- Financial incentives are generally available equally to Portuguese and foreign investors.
- Government policy is to stimulate investment in depressed areas or industries.
- Large foreign investment projects (over Esc10 billion) may benefit from tax, financial and other incentives under the so-called contractual regime.
- Substantial tax benefits and incentives are available for special-use companies.
- Non-resident corporate entities are exempt from tax in connection with sale of the shares and quotas of Portuguese limited liability company.
- Substantial financial incentives are available for research and development, agricultural, tourism, energy, trade, and environmental projects.
- Regional and local financial incentives are also of significant importance.
- Significant financial and tax incentives are offered in the autonomous regions of Madeira and the Azores.
INVESTMENT POLICY
The internationalization of the Portuguese economy makes it necessary for the state to assist with the modernization and restructuring of existing industry and to promote initiatives with high-growth potential and satisfactory technological and environmental protection levels. It is also government policy to stimulate investment in depressed areas or industries. Such assistance and promotion, with substantial support from the European Union, will be based on several programs, of which the following have already been announced.
- PAMAF (Agriculture and forestry).
- PEDIP II (Industry).
- SIURE (Energy).
- SIR (Regional development).
- PROCOM (Commerce and trade).
- SIFIT II (Tourism).
The new financial support policy established in the new QCA (Community Support Program) establishes the following trends.
1.Give priority to executive entities from the point of view of their achievement capability
2.Give priority to reimbursable subsidies and other financial engineering mechanisms instead of the traditional nonreimbursable subsidies.
3.Use nonreimbursable subsidies to support investment in areas related to the environment, quality or other areas where the investment cannot be immediately recovered by increased sales prices.
IN GENERAL TERMS, THE PROGRAMS CAN BE SUMMARIZED AS FOLLOWS:
1.PAMAF (Forest and Agriculture Modernization Support Program):
Gives support in the following areas:
- Agricultural infrastructure;
- Agricultural exploration;
- Forests;
- Research and development, formation and organization; and
- Transformation and commercialization of agricultural and silvicultural products.
PAMAF's objective is to reinforce the competitiveness of the agricultural sector, the economic viability of agricultural explorations and the preservation of natural resources and the environment.
2.PEDIP II (Program for the Development of Portuguese Industry):
Gives support in the following areas:
- Promotion and consolidation of technical and technological support infrastructure;
- Encouragement of complementary financial engineering mechanisms;
- Consolidation and reinforcement of economic strategies;
- Promotion of productivity, quality and internationalization strategies; and
- Promotion of strategies related to improvement in human resources.
PEDIP II's objective is to encourage the supported growth of the competitiveness of Portuguese industrial companies by reinforcing the capacity to adjust to rapid technological and market changes, promoting modernization and diversification, and facilitating the internationalization of industrial structure.
3.SIURE (System of Incentives for the Rational Use of Energy on a Regional Basis):
This program aims to encourage the efficient use of energy and involves the replacement equipment, increased energy saving, and intensifying and diversifying the use of internal sources of energy, with particular emphasis on renewable sources, while maintaining a balanced development between the different regions of Portugal.
4.SIR (Regional Incentive System):
Objective is to support the creation and modernization of small and medium-size companies trying to create alternative activities to agriculture. This program is still in a definition phase. Particular emphasis is given to projects relating to the transfer of industries from congested zones or from urban centers to surrounding areas.
5.PROCOM (Commerce Modernization Support Program):
This program's objective is to help in the encouragement of small or medium-size commercial companies through the support of reorganization, increases in productivity, diversification of commercial activity, expansion, and distribution.
6.SIFIT II:
Because of the importance of the tourism sector, this special system distributes financial incentives. Grants are made available according to project type and location. A separate fund for tourism has also been established.
In addition to the above, there are general incentives for the restructuring of industrial sectors that the government has declared to be in difficult economic circumstances (e.g., the wool and foundry sectors).
Furthermore, industrial projects that involve investments in excess of the equivalent of some Esc10 billion and that have a major impact on exports and on the balance of payments qualify for substantial tax and financial benefits. The extent and duration of these benefits are negotiated on a case-by-case basis.
Subsidies and tax incentives are also available to investors in Madeira and the Azores. Also, subsidies/grants are available for research and development, agriculture, tourism, and energy and telecommunications projects in the country as a whole.
TAX CONCESSIONS
Tax concessions (benefits and incentives), both those of a general nature and those specifically for resident and non-resident individuals or corporate entities, are available. The autonomous regions of Madeira and the Azores also offer substantial tax benefits to the foreign investors (see "Free-trade zones" below).
GENERAL TAX BENEFITS AND INCENTIVES
1.Capital gains:
- The sale of shares of a limited liability company (SA only) is exempt rom individual income tax if shares are held for more than 12 months.
- The sale of shares of a limited liability company (SA only) is exempt from individual and corporate tax.
2.Dividends:
- Fifty percent of dividend distributions by quoted companies is exempt from individual and corporate income tax.
- Only 50 percent of the dividend distribution by SAs with respect to shares acquired as a result of privatization is subject to individual and corporate income tax. The exemptions applies during a five-year period beginning with the dividends distributed in respect of the year in which the privatization process has ended.
3.Interest on bonds:
a.Interest on state bonds:
- Interest in respect of bonds issued before May 9, 1989 is exempt for individual and corporate income tax purposes;
- Only 80 percent of interest in respect of bonds issued from May 9, 1989 until February 1, 1991 is subject to individual and corporate income tax;
- Interest in respect of bonds issued during the calendar years 1989 through 1992 is exempt from the 5 percent withholding inheritance tax.
b.Interest on other bonds (including rights issues):
- Interest in respect of other bonds issued up to December 31, 1988 is exempt from individual and corporate income tax, depending on date of issue;
- 80 percent of interest receipts in respect of bonds issued during the calendar year 1989 is subject to individual income and corporate tax;
- Interest on bonds issued during the calendar years 1989 through 1996 is exempt from the 5 percent withholding inheritance tax.
TAX BENEFITS AND INCENTIVES FOR CORPORATE ENTITIES
Resident Corporate Entities
General
For all resident corporate entities, capital gains on the sale of fixed assets are tax exempt if the proceeds of the sale are reinvested in fixed assets within two years. The relief operates by way of a deferral.
Limited social security tax incentives are available for special cases of job creation.
Special-Use Companies
The following special-use companies qualify for incentives.
1.Holding companies (SGPS):
95 percent of income received by holding companies from equity holding is not taxed. The 5 percent inheritance tax levied on dividend distributions made by SAs (see Chapter 17) is not levied on dividend distributions made to holding companies that have the status of SGPS (see Chapter 9).
2.Investment companies:
Ninety-five percent of income from equity holdings is tax exempt.
3.Investment funds:
a.Property investment funds are subject to corporation tax at the following rates:
Real estate income: Rents (net of expenses) 20 Realized capital gains net of capital losses 12.5 Other realized capital gains net of capital losses 10 Other income: Earned in Portugal 20-25 Earned abroad 25
b.Portfolio investment funds are taxable at the following rates.
Realized capital gains net of capital losses 10 Other income: Earned in Portugal 20-25 Earned abroad 25
c.Companies are taxed on income received from investment funds. Tax paid by the fund on domestic income, including tax on capital gains and part of the underlying tax on dividends received by the fund from domestic sources, is recoverable by the participants in the fund. Investment funds cannot claim credit for foreign tax paid on foreign-source income or capital gains. Income paid by investment funds to non-resident entities is exempt from withholding tax and corporation tax.
4.Property investment and management companies (SGII):
- If incorporated by December 31, 1989 the profits are taxed at 25 percent for the years 1989 to1998;
- If incorporated during 1990 the profits are taxed at 25 percent for the years 1990 to 1996;
- If incorporated since January 1, 1991 the profits are taxed at 25 percent for the first eight years;
- To eliminate double taxation on profit distributions, a tax credit of 100 percent of the underlying corporate tax is available at the shareholder level.
- These companies are also entitled to exemption from real estate transfer tax (SISA) for acquisitions of real estate and exemption from municipal real estate tax for urban houses that are to be used as private residences.
5.Regional development companies incorporated up to December 31, 1992:
Bank interest is only taxed at 20 percent, and all other income is exempt from corporate tax during the first five years.
6.Savings pension funds:
Funds with a minimum of 50 percent invested in medium- and long-term state bonds are exempt from corporate tax, real estate transfer tax, and gift and inheritance tax.
7.Securities dealers and stockbrokers:
95 percent of income from equity holdings is tax exempt.
8.Venture capital companies incorporated by December 31,1990:
Bank interest is taxed at 20 percent and all other income is tax exempt during the first five years.
9.Contractors for NATO infrastructure:
Contractors for NATO infrastructure are exempt from corporate tax. (This exemption applies to resident individual contractors as well.)
NON-RESIDENT CORPORATE ENTITIES
CAPITAL GAINS
Gains on the sale of equity capital (shares and quotas) in a limited liability company, if not imputable to permanent establishment in Portugal, are tax exempt. Gains realized on the sale of state and other bonds are tax exempt.
1.Loan interest paid by the state, regional authorities, public services, and utility companies qualifies for exemption on application. (This exemption applies to non-resident individual taxpayers as well.)
2.Interest paid to non-resident credit institutions: Interest paid on loans granted by non-resident financial institutions to resident credit institutions is exempt from corporate tax.
3.Interest paid on foreign currency time deposits: Interest paid by resident credit institutions to non-resident credit institutions on foreign currency deposits is exempt from corporate tax.
LEASE RENTALS
Lease rentals of imported equipment qualify for exemption upon application. (This exemption applies to non-resident individual taxpayers as well.)
FINANCIAL INCENTIVES
Financial incentives are available for qualifying industrial, regional development, agricultural, energy, textile, tourism, trade, and offshore projects. These incentives are generally available to both Portuguese and foreign investors.
Some of the funds have already been fully exhausted. Future funding of such programs will very much depend on further EU assistance.
INDUSTRIAL PROJECTS
Financial support for industrial projects is available for companies established under Portuguese law. However, Portuguese subsidiaries of foreign companies are not eligible.
The general application conditions are as follows.
- Debt-to-equity ratio before the project of a maximum of 3:1.
- Debt-to-equity ratio of 1.86:1 after project completion.
- SWOT (strengths, weaknesses, opportunities, threats) analysis of companies and projects.
PEDIP II is a very comprehensive program with a wide range of incentives that cover different areas of industrial activity from production to quality as well as environment and training.
There are two main types of financial support.
- Nonreimburseable grants.
- Reimburseable grants.
The nonreimburseable grants primarily cover non-productive investments and can go up to 65 percent of eligible items. The reimburseable grants can go up to 80 percent of eligible items and are paid up to a maximum of ten semiannual installments with a maximum two-year grace period.
Future areas to be supported by this program are described at the beginning of this chapter.
REGIONAL DEVELOPMENT PROJECTS
The Regional Incentives System (SIR), as already described, covers industrial, trade and manufacturing projects carried out in economically depressed areas. Eligible investments should be in the range of Esc10 million to Esc100 million.
The support to be given will be in the form of nonreimbursable subsidies (30 to 70 percent of the investments made in tangible fixed assets, with a maximum of Esc50 million and with a reimbursement period ranging from three to six years and a deferral period of one to three years).
AGRICULTURAL PROJECTS
Investment in agricultural land, equipment and certain quotas of farm animals and cattle is subsidized up to a maximum of 60 percent of the qualifying investment or ECU120,000. Costs incurred with the rationalization of production and introduction of new products and new production methods are subsidized up to a maximum of 35 percent of the qualifying investment or ECU120,000.
For farmers aged between 18 and 40, the above maximum percentages are increased by 25 percent.
ENERGY PROJECTS
Energy projects are defined as "those projects whose purpose is the conservation, savings of energy and fuel, and the production of energy and fuel from renewable raw materials, scrap and wastage." equipment and in converting existing equipment, including installation costs and technical assistance in implementing the project, are subsidized up to a maximum of 25 percent of the qualifying investment or Esc100 million.
TELECOMMUNICATIONS
Viability studies for new telecommunications services are subsidized up to a maximum of 70 percent of the qualifying investment or Esc16 million. Experimental teledata projects qualify for similar subsidies.
The following are subsidized up to a maximum of 50 percent of the qualifying investment or Esc220 million.
- Setting up or adapting industrial units for the production of equipment for advanced telecommunication services.
- Setting up or adapting enterprises to provide advanced telecommunication services -- the same as above.
TOURISM
Investment in land, infrastructure, buildings, and equipment for hotels, motels, apartment hotels, tourist developments, restaurants, golf courses, tennis courts, swimming pools, and other tourist-related facilities is subsidized up to a maximum of 40 percent of the qualifying investment or Esc300 million.
TRADE
Investment in new equipment and transportation and technical assistance by entities involved in the retail trade qualifies for grant assistance that can reach 60 percent of investment. In the case of a merger of qualifying entities, the percentage can rise to 70 percent. However, multinational companies cannot apply.
OFFSHORE -- MADEIRA AND THE AZORES
Investments in Madeira and the Azores may qualify for the subsidies set out below.
Madeira
Staff training is subsidized up to a maximum of 50 percent of qualifying costs. Costs incurred with the adaptation of energy-saving production methods are subsidized up to a maximum of 50 percent of qualifying costs. No monetary limit is allowed.
Azores (Santa Maria)
Staff training is subsidized up to a maximum of 100 percent of qualifying costs. Construction or rental of premises for a period up to five years is subsided up to a maximum of 50 percent of qualifying costs. The total subsidies cannot exceed Esc50 million.
TEXTILES
A new program for the support of the textile sector (RETEX) is included in the SIR program. It aims to support the modernization, internationalization and diversification of the industrial base of those regions that will be more affected by the restructuring process. This program will provide the following.
- Support for those actions taken to penetrate foreign markets: Nonreimbursable subsidies ranging from 40 to 50 percent.
- Access to bank loans in the case of modernization / internationalization projects: Interest-free loans to a maximum of 40 percent of the investment amount.
- Support for the subscription of equity: To ensure adequate financing of the equity.
- Support for studies and analyses of strategy for productivity increases: Nonreimbursable subsidies to a maximum of 70 percent of the investment amount.
FREE-TRADE ZONES
Portugal has established free-trade zones in Madeira and the Azores. The Azores free-trade zone (Santa Maria) includes a set of incentives comparable to the best of any other zone with similar characteristics, although it is at an earlier development stage when compared with the Madeira zone.
Entities establishing a business presence (including offshore banking) in the Madeira and Santa Maria (Azores) free-trade zones may qualify for substantial tax and financial incentives. The tax incentives are as follows:
- Business profits are exempt from individual and corporate tax until December 31, 2011.
- Dividend distributions are exempt from withholding individual and corporate income tax.
- Interest on bank loans used for business investment purposes in the islands are exempt from withholding and corporate income tax.
- Interest payable on shareholders loans is exempt from withholding, individual and corporate income tax.
- Royalty payments related to the activity performed in these zones are exempt from withholding individual and corporate income tax.
- For offshore banking only, business transactions are exempt from stamp tax and VAT.
- An exemption from real estate municipal tax is available for qualifying real estate.
INTERNATIONAL FINANCIAL CENTER OPERATIONS
The creation of a thriving trade and industrial zone and the development of a major offshore financial and services center in Madeira have created a new and highly attractive alternative to other tax havens in the world, embracing commercial and services activities. The zone is not restricted to a predetermined part of the region except in relation to industrial and commercial activities. The main areas of activity in the zone are industrial and commercial activities, international services activities, offshore financial services, and international shipping registry. See also "Free-trade zones" above.
EXPORTS INCENTIVES
Incentives are available for exporters in the form of finance for the preparation and execution of firm export orders in addition to bridging finance and three-year loans to cover qualifying company expenditure of an extraordinary nature involving exceptional financial effort in exporting. Other incentives take the form of technical assistance to exporters, promotional campaigns within and outside Portugal, support for groups that combine to export and for bilateral chambers of commerce. Export credit insurance is also available.
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'.
