The recent financial crisis has put an extraordinary pressure on the resilience of the financial system, which was only able to avoid more extreme consequences with the aid of Governments around the world.

Although most Portuguese banks had a reduced exposure to US and Spanish mortgage markets, the reduced liquidity in the market prevented Portuguese banks from tapping into the international financial markets to fund their domestic activities.

With the collapse of Lehman Brothers in 2009, Portuguese banks were no longer able to securitise loan portfolios, which was one of their main sources of funding, as well as to access other forms of financing.

This situation forced some of the largest Portuguese banks (Caixa Geral de Depósitos, Millenniumbcp and Banco Espírito Santo) to make use of the €20 billion State guarantee scheme, made available by the Portuguese Government following similar measures put forward other EU and OCDE members, to support the banking system. Only BPI and Santander Portugal, ranking in the top five of Portuguese banks, did not issue debt under the Government guarantee scheme.

Like in most other countries around the world, the financial crisis lead to an economic recession, with a drop in Portuguese GDP of 3.9% in 2009 spite the steep increase in Government spending.

With a projected Government deficit of 8.3% for 2010 (falling merely 1% from a record 9.3% in 2009) and a debt of 76.6% of GDP, prospects for the Portuguese economy are not optimistic. All three major rating agencies, Moody's, Standard & Poors and Fitch, downgraded the rating of the Republic of Portugal recently and put Portugal on watch pending the approval by the European Commission of a new "Stability and Growth Plan" for the Portuguese economy to be presented in March.

Comparisons of the Portuguese situation with Greece's, now facing the risk of default, made it more difficult for Portugal to access the international debt markets at levels comparable with those that could be obtained when the markets started to calm down in the fall of 2009.
These comparisons with Greece's debt crisis also caused a massive exit from the Portuguese stock exchange, with the Portuguese index, PSI 20, falling 7.4% and Portugal's CDSs to reach 227 basis points early in February.

Despite the efforts of the Portuguese Government and leading bankers to point out the differences between the Portuguese situation and that of Greece, it is a fact that the levels of the Portuguese Government deficit must be reduced before the Portuguese economy can be put back on track.

In any case, one cannot forget that historically Portugal has only defaulted on its sovereign debt in very few occasions and that, in general, the level of defaults of Portuguese companies involved in international financing transactions should be considered low by any standards.

However, the market's perception of an increased risk of the Republic of Portugal's debt is likely to put additional difficulties to Portuguese public authorities, municipalities, banks and other borrowers, in general, and will require lenders and borrowers to be more careful the way they document and negotiate new financings.

This paper reviews the main implications of the financial crisis in the manner lender and borrowers should approach transactions.

In assessing the viability or the exposure resulting from a claim, lawyers should be able to give clients an estimate of the costs involved, a timeline of the procedures, including appeals and more importantly on the merits of the claim.
This briefing provides an overview of proceedings, which may help foreign clients to understand some of the formalities surrounding Portuguese civil and commercial procedures.

The Portuguese Government has plans for the development of several infrastructure projects in the next decade.
This paper reviews the three major PPP projects that are being carried out in Portugal: the high speed rail network, the new Lisbon international airport and the conclusion of the National Road Programme.

The construction of a new Lisbon airport (the "New Lisbon Airport ") has been under discussion since the seventies. However, the continuous expansion of the Portela airport, now located in the middle of the city of Lisbon, allowed it to continue to meet the increasing traffic demand.

In July 2005, the government, pressed by the exhaustion of Portela's capacity, which will no longer meet the demand by the end of 2016, finally announced that the new Lisbon airport would be built.

The main guidelines for the New Lisbon Airport have been approved as well as the model for its construction and operation. Early this year, the location for the New Lisbon Airport was finally decided.

After several studies on the possible locations, the Portuguese Prime Minister announced on the 10th January 2008, that the New Lisbon Airport will be built in Alcochete, on the southern bank of the Tagus River and dismissed the original proposed location in OTA in its northern bank.

The construction of the new airport is one of the main objectives of the Government's economic programme to promote the growth of the economy and the development of other major PPP projects, worth €25 billion through existing and new PPPs, which are described in the infrastructure investment priorities programme (Programa de Investimentos em Infra-estruturas Prioritárias - the "Priorities Programme").

This briefing note reviews some of the structural and legal issues regarding the construction of the New Lisbon Airport project, which is now underway.

The single Iberian electricity market (Mercado Ibérico de Electricidade – “MIBEL”) is generally considered as the most effective option to develop competition in the Portuguese and Spanish power markets.

However, as mentioned by the European Commission (“EC”), in its “Implementation report on electricity and gas EU regulatory framework” (“EC Report”), presented by the EC early in 2007, MIBEL has not been functioning correctly: the futures market based in Lisbon is working only for Spanish customers while the spot branch located in Madrid is allegedly manipulated by the Spanish Government. According to the country’s review included in the EC Report, the continuity of the long term power purchase agreements in Portugal (Contratos de aquisição de Energia) and the financial support granted by the Spanish Government to Spanish generators were the causes for MIBEL’s malfunction.

Nowadays, perspectives are better, as the Portuguese Government has managed to terminate the long-term power purchase agreements with EDP – Energias de Portugal, S.A., the former Portuguese incumbent, increasing the liquidity of the wholesale market. On the other hand, MIBEL’s derivatives market has been gradually increasing the number of participants and transactions. Power and financial players like EDP, Iberdrola, Electrabel, EDF, Endesa, Gás Natural, Enel Viesgo, Unión Fenosa, Morgan Stanley or Deutsche Bank are members of MIBEL’s derivatives market.

As a result, despite its inauspicious start, MIBEL is gradually becoming a reality.

This paper aims to give an overview on the main regulatory conditions for the admission to MIBEL’s derivatives market.

© 2008 Macedo Vitorino & Associados

The Portuguese energy market is undergoing a liberalization process since late eighties through the implementation of the European rules.
 
In 2005, the Portuguese Government defined a new energy strategy. Competition, energy efficiency, security of supply and promotion of renewable energies are the main guidelines for this strategy. As a result, new regulatory frameworks for power, natural gas and oil systems were approved and the institutional model of the sector was reviewed, mainly through the concentration of power and gas major facilities in a single company. Further to the institutional and regulatory reform, the Portuguese Government has also announced ambitious targets for renewable generation and biofuels and a new program for energy efficiency. 

However, despite these reforms, the Portuguese energy markets, particularly power and gas markets, are not competitive. The size of the market, the insufficient integration with Spain and several regulatory constraints (such as, for instance, regulated tariffs for eligible customers, remaining in force of long-term power purchase agreements) are some of the causes for the lack of competition on those markets.

EDP – Energias de Portugal, S.A. remains the dominant company in the power system, REN – Redes Energéticas Nacionais, SGPS, S.A. is still waiting for privatization to occur and Galp Energia, SGPS, S.A., although privatized dominates the oil and natural gas markets.

This paper aims to give an overview on the main regulatory and practical conditions under which energy activities are carried out in Portugal.

© 2007 Macedo Vitorino & Associados

One of the main purposes of the securitisation of assets is financing the activities of corporate entities through the transfer of the right to collect future receivables by the issue of securities which are linked to those receivables. The securitisation of assets allows corporate entities to receive in advance credits not yet due at the date of issue of the securities or even future receivables in respect of future rights.
In general, two types of securitisation structures may be considered: true sale structures whereby the originator assigns credits not yet matured and synthetic structures whereby the holder of the receivables constitutes a right in favour of a third party to collect future payments, whenever such credits exists prior to the date of the securitisation of the receivables.

Saying that the Internet is "unregulated" is not true and may prove, in the future, to be the source of trouble for dot companies if they do not take care in complying with the laws and regulations of the countries where they do business. This fallacy has its origin in what we could call "off-line" legal thinking. In other words, there is a general belief that sites may be regulated by the laws of the countries where they are located or where its owners reside, which are the only countries where they can be sued. However, this is not true. Sites are also regulated by the laws and regulations of the countries where its users are located.
This article describes some of the legal aspects of doing business over the Internet in Portugal. However, even from a Portuguese law perspective the issue involves several legal issues that can only be dealt with from an international perspective as Portuguese sites will be subject to the laws of foreign jurisdictions and Portuguese consumers have rights against foreign site owners.

Understanding the legal environment in which telecommunication projects are developed, financed, constructed and operated in Portugal is critical to an accurate assessment of the potential for a proposed project. The following is a general discussion of selected Portuguese laws relevant to the operation telecommunications networks and provision of services. However, the information and expressions of opinion this document contains are not intended to be a comprehensive study and should not be treated as a substitute for specific advice concerning individual situations.

#whyportugal 

Why you shouldn’t be scared of portuguese tax laws

With a regime focused on investment and attracting new business, as well as incentives for new tax residents, it may be time to consider taking your taxes to Portugal.

While no one likes doing their taxes, the questions of ‘how’, ‘where ‘and ‘how much’ you’re going to be taxed is surely at the top of priority lists. Portugal’s Government has also given priority to its tax regime to make it an attractive and cost-effective place for potential investors and incoming workers, as well as companies doing business in or via Portugal. There are, of course, a whole host of different scenarios, conditions and exemptions to be looked at on a case-by-case basis.

The Tax and Customs Authority is responsible for the management of taxes in Portugal in accordance with the rates set out in the tax legislation approved by the Parliament. General tax rules apply nationwide, but the Azores and Madeira enjoy fiscal autonomy, so some tax rates differ from mainland Portugal.

To note that any income obtained abroad by Portuguese residents, or in Portugal by non-residents, is subject to tax, but to avoid double taxation the country is party to agreements with over 85 countries including the US, Poland, Russia, China, Canada and Germany.

What is the regime for taxation of companies?

If your business is headquartered or managed in Portugal, your taxable income is subject to Corporate Income Tax (CIT). CIT also applies to the taxable profit of businesses with a permanent establishment here, even if HQ and management are abroad. You have a permanent establishment if your business activities in Portugal are carried out using an office or other place of business or via someone acting on behalf of the company who can conclude contracts in the company’s name.

For mainland Portugal, the CIT rate is 21%, 20% in Madeira and 16.8% in Azores. For residents, this is applied to the taxable income and for non-residents with a permanent establishment to the taxable profit on any activities in Portugal. SMEs benefit from a reduced rate applied to their first €15,000 – 17% on the mainland, 13% in Madeira and 13.6% in the Azores.

A Municipal Surcharge is applied on top of CIT to any taxable amount not exempt from CIT. Rates vary with a max limit of 1.5%, although in some municipalities you can get a reduced rate if your past year’s turnover is less than €150,000.

State Surtax also applies on taxable profits over €1.5m at the rate of 3% from €1.5m to €7.5m, 5% from €7.5m to €35m and 9% for anything over €35m.

To note, you could be liable for Autonomous Tax on certain expenses including undocumented expenses (50% or 70%), charges with vehicles (10% to 35%), representation expenses (10%), and employees’ daily allowances not charged to customers (5%).

How are non-resident companies with activities in Portugal taxed?

Even as a non-resident company without a permanent establishment in Portugal, you could still be liable for CIT if the income is considered obtained here and taxable under the applicable double taxation agreements (eg, dividends, capital gains, interest and royalties).

In general, income (excluding capital gains) deemed to be obtained in Portugal will be subject to a withholding tax at a rate of 25%, although that rate might be reduced to 15% or 10% under double taxation agreements. There are, however, various reductions and exemptions available.

The payment of dividends to a company based in another EU Member State with a shareholding of at least 10% of the share capital of a company established in Portugal for an uninterrupted period of one year is exempt. The company must be deemed ‘eligible’ in accordance with the Parent Companies Directive.

Interest and royalties are exempt from withholding tax if you make a payment to an affiliated company resident in another EU Member State, provided the relevant holding requirements are fulfilled.

Are non-resident companies subject to capital gains?

In relation to capital gains, any gain from the sale of real estate in Portugal will make you liable to CIT, even as a non-resident company without a permanent establishment in Portugal. However, gains from the sale of shares and other securities issued by a company resident in Portugal will be CIT exempt unless:

• The seller’s HQ is in a jurisdiction with a more favourable tax regime;
• 25% of the company is, directly or indirectly, owned by resident companies or individuals. This doesn’t apply if the shareholder is resident in an EU Member State, EEA country or a country with a double taxation agreement with Portugal and the stake fulfils some of the participation exemption requirements (eg, a minimum stake of 10% and a minimum holding period of one year);
• Over 50% of the target company’s assets are real estate in Portugal or, if the target is a holding company, over 50% of any controlled company’s assets include real estate in Portugal.

When will VAT apply?

If your business involves the supply of goods and services, importing of goods and intra-community transactions carried out in Portugal, and your day-to-day activity or even one single taxable transaction falls within the scope of Personal Income Tax (PIT) or CIT, then Value Added Tax (VAT) will apply. VAT will apply to the value obtained or to be obtained from the purchaser. However, default interest, discounts, rebates and bonuses are discounted.

VAT is due at the moment the services are provided or when the goods are in the purchaser’s possession.

VAT will always apply to certain services in Portugal: real estate services; access to cultural, sporting, educational and similar events; short-term transport rental; and transport services. Notable VAT exemptions include medical and educational services, transfer and rental of property, insurance and reinsurance operations, and certain financial transactions.

For transfers of goods within or starting out in Portugal, VAT will be applied, and any Intra-Community purchases will also be subject to VAT. Exceptions include: Intra-Community transfers; exports; operations associated with exports and international transport; and, the transfer of goods to be placed in customs / tax warehouses under a suspensive regime.

The supply of services is also subject to VAT when the purchaser is also based in Portugal, but if the provider is in Portugal and the purchaser is abroad, there’s no VAT, as a rule.

To note there are exceptions to these location rules for example for telecommunications services, broadcasting and electronic services where the acquirer is a private individual resident in Portugal.

What are the VAT rates?

The standard rate is 23% in mainland Portugal, 18% in the Azores and 22% in Madeira, and there are intermediate and reduced rates on certain goods/services. On the mainland there is an intermediate rate of 13% and a reduced rate of 6%. In the Azores the intermediate is 9% and reduced is 4%, while in Madeira the intermediate is 12% and reduced is 5%.

When do excise and customs duties apply?

If your goods or services have an environmental or public health element, such as alcohol, alcoholic beverages, added-sugar beverages, petrol and energy, and tobacco, you could be hit with Excise Duties. These will be levied by the authorised warehouse keeper or registered consignee. As a rule, these taxes are payable at the time of release for consumption.

Note that any products subject to excise duty are exempt when their use is for embassies or consulates, international organisations recognised by the Portuguese State or for a  State party to the North Atlantic Treaty Organisation.

If you are importing into Portugal from outside the EU, then Customs Duties will also apply. Tariffs are calculated on the basis of a percentage of the price of the imported good as well as the related costs included in the Common European Customs Tariff.

Which taxes are due in relation to a real estate purchase?

Municipal Real Estate Transfer Tax (MRETT) applies on any real estate purchase, with a few exceptions.

As a general rule, MRETT applies to the contractual price or its taxable patrimonial value, if higher. MRETT also applies to the acquisition of more than 75% of the share capital of a limited liability company, or a closed-end real estate investment fund, which owns real estate in Portugal.

You need to pay MRETT prior to the transfer of the real estate as to execute the purchase deed a notary will require proof of payment. Payment must be made through the Tax Authority website.

Rates differ depending on the nature and use of the property: 5% for land, 0-6% for urban buildings exclusively for private and permanent housing, 1-6% for urban buildings exclusively for housing and 6.5 % for the acquisition of other urban buildings and onerous acquisitions. The rate will be 10% for buildings (urban or land) or other acquisitions where the purchaser is resident in a country, territory or region subject to a more favourable tax regime.

To note, the acquisition of buildings for resale by real estate companies are exempt from MRETT. You can also get an exemption on the acquisition of your permanent home, as long as the taxable amount doesn’t exceed €92,407.

When does stamp duty apply?

You may also be liable for Stamp Duty on  various legal acts, documents, contracts and operations (all of which are VAT-exempt) and as outlined in the General Stamp Tax Table. Flat rates apply as follows: 0.8% on onerous acquisitions of real estate; 10% on the acquisition of real estate for free; 10% on leases and subleases; 5% on transfer of businesses as going concerns (trespasses) and 5% on health insurance contracts.

Do look out for exemptions that may apply on life insurance premiums and commissions, as well as on interest on loans for the acquisition, construction, reconstruction or improvement of your home.

Which tax applies to property owners?

Real estate owners pay an annual Municipal Property Tax (MPT) each April on the asset value of a building with rates dependent on the type of real estate: 0.3% to 0.45% on urban buildings, 0.8% on land and 7.5% on buildings held by entities resident in tax havens. MPT can be paid in one go or in instalments: a single instalment payable in May where the taxable amount is equal to or less than €100; two instalments (to be paid in May and November) for over €100 and equal to or less than €500; and, three instalments (to be paid in May, August and November) for anything over €500.

Reduced rates apply in certain situations. You can get a three-year reduction on your permanent home, as long as the value doesn’t exceed €125,000 and your PIT taxable income in the year prior to the acquisition doesn’t exceed €153,300. There may also be a reduction in MPT in relation to the number of dependents you are responsible for and living with you, which can range from between €20 to €70.

An additional tax on top of the MPT will apply in certain circumstances over the sum of the aggregate taxable value of the owned property as follows:

• Individuals and undivided inheritances will be subject to the rate of 0.7% on the taxable value up to €1m, 1% on the taxable value up to €2m, and 1.5% on the taxable value above €2m; these rates apply after a deduction of €600,000 (or, in case of married couples or non-marital partnerships who opt for joint taxation, €1.2m);
• Companies will also be subject to a rate of 0.4% of the aggregate value of the property, unless the property is used by shareholders or members of corporate bodies, in which case the rates set out for individuals will apply;
• Residents in a country, territory or region subject to a more favourable tax regime will pay a rate of 7.5%.

To note, urban buildings related to commerce, industry or services are not covered by this additional tax.

How is personal income taxed?

When it comes to your personal taxes, PIT is applied to employment income, business and professional income and pensions at progressive rates from 14.5% to 48%. PIT depends on the type of income, the regime to which you subscribe, as well as the benefits and exemptions you are entitled to.

Any taxable income you make over €80,000 is also subject to an additional solidarity charge at a rate of 2.5% for income between €80,000 and €250,000 and at 5% for anything over €250.000.

Your employment income is subject to different withholding taxes according to the income itself and your family situation. You may also be entitled to exemptions for certain benefits such as meal allowances and subsidies, up to a predetermined limit.

If you are self-employed, you can choose to apply a simplified accounting regime if your income doesn’t exceed €200,000.

In general, passive income (e.g. capital gains from the sale of shares and other securities, dividends, interest, rental income) are taxed at a 28% flat rate, but you can opt for the inclusion of this type of income in your annual tax returns.

There are some notable exemptions, for example, any gains from the sale of your permanent home won’t be taxed if you reinvest the proceeds into the purchase of a new home either two years before or up to three years after the sale.

To note, unlike residents who are taxed on their overall income obtained in Portugal and abroad, non-residents are only taxed on their income obtained in Portugal and in accordance with any applicable double taxation treaties.

What are the obligations in relation to Social Security?

Social Security also comes into play if you’re working in Portugal, whether as an employee, self-employed or a member of corporate body, although certain exemptions apply. Portugal is also party to several social security conventions that establish exemptions for workers who are temporarily working in Portugal, for example with the US and Canada.

If you’re an employee the rates are 11% payable by you and 23.75% paid by the company. If you’re self-employed you pay 21.4% and the companies you work for pay 10%, if work is performed to such companies exceeds 80%, and 7% in other cases. If you’re a member of a corporate body you pay 11% as a director or manager and 9.3% in all other positions, and then 20.3% or 23.75% respectively is paid by the company.

To note, certain benefits are excluded from contributions: allowances up to the limits established for PIT purposes; compensation for termination of the employment contract in case of collective dismissal; and possible subsidies for medical care and medicine for workers and their families.

Are there any tax benefits for expatriates?

There are considerable benefits for expatriates that become a tax resident under the Non-Habitual Residents Regime (NPR).

The main benefits include a flat rate of 20% on all your employment / self-employment income in Portugal, and pensions from outside Portugal are PIT exempt. Also, any foreign-sourced income you have will be exempt, provided it can be taxed outside of Portugal under applicable tax conventions or the OECD model (if not a tax haven) or, in the case of employment income, it is effectively taxed in the source country.

To qualify you must have been non-tax resident for the previous five years, request the NPR when you do register as tax resident or up to end of March of the following year, and if you have employment income it must come from a ‘high added-value’ activity, which includes architects, engineers, artists, auditors, doctors, dentists and teachers.

Once you have the NPR, the above-mentioned benefits will last for a full 10 years from when you become a tax resident as long as you continue fulfilling the above criteria. If you do not fulfil the criteria in any given year then you will lose your NPR status for that year, but your right can be renewed in any following year (within the 10-year period) if you ensure to fulfil all the criteria again.

This is of course only a snippet of the intricate tax regime in Portugal, so for more in-depth information do read our Guide ‘Why Portugal?’ or get in touch so we can offer you a more personalised approach.