Corporate Tax

1. Rates of tax

The basic rate of corporate income tax of 36% is unchanged. With the 10% municipal surcharge levied by most municipalities the effective rate is 39.6%.

2. Tax losses

When a change is made to the Articles of Association of a company (the social objects clause) or there is an substantial change to the nature of its business tax losses brought forward will be lost unless an application to the Ministry of Finance is made and approved.

3. Thin capitalisation

The Government have been given power to introduce legislation on "thin capitalisation" on the basis that where debt from related parties is more than double equity the interest on the "excessive" debt will be treated as a distribution. Further more specific proposals are awaited.

4. Representation expenses

20% of representation expenses i.e. expenses incurred by officers and employees of the company in representing the company (such as business entertainment) are disallowed for tax purposes.

5. Car expenses

20% of expenses related to the use of passenger cars will not be accepted as fiscal expenses. In addition annual depreciation for any car is tax deductible only to a maximum allowable limit of Esc. 800,000.

6. Confidential expenses

Confidential undocumented expenses remain non deductible for corporate income tax. The present flat rate tax of 10% to which such expenses are subject will increase to 25%.

7. Fuel expenses

If an entity is unable to prove that all its fuel expenses relate to normal consumption on its own assets, such expenses will not be accepted as tax deductible.

8. Taxation period

A company can apply to adopt a fiscal year different to the normal calendar year and this can be maintained under certain conditions for a minimum period of 5 years.

Personal Tax

1. Rates of tax

Last year's income tax brackets have all been increased by 4-5%. This has set the upper limit of the first range, taxed at 15%, at PTE 970,000 and personal income in excess of PTE 5,750,000 will be taxed at 40%.

2. Tax deductions

The standard allowable deduction for 1995 has been increased to PTE 440.000. The limits of most other deductible items, such as education, home mortgages, etc. have been proportionally raised in a similar manner.

3. Tax benefits/incentives

The series of benefits which were available last year (such as for share purchases/retirements funds) continue to exist with their limits having been adjusted in most cases.

The allowable deductions for participations in the two types of public savings plans have been set at 300,000 (PPA) or 400,000 (PPP) for a married couple. Only 20% of the proceeds from these will be taxed.

4. Insurance premiums

The limits of tax allowable deductions in relation to life insurance premiums, pension funds etc. have been decreased to PTE 50,000 for a married couple or half for an individual. Only contributions paid to Portuguese resident entities are deductible.

5. Other housing allowances

Whenever accommodation is made available to a employee, the difference between the value of the accommodation and the part actually paid will be considered as income in kind.

In the absence of actual rent payments the value will be determined in accordance with going market rates but will not exceed 1/6 of total compensation.


1. Changes in rates

The standard rate has been changed from 16% to 17% and the higher rate of 30% has been abolished. The reduced rate of 5% remains in place.

In the autonomous regions (of Madeira and the Azores) the normal rate has been changed to 13%.

2. Lease rentals

The position on lease rentals has been clarified. It has been confirmed that VAT should be charged on both the capital and interest element of lease rentals.

3. Withdrawal of exemptions

Legislation has been proposed which would withdraw VAT exemptions for translators, interpreters and guides

4. VAT on intracommunity transactions and acquisitions

Legislation has been proposed which would enable a VAT charge to be levied if a business engaged in intra-community transactions does not report the transactions.

For further information please contact Mark Gibbins, tax partner, KPMG Peat Marwick, telephone: +351 1 311 04 06.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances before taking business decisions.