: normal VAT rate = 23%; intermediate VAT rate = 13%; reduced VAT rate = 6% (for information on what each rate applies to: VAT rates, list 1, list 2)

There are more taxes that can become burdens for the company, such as IMI (“Imposto Municipal sobre Imóveis” – Municipal Property Tax) and IUC (“Imposto Único de Circulação” – Vehicle Circulation tax) in case of owning a property or a company vehicle, respectively.

It’s important to also consider the taxation on the distribution of company profits to partners/shareholders, which has a rate of 28%.

Despite not being a tax, Social Security contributions are another expense for companies. The contribution rate has a value of 34.75% of each worker’s gross salary, with the company paying 23.75% of it, and the workers responsible for the remaining 11%.

Benefits and incentives to starting a company in Portugal:

In Portugal, with the new features brought by the 2024 State Budget, there are incentives and benefits to promote entrepreneurship and innovation, including:

  • Small and Medium Enterprises (SMEs) benefit from a corporate income tax rate of 17%, but only on the first 25,000 euros of taxable profit (profit after deducting tax benefits and losses).
  • Entities obtaining startup status will have a reduction in the CIT rate, which will be 12.5% for the first 50,000 euros of taxable income (For information on startup status, please read our document “What is a startup?”).
  • Eligible investment costs for tax benefit (incentives to invest and spend profits of the company, with the benefit of reducing its tax burden).
  • VAT exemption for the first 6 months of activity, only for a business volume of less than 10,000 euros.
  • Deductible VAT on the purchase of an electric car with an acquisition cost of less than 62,500 euros.

Process to open a company:

From a bureaucratic standpoint, as mentioned in our document “How to launch a StartUp in Portugal?”, nowadays this is a straightforward process that can be initiated quickly, through services such as the “Empresa na Hora” desk or even online, which proves to be valuable and practical for an entrepreneur.

Moreover, in the case of a foreign entrepreneur wanting to open a company in Portugal, the process is only slightly more demanding than for a Portuguese citizen: it’s just a matter of requesting a NIF (Tax Identification Number), which can be obtained through the Portuguese authorities, even if you don’t have residence in Portugal (if you’re a citizen of an European Union country). In the case of not being an EU citizen and requiring a visa, there are programs like the StartUP Visa and others (more information here).

EU member:

Portugal is a member of the EU Single Market, which brings significant advantages for entrepreneurs in the country. This ensures the free movement of goods, services, capital, and people, without countries having to deal with commercial barriers. It is also highly advantageous for entrepreneurs looking to scale their business to other countries within the EU Single Market.

Labor force:

For an entrepreneur, it’s important to understand the characteristics of the labor force where they intend to establish a business, in order to gauge the growth and productivity potential.

That being said, there is significant investment from the Portuguese government in education and research, which are good indicators of a skilled workforce. Unfortunately, considering the country’s economic growth challenges, around 1 in 3 young people emigrate in search of a better quality of life, demonstrating that Portugal struggles to retain some of this promising labor force.

Comparison with foreign countries:

Now, making comparisons between Portugal and other countries regarding topics relevant to entrepreneurship:

Tax competitiveness:

In this domain, compared to the other 37 OECD (Organization for Economic Cooperation and Development) countries, it becomes difficult to argue for Portugal as an attractive country for entrepreneurship and investment.

CIT:

According to the 2023 Tax Foundation Tax Competitiveness Index, Portugal ranks as the fifth least competitive country in the OECD. This ranking takes into account 5 different domains: Property, Consumption, International Taxation, Individual Income, and Corporations.

Specifically in the corporate ranking, Portugal ranks second to last, just ahead of Colombia. This can be explained by the high tax burden on companies, as Portugal has the second-highest maximum statutory rate of Corporate Income Tax (31.5% = 21% corporate income tax + 1.5% municipal surtax + 9% state surtax).

The 3 OECD countries with the lowest corporate income tax rates are Hungary (9%), Ireland (12.5%), and Lithuania (15%).

VAT:

The Tax Foundation also highlighted the inefficiency of Portugal’s VAT system with normal, intermediate, and reduced rates, ranking it 26th out of 38. The countries with the highest rankings in this category have a fixed reduced VAT rate.

Estonia was ranked as having the highest tax competitiveness, with a corporate income tax rate of only 20% on distributed profits (not applicable to retained or reinvested earnings) and a flat individual income tax rate of 20% as well.

The country in second place was Latvia, which has a corporate tax regime similar to Estonia’s.

Labor force qualification:

A metric typically associated with workforce qualification is the level of labor productivity. According to data from the European Union statistics office in 2022, once again, Portugal finds itself at the bottom of Europe. It ranks as the third least productive country (72.1% productivity per worker), only ahead of Slovakia and Greece, with 28% less than the average of Eurozone countries.

The three Eurozone countries with the highest levels of labor productivity were Ireland, Luxembourg, and Belgium.

These statistics align with the difficulty Portugal faces in retaining the qualified labor force it educates, which is being lost to foreign countries that offer better remuneration and proper incentives.

Cost of living:

According to the country cost of living indicator from the Numbeo website, among European countries, Portugal has the 29th highest cost of living. This places Portugal in the lower half of Europe, allowing us to conclude that the cost of living in the country is relatively low.

This can be positive for entrepreneurs as it means lower operational costs, less financial pressure, and generally more affordable labor.

The three European countries with the highest cost of living are Switzerland, Iceland, and Norway. Conversely, Belarus, Ukraine, and Russia have the lowest cost of living in Europe.

Conclusion

In summary, there are both positive and negative aspects when looking at Portugal from an entrepreneurship perspective. Despite the ease and speed of starting a business, both for Portuguese and foreign entrepreneurs, the existence of tax incentives to promote business creation, and the relatively low cost of living in the country, we can conclude that Portugal has a less competitive tax system and is behind various European countries in terms of its ability to attract investment and entrepreneurs.

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