INVESTOR CONSIDERATIONS

  • Portuguese economy is open to international trade.
  • Governmental support is provided for the attraction of overseas investment.
  • Attractive incentive packages are offered.
  • Ready supply of labour.
  • No foreign ownership restrictions.

INVESTMENT CLIMATE

Government Attitude Toward Foreign Investment

Government policy is to actively seek and encourage foreign investment in Portugal. There are no specific restrictions placed on foreigners who wish to carry on business in Portugal. There is also no requirement that shares in Portuguese companies must be held by Portuguese citizens. (ICEP), which must approve or deny an application within two months. EU-resident investors are required only to notify ICEP of the investment, although in all cases capital movements are subject to the control of the Bank of Portugal. Substantial tax and cash incentives are available (see Chapter 4). The Institute is efficient and accommodating.

Inward investment is regulated by the Foreign Trade Institute (ICEP), which must approve or deny an application within two months. EU-resident investors are required only to notify ICEP of the investment, although in all cases capital movements are subject to the control of the Bank of Portugal. Substantial tax and cash incentives are available (See Chapter 4). The Institute is efficient and accommodating.

In general, there are no restrictions on the purchase of land by foreigners for industrial purposes, but a purchase of land exceeding 200 square miles constitutes a commencement of commercial activity for regulatory (but not necessarily fiscal) purposes.

Trade Policy

Historically, Portugal relied on protectionism and a guaranteed domestic market to foster industrial growth and employment. The late 1980s and early 1990s have seen a move away from protectionism to outward-looking policies. Restrictions on foreign investment were replaced by tax incentives, fixed-asset grants became more available and a favourable climate was created for firms offering the promise of export-led growth.

Portugal became a full member of the European Union on January 1, 1986. Accession to the European Union involved a phased removal on industrial tariffs on goods from member states, and Portugal now competes equally in a market of 320 million people. As a result of the outward-looking policies of the 1980s, the economy is very open to international trade, both export and import.

Taxation Policy

A range of tax-based incentives is available to resident and non-resident investors alike. Investments above Esc5 billion that are concluded by the end of 1995 and that target export industries and may lead to a significant positive impact on the balance of trade can qualify for a wide range of tax benefits, such as exemptions, reductions, deductions, and accelerated depreciation charges on a case-by-case contractual basis.

Smaller investments receive various tax benefits according to the special nature of the investor and/or the type of income. Most notable are tax deferrals for reinvested capital gains and deductions for dividend income from securities acquired through the stock exchange or in a privatisation process. Certain capital gains by non-resident investors are tax exempt.

Limited social security tax incentives are available for special cases of job creation. Two offshore centres (in the Madeira and Azores islands) provide for tax-exempt business and passive income until the year 2011 as well as for tax-exempt remittance of dividends, interest and royalties to resident and non-resident entities. Offshore companies still benefit from the Portuguese tax treaty network and its foreign tax credit provisions.

Local Competitor Attitude Toward Foreign Investment

There is widespread support for foreign investment in Portuguese industry. Foreign investment in Portugal is to a large extent export oriented and, as a result, competition with local business is generally not a major issue. Foreign-owned industry provides a major subcontract market for local firms.

Labour Attitude Toward Foreign Investment

Labour unions in Portugal are welcoming the creation of employment by foreign investors as the rate of unemployment is rising.

Before or after commencement of activity, it is common practice for medium-size and large firms to enter into collective labour contracts either directly or indirectly through membership in employers' associations.

SPECIAL INVESTMENT OPPORTUNITIES

Portugal has in the recent past been an attractive destination for foreign investment, both from within the European Union and from non-EU countries whose companies regard Portugal as an interesting investment location for penetrating the common market.

Portugal has been a compliant EU member state regarding the implementation of directives in anticipation of the single market of 1993. In a few cases the implementation deadline has been extended slightly to allow for internal adjustments.

The anticipated doubling of EU structural funds to be channelled to Portugal (the "Delors II package") should create new and attractive investment opportunities for both EU and non-EU residents by tapping those resources in the form of grants or low-interest financing.

Major public works contracts have been tendered for the construction of the new bridge over the Tagus River, the Lisbon World Fair of 1998 and the expansion of the highway network. Contractors from EU countries will be able to compete on an equal basis.

Membership in the European Union has given Portugal an economic pull much larger than its size and its economic structure would inherently warrant. Growth rates have been consistently the highest in the European Union, and Portugal will continue to move toward Western-European standards in the future. On the other hand, exposure of traditional industries, such as textiles and manufacturing, to increased competition will undoubtedly give rise to adjustment and restructuring, as well as provide opportunities to both new and existing participants.

PLANNING GUIDE FOR THE FOREIGN INVESTOR

Government Policy

  • Government supports free enterprise and private investment.
  • Foreign investment is actively encouraged through tax incentives and cash grants.
  • Active policy of privatisation.
  • Portuguese and foreign investors are treated equally.
  • There are no price controls on manufactured goods, other than pharmaceuticals and tobacco.
  • A very few price restrictions are imposed on commodities such as gas, gasoline and electricity and on services such as mail and public transport.

Investment Possibilities/Restrictions

  • There are virtually no restrictions on foreign ownership.
  • Few restrictions on private enterprise are in effect, other than those in areas of national public interest such as rail and air transport services, basic sanitation and the military industry.

Prior Approval Or Registration

  • Investment decision and exchange control approval are required for foreign incoming investment (generally not an issue).
  • Approval is required from the regulating government agency (ICEP) before any investment decision can be implemented. This requirement does not apply to EU investors.
  • No other government investment or approval process is

Possible Business Structure

  • For foreign investors, the most common forms of doing business in Portugal are through a Portuguese-resident subsidiary company or through a branch operation.
  • The choice of structure will often depend on tax requirements of the foreign parent.
  • There are advantages and disadvantages to both structures and the preferred one in any situation will depend on the circumstances involved.

Setting Up Or Acquiring

  • There are no restrictions on foreign ownership of Portuguese companies, whether set up or acquired.
  • Due to the export orientation of much foreign investment, a start-up is more common than an acquisition.

Investment Incentives

  • Tax deferral applies on the reinvestment of capital gains.
  • Special tax benefits are granted for large export-oriented investments.
  • Portugal has developed fully tax-exempt offshore centres.
  • Other export-oriented incentives are available, e.g., export credit guarantee schemes.
  • Foreign and domestic investors are equally eligible for all available incentives.


Location/Industries
  • Large manufacturing activities may qualify for special tax incentives.
  • Higher grants are available in certain designated areas.

Finance

  • Portugal's well-developed banking system can provide local finance.
  • Local and foreign companies are treated equally.
  • The existing minimum capitalisation requirements are negligible (other than for certain financial and real estate businesses).
  • Foreign borrowings are subject to Bank of Portugal regulations.

Repatriation Of Capital And Earnings

  • No restrictions are imposed on repatriation of profits (provided initial exchange control approval obtained).
  • There are no withholding taxes on repatriation of profits or surplus funds from a branch.

Tax Planning Considerations

  • Tax rates are high for most foreign investment.
  • Consideration should be given to the investment of surplus funds.
  • Repatriation of profits as dividends/surplus funds from a branch may have foreign tax implications.
  • Some tax treaties provide foreign tax exemptions.
  • Consideration should be given to customs/import duty.
  • Tax implications of expatriate remuneration require careful consideration.

Labour And Labour Costs

  • Portugal has an educated labour force.
  • Labour is fairly readily available.
  • Labour costs are low for an industrialised country.

Market Studies

  • Due to export orientation of investment and small local market, studies of overseas markets may be more appropriate than local markets.
  • Portugal is a member of the European Union, and thus Portuguese manufactured goods have unlimited access to a market of 320 million people.

International Financial Centre

  • Offshore financial services centres are conveniently located in outlying islands.
  • There is full tax exemption on offshore-zone-related income and remittance of dividends, interest and royalties.
  • Offshore centres have full access to the Portuguese double taxation treaty network.

Information And Assistance

  • Price Waterhouse offers a full range of audit, tax and management consulting services and can provide specific assistance on both national and international levels to clients in a wide variety of industries.
  • Potential investors should also approach the government development agency, the Foreign Trade Institute (Institute do Comercio Externo de Portugal -- ICEP), either in Portugal or abroad. The ICEP will assist and co-ordinate with other agencies including the distribution of government grants. (See Appendix XV for the address.)

Trends

  • Inflation and interest rates are declining.
  • Government policy is to continue to encourage foreign investment and no change is likely.
  • Continuing stable corporate tax rates and personal income tax rates are foreseen.
  • Liberalisation of trading within the European Union since 1993, including cessation of exchange controls, is increasing.

The Content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information, please contact John Duggan Tel: 351 1 311 3300, E-mail: John_Duggan@europe.notes.pw.com, or enter a text search 'Price Waterhouse' and 'Business Monitor'.