Foreign investment in Portugal

These are the highlights if you want to know more about Foreign investment in Portugal. This entry was drafted by Sousa Machado, Ferreira da Costa & Associados, Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case  Sousa Machado, Ferreira da Costa & Associados is an excellent option in Portugal.

1. Introduction

Foreign investment occurs when an individual, a company or a group of entities from one country apply capital in a foreign country, which means, in an outside economy of the investor.

With the process of globalization, accompanied by the free flow of capital, the lifting of customs and tax restrictions, the movement of people and goods, this form of cross-border investment began to live a period of expansion, so that the national economies have started to receive finance from other countries.

Foreign investment can be split into direct and indirect investments. Foreign direct investments, generally known by its acronym FDI, refers to the physical investments and purchases in buildings, factories, machines and other equipment in the foreign country. The investment is direct because the investor can control, manage or have significant influence over the foreign company. Foreign indirect investments occur when companies, financial institutions or private investors purchase positions or stakes in foreign companies or also debt instruments such as bonds. Generally, this form of foreign investment is less favorable because the investor doesn’t have close contact with his investment.

2. Foreign investment in Portugal

The first instrument that regulated the private investment was launched in the 1980’s and proposed many bureaucratic and limiting mechanisms, since most projects (such as agriculture, agroindustry, forests, forestry, etc.) imposed a majority of public capital, and because of that all activities were reserved to the State.

In the last years, there have been profound changes due to the recognition of the advantages of an economy based on the promotion and stimulation of the private investment.

As a result of these changes of paradigm, the private investment has grown up and opened their doors to foreign investment and today Portugal is undoubtedly one of the best countries to invest.

3. Reasons to invest in Portugal

The Portuguese economy presents several elements that make Portugal an increasingly attractive and competitive country:

Geographical location: as an investment destination, a factor that stands out is the geostrategic position on the Atlantic zone. Portugal is the gateway to the world markets as it is the closest European country to the United States, South America and Africa.

Free market: Portugal is a Member State of the European Union, which means a single currency, single market, free trade, without internal borders or other regulatory obstacles to the free movement of goods and services.

Competitive costs: the operating costs in Portugal are significantly lower compared to the Western European countries and without compromising the quality. Portugal has a skilled and flexible workforce at a more favorable cost than most Western economies. There is a large variety of property to choose from with rental and purchase prices much lower than the rest of the European capitals and with the lowest level of taxes.

A good legal framework for investment: Portugal has been creating a favorable legal framework for foreign investors since the legislation has adapted to the rules of a liberal foreign investment system. Government policies have prioritized the promotion of Portugal’s appeal to foreign investors, introducing measures like the non-discrimination between domestic and foreign investors (when establishing a business) and the implementation of incentives for investors (contributions for the development of the business, tax benefits, etc.). It has also created a public authority (Portuguese Investment and Promotion Agency – AICEP) focused in the development and execution of structuring policies and supporting the internationalization of the Portuguese economy.

Furthermore, it is now much easier to do business in Portugal. Not only because it is possible to set up a company in less than one hour (through the mechanism “Empresa na Hora” – On the Spot Firm), but also because the taxation procedures are more simplified and it has been promoted measures to ease some labor regulations and to increase workplace flexibility.

Modern infrastructure: the quality of the highway network and the air transport, which offers frequent direct flights to major business centers around the world, are important factors to the growth of investment. Lisbon is less than an hour away from Madrid with several flights every day and about two and an half hours from Paris and London. Portugal also maintains privileged ties to its former African colonies, especially Angola.

One of the many indicators of Portugal’s development in this sector is precisely the fact that the Government has announced its intention to redevelop the military airbase at Montijo so that it can be used as a second airport for Lisbon, in order to cope with the ever-growing number of visitors that use Lisbon’s main airport at Portela, which is expected to reach its maximum capacity sometime soon.

Finally, the port infrastructure, especially in the Sines terminal, and the railway network that provides connections from the north to the south of the country and international connections between Portugal-Spain-France and in the future until Germany, are also important factors to attract investors into Portugal.

Modern technological services: we are technologically equipped for the global economy. Portugal stands out in different services such as bank services, telecommunications and renewable energy, which have been greatly improved. In fact, our Internet has the highest speed broadband and the fiber optic network was recently recognized as the best. Besides that, we are a leading country in executing operations through the ATM network and very opened to technological innovations and investments in renewable energy.

Talent and integration in Europe: Portuguese people invest heavily in their education and our society is extremely internationalized. The Portuguese culture stands out for having highly educated human resources (with a higher education degree and a vocation for technology). Likewise the majority of Portuguese people speak English – the language of business worldwide – and many are capable of mastering other languages or are even multilingual. Portugal is also very well positioned in the rankings of scientific studies with thousands of publications.

Tourism Growth: another important indicator is the fact that tourism in Portugal has been growing increasingly and, at the same time, the real estate market has been expanding in the same direction.

The high quality of life: lately, Portugal is a good country to invest, but also to live and visit, offering an affordable cost of living and an exceptional quality of life. It is a safe country with a relatively low crime rate and a socio-political stability, since freedom, human rights and a stable democracy represent are basic values of our democratic political system. Last but not the least, the pleasant Mediterranean climate with a major of sunny days in each year makes Portugal one of the best places to live in Europe.

In addition, as a law firm, our lawyers possess specialized knowledge in international corporate operations (particularly mergers, acquisitions and joint ventures) and have the necessary experience to advise clients, prepare, conduct and conclude this kind of operations.

4. Foreign Direct Investment

In Portugal the form of foreign investment that is more common and has been growing is the Foreign Direct Investment. FDI is defined by the OECD (Organization for Economic Co-operation and Development) as a type of international investment made by an entity (direct investor) with the purpose of establishing a lasting interest on a company resident in a different country of the one the investor is registered (direct investment company). To be more specific, a non-resident individual or a company who invests at least 10% in a Portuguese company’s capital and participates in the decision making of that company is a direct investor.

In compliance with the FDI Regulatory Restrictiveness Index made by OECD, Portugal had the second less restrictive foreign investment regime in 2014. This means that the Portuguese policy in this regard is one of the most open to direct investors of all the 62 countries covered by this Index.

Over the last years, according to AICEP (Portuguese Investment and Promotion Agency), FDI has been growing substantially, which means that the investors have been reacting well to the efforts described above. In 2017, according to a study conducted by Ernst & Young, Portugal was able to capture the biggest value of FDI of the last 20 years.

According to data from the Banco de Portugal and the Directional Principle, the flow of Foreign Direct Investment into Portugal (FDI) registered an amount close to 5.5 billion Euros in 2016 (-12.3% in relation to 2015). The highest value in the last five years was registered in 2012, when FDI reached 6.9 billion Euros and in 2015 with 6.3 billion Euros.

Portuguese Foreign Direct Investment (PFDI) was close to 1.4 billion Euros in 2016 (-72.1% in comparison to the previous year). The highest value during the period 2012-2016 was in 2015 (nearly 5.1 billion Euros).

In terms of stock of Foreign Direct Investment (FDI) into Portugal, at the end of December 2016, 112.1 billion Euros (+4.4% in relation to the value in December 2015) were registered.

However, in relation to stock of Portuguese Foreign Direct Investment (PFDI) this represented close to 53 billion Euros in December 2016 (+1.7% in relation to December 2015).

In global terms the European Union was the principle origin of FDI in Portugal, with a quota of 87.5% at the end of 2016, highlighting, on an intra-Community level, the Netherlands and Spain (with 25.6% and 22.9% of the total, respectively), Luxembourg (18%), United Kingdom and France (7.6% and 4.8% respectively). Within the non-EU countries (12.5% of the total), the following are worth a mention: Brazil (2.5% of the total), the USA (1.7%), Switzerland and China (with quotas of 1.6% each), and Angola (1.2%).

The European Union was also the main destination of PFDI in global terms, with a contribution of 74.3% at the end of 2016, highlighting, on an intra-Community level, the Netherlands and Spain (with quotas of 34.1% and 22.4% of the total, respectively), followed by Luxembourg (4.1%). Within the non-EU countries (25.7% of the total in 2016), the following are worth a mention: Angola, Brazil, USA and Mozambique (with quotas of 7%, 5.2%, 2.1% and 1.7% respectively).

In essence, Portugal has an appealing economy and an open attitude towards FDI, which means that it is quite attractive to invest in Portuguese companies in a vast number of business areas and, moreover, it is highly encouraged by the Portuguese government.

5. Who may invest?

In Portugal there are no restrictions on the entry of foreign capital. The principle guiding the Portuguese normative framework is the non-discrimination of investment on grounds of nationality. Which means there are no constraints to foreigners to invest and all the incentives are the same to domestic or foreign investors.

In fact, it is not mandatory to have a national partner nor there are limitations to the distribution of profits or dividends abroad. In essence, you can invest in Portugal as an individual or as a company and foreign companies are subject to the same rules as domestic companies. Anyhow, you will have the same conditions that are given to the nationals: the same rights and the same obligations.

6. How to invest?

There are many possible ways to invest in Portugal, the most usual ones are the following: buying companies’ capital; buying real estate; and set up a company. For all of these types of investment it is advisable to seek legal advice.

It is possible to buy stocks or bonds of the better-rated companies on the stock market (that may or may not be included on the Benchmark Index PSI 20) or to buy shares of the PME (Small and Medium-sized Enterprises). To a short-term investment, there are many companies in Portugal that are low-rated on the market and will certainly gain value. On the other hand, to a long-term investment, there are numerous companies in Portugal that distribute among the shareholder’s considerable dividends.

7. Incentives offered by the Portuguese government

There are loads of incentives that the Portuguese government provides to investors. Notwithstanding, these incentives are based on certain factors such as the contribution of the investment for development purpose, the size of the investment and job creation.

There are different types of incentives, but the most usual ones are the following four: productive investment, research and development (R&D) investment, job creation and non-habitual residents.

Within the productive investment there are financial and tax incentives. The financial incentives apply to new products or services or to new production methods or processes, but the innovation must be at least nationwide. It can be used in three sorts of expenses, the tangible fixed assets, such as machines, equipment and buildings; the intangible fixed assets as software and technology transfer; and the training expenses. There are two types of support, the loan up to 30% of eligible expenses with an interest-free loan and with 8-years reimbursement period or the cash grant, consisting in a loan conversion up to 60% of the incentive depending on the performance of the project.

The tax incentives apply to projects with positive impact on innovation and jobs creation. It includes tangible fixed assets, such as machine, equipment and buildings; and intangible fixed assets, such as software and technology transfer. There are three different types of support, the corporate income tax credit from 10% up to 25% of eligible investment; the tax benefits up to a 10-year period after the conclusion of the investment; and the exemption from Municipal Property Tax, Municipal Tax and Stamp Tax Transactions.

Nevertheless, financial incentives combined with tax incentives applied to the same expenses cannot exceed 25% of the eligible investment. And if the project is located in Lisbon or Algarve region, only investments in new activity are eligible up to a limit of 10% of the eligible investment.

Within the research and development (R&D) investment there are also financial and tax incentives. The financial and tax incentives aim to appeal to the investment in R&D activities in order to develop new products or services. It covers costs with technical staff dedicated to R&D activities; acquisition of services from third parties, including technical and scientific assistance and consulting; purchase of scientific and technical instruments and equipment (depreciations during project); and also costs associated with patents registration and acquisition.

Concerning financial incentives there are several types of support, such as a base rate of 25% of eligible expenses; bonuses up to 60% according to the project scope and the company size; cash grant up to € 1.000.000,00 of incentive; and for incentive amount that exceeds €1.000.000, 25% as an interest-free loan and 75% as cash grant.

In regards to tax incentives there are two sorts of support, which are corporate income tax credit with a base rate of 32.5% and incremental rate of 50% of the increase in expenses incurred during that period compared to the average from the previous two fiscal years, up to €1.500.000,00.

Nonetheless, financial grants combined with tax incentives, applied to the same expenses cannot exceed 80% of gross grant equivalent for industrial research projects and 60% of gross grant equivalent for experimental projects.

In terms of job creation, the Portuguese government, through the Public Employment Service (IEFP), supports financially and during nine months the internships for unemployed people between 18 and 30 years with at least the high school graduation and for unemployed people over 30 and under 45, if registered for at least 12 months at an employment center.

Moreover, the Portuguese government, throughout the Social Security, also exempts the company of paying social contributions if the contract is permanent. It applies to young people under 30 years looking for their first job or to long-term unemployed, registered at an employment center for more than 12 months. It allows 50% exemption from payment of social security contributions, during 5 years for young people looking for their first job and during 3 years for long-term unemployed.

There is a third option, the “Contrato Emprego” Programme, in which the Public Employment Service (IEFP) is the competent service to submit the request. This one refers to unemployed people registered at an employment center for 6 months or unemployed people under 29 or over 45, if registered for at least 2 months at an employment center. It is granted once and the amount is € 3.791,88 if it is a permanent contract or € 1.263,96 if it is a fixed-term contract (with a minimum of 12 months). However, the investor needs to bear in mind that this measure cannot be cumulatively applied with the exemption of social contributions.

At last, the non-habitual tax resident regime allows qualified expatriates and qualified foreign people in high added-value activities, scientific, artistic or technical activities and upper management positions, that became tax resident in Portugal, to benefit from a flat rate for income tax of 20% during 10 years, instead of progressive tax rates that can reach 48%. In addition, in general, non-Portuguese source income may be exempt under some specific conditions (eg, pensions, dividends and interest that may be taxable on the source State).

8. Bilateral agreements to promote investments

There are many bilateral agreements between Portugal and countries all over the world that contain binding measures in order to provide reciprocal protection and promote investments. These agreements cover four major areas, which are the entry of investments, the treatment of investments, the expropriation and losses on investments and the conflict resolution.

As so, bilateral agreements are very useful because they provide the creation of more favorable conditions to the investors of one signatory state in the territory of another, the assurance of more favorable treatment of investors and a guarantee of complete security and protection of investments already made, on a reciprocal basis.

9. Set up a company

It is very easy to create a company in Portugal in few hours or even in minutes. Indeed, throughout the “Empresa na Hora” (On the Spot Firm) it is possible to create a company in just one office (one-stop office) in a single day (in medium 36 minutes). The investors will no longer have to obtain in advance a certificate of company admissibility from the National Registry of Companies (RNPC). Nor will it be necessary any longer to sign a public deed.

During the incorporation procedure, the definitive legal person identification card will be handed over, the Social Security number will be given, and the company will immediately receive its memorandum and articles of association and an extract of the entry in the Commercial Register.

In other words, Portugal has become one of the cheapest (costing about 360 euros) countries in Europe to set up a company, apart from being fast and less bureaucratic than many other countries.

Also, the Legislative and Administrative Simplification Program (“Simplex”) simplified the procedures and reduced the bureaucracy associated with the creation of a company. The mandatory steps to do so are as follows: i) choose the company’s name; ii) choose pre-approved standard articles of association (customized articles of association will delay the procedure and push up the costs); iii) attend to the competent service; iv) execute the articles of association and commercial registry; v) deposit the share capital; vi) fill out the commencement of activity.

10. Golden Residence Permit Program

The Golden Residence Permit Program entered into force in 2012 and it is another effort to attract investors to Portugal. It applies to non European Union member-state nationals who need a residence permit and want to invest in Portugal.

This Program allows foreigners of third countries to live in Portugal and travel through the Schengen Space as long as they comply with the investment requirements established by the law.

There are many ways to acquire a golden residence permit: by transferring at least 1.000.000,00 Euro to a Portuguese bank; by buying a house in Portugal of at least 500.000,00 Euro; by spending at least 350.000,00 Euro buying and renovating a house in Portugal; or by establishing a company in Portugal and employing at least 10 people.

After making one of the above mentioned investments your lawyer can help you applying for the residence permit at the Immigration and Borders Service (SEF), for which it is required to present the following documents: passport (with proof of legal entry into national territory), criminal record, evidence of compliance with tax and Social Security obligations and the documents that prove the investment has been made (declaration of investment, declaration of the bank assuring that an international transfer of capitals has been made, etc.). It is also necessary to schedule an appointment on SEF to collect the biometric data (photography, fingerprints and signature).

It is also possible to obtain a residence permit for your immediate family members, under the family regrouping option (namely wife, sons underage, sons of age in economic dependency, parents or parents-in-law with more than 65 years or in economic dependency) by submitting their documents, which will be the same as the above, plus a proof of family bond (for example, the certificate of marriage or the certificate of birth) and minus the investment documents.

After obtaining the residence permit it is mandatory to maintain the investment for a minimum of 5 years. After the first and the third years the residence permit needs to be renewed. For the renewals the procedure is the same as for the submission, the only difference is that it is required a proof of the stay in Portugal for at least 7 days (continuously or intermittently) during the first year and 14 days (continuously or intermittently) during the following two-year periods.

After 5 years since the date of submission it is possible to apply for a permanent residence permit. On this final stage you will need to present your criminal record, proof of means of subsistence, proof of accommodation and, lastly, you will need to prove a basic knowledge of the Portuguese language. Alternatively, 6 years after the date of submission, it is possible to apply for Portuguese citizenship.

Lastly, the Golden Residence Permit is subject to three administrative fees: the application costs € 517,40 for the investor and € 80,60 for each family member; if the application is accepted, the issue of the golden residence permit costs € 5.173,00 for each one (the investor and his family); and, finally, each renewal costs € 2.568,75 for each one (the investor and his family).

11. Real estate sector

The real estate sector with its luxury properties in the center of the cities, like Lisbon and Oporto, at competitive prices is the main attraction of investors from different parts of the world, such as France, Brazil and China.

Since the entrance in the Eurozone in 1999 foreigners investors have been investing in Portugal approximately € 4.2 billion of foreign capital in the acquisition of 150 real estate assets. The majority is from Germany, the United Kingdom, Netherlands and the United States of America.

The end of the exchange rate risk and the positive evolution of the retail and office sectors contributed to attract foreign investment, which sought to take advantage of the expected capital appreciation.

Attractive prices, the potential for good return through subsequent lease, tax benefits and programs such as Residence Permit for Investment Activity (ARI), allied with hospitality and security have led to a growth of investment in this sector.

Furthermore, the Portuguese government has recognized the importance of the real estate sector to attract Foreign Direct Investment and, in this sense, has joined efforts to establish measures to facilitate and attract private investment (like real estate restructuring)

The investment in rural property has also developed due to the increasing of the rural tourism. Portugal is, undoubtedly, a country that offers a unique climate and has an extension of nature that stands out from many countries and in the face of those potentialities the Portuguese government has also sought to establish measures to support this growing form of tourism and investment.

In fact, in the last years the tourism sector has registered an exponential increase, with an enlargement of the number of tourists visiting the country. This growth has impacted Portugal’s economy and in special the real estate sector in a very positive way. In particular, new tourist accommodation has been opening at a fast pace and there has been a clear growing interest shown by international hotel chains that are currently seeking new opportunities to invest in the country, with a particular focus on Lisbon, Oporto and Algarve.

Lisbon, in particular, has been the center of investment. Although the Portuguese capital may not be quite as popular as some other major European capitals, like Paris and Rome, the fact that property prices in Lisbon are far more affordable that those found in other major capitals combined with the rising of the tourism makes Lisbon the perfect place to invest.

12. Other investment opportunities

The electric and electronic sectors have also attracted many investors and provided many opportunities. With more than 7.600 companies in ICT, the Portuguese information and communication technologies market has shown itself capable of rapid adaptation to and effective assimilation of new inventions. Biological industries also bring together several international projects in domains such as pharmacy, biotechnologies (especially with renowned Portuguese universities) and research and development.

13. Conclusion

In conclusion, there is a large variety of forms of investment to choose in Portugal. All are very compelling and can be highly profitable. As we described above, the potentialities as a country are evident and procedures to invest are quite simple, but this does not exempt the legal advice, which is always recommended in order to make sure everything goes according to plan as well as to obtain protection against any political or legislative uncertainty that characterizes even the most sophisticated country.