Comprehensive-Guide_Establishing-a-Subsidiary-in-Portugal-for-UK-Businesses

Expanding your UK business into Portugal offers strategic advantages, especially in the post-Brexit landscape. With access to the European Single Market, attractive tax incentives, and a highly skilled workforce, Portugal is an ideal destination for international growth. This comprehensive guide provides a step-by-step roadmap to help you establish and maintain a successful subsidiary in Portugal. Our approach is practical and insightful, designed to make the process straightforward while maximizing your business potential.

Why Create a Subsidiary in Portugal?

1. Strategic Benefits for UK Companies

Access to the EU Market Post-Brexit

Creating a subsidiary in Portugal allows UK businesses to maintain access to the European Single Market, providing several key benefits:

  • Tariff-Free Trade: Avoid customs duties, ensuring seamless trade across EU member states.
  • Regulatory Alignment: Operate under EU standards, simplifying compliance and reducing trade barriers.
  • Simplified Customs Procedures: Benefit from streamlined customs processes, lowering costs and delays.

Cost-Effective Hiring and Talent Acquisition

Portugal offers a highly skilled, multilingual workforce at competitive wage rates compared to other Western European countries. This makes it an attractive hub for:

  • Technology and Engineering Talent: Portugal is emerging as a tech hub, with a growing pool of IT professionals and engineers.
  • Professional Services: The multilingual workforce is ideal for finance, legal, and consulting services.
  • Creative and Digital Industries: A vibrant creative community provides expertise in digital marketing, design, and content creation.

Attractive Tax Incentives and Business-Friendly Environment

Portugal offers several favorable tax regimes designed to attract foreign investment:

  • R&D Tax Credits: Generous incentives for companies investing in research and development.
  • Investment Incentives: Tax benefits for strategic sectors such as technology, renewable energy, and manufacturing.
  • Tax Incentives for businesses that are located in low-density and less developed areas.  If the location of your business isn’t important, by locating your business in a low-density area you can reduce your corporate tax rate from 21% to 17%, receive tax benefits up to 25% of relevant investment expenses, as well as enjoy other potential benefits.
  • Madeira Free Trade Zone: A special economic zone with one of the lowest corporate tax rates in Europe, ideal for international trading companies.

Stable Economic and Political Climate

Portugal’s stable political environment, robust legal system, and supportive business policies provide a secure landscape for foreign investments. It consistently ranks high in ease of doing business, ensuring a transparent and efficient regulatory framework.

Why Hiring Portuguese Employees is a Game Changer

One of the most significant advantages of establishing a subsidiary in Portugal is the opportunity to hire local talent. Here’s why this can be a strategic move for UK companies:

Skilled and Multilingual Workforce

Portugal is renowned for its highly educated workforce, particularly in technology, engineering, and professional services. Many Portuguese professionals are fluent in English, ensuring seamless communication and integration with UK operations.

Cost Efficiency

Labor costs in Portugal are significantly lower than in the UK, providing substantial cost savings without compromising on talent quality. This cost advantage extends to:

  • Employee Benefits: More affordable healthcare and social security contributions.
  • Operational Costs: Lower office rents and utility expenses compared to other Western European countries.

Comparison of Salaries of Common Occupations (Source: UK Salaries: Talent.com,  Portugal Salaries: SalaryExpert)

Occupation

Average Salary (UK)

Average Salary (PT)

Average Salary (PT) in GBP – 1.21 Conversion Rate

Software Developer

£45,000

€ 25,000

£20,645

Data Analyst

£30,000

€ 20,000

£16,516

Project Manager

£50,000

€ 30,000

£24,774

Mechanical Engineer

£40,000

€ 22,000

£18,165

Graphic Designer

£28,000

€ 18,000

£14,867

Marketing Manager

£55,000

€ 35,000

£28,899

Customer Service Representative

£22,000

€ 15,000

£12,389

IT Support Specialist

£27,000

€ 19,000

£15,693

Human Resources Manager

£50,000

€ 32,000

£26,426

Sales Representative

£25,000

€ 18,000

£14,867

 

Remote and Hybrid Work Capability

Portugal’s advanced digital infrastructure supports remote and hybrid working models, making it an ideal location for international teams. This flexibility allows UK companies to optimize their workforce strategy, leveraging local talent while maintaining a global presence.  Moreover, remote work options are highly sought after in Portugal, making your job offer more appealing.

EU Employment Flexibility

Employing Portuguese staff allows for more efficient management and expansion of European operations. This strategic advantage is particularly valuable for UK companies post-Brexit, as it ensures continued access to the EU talent pool without the complexities of international employment laws.

Insider’s Perspective:

  • Many highly qualified Portuguese employees believe they can only find “good” employment in Lisbon or outside the country, but they would prefer to live and work from their hometown near their families. The workforce in the Lisbon metro area, while still quite inexpensive compared to UK salaries, can often be twice the price of salaries outside of Lisbon.
  • This presents a fantastic opportunity for foreign businesses to either open their offices outside of the Lisbon Metro Area or allow for remote work which allows them to get the same caliber employee at a fraction of the cost, all while making the employee more loyal to their business.
  • Couple this by locating your office in an area that can take advantage of programs for businesses in low-density areas (reducing your tax rate and providing other benefits), and you’ve got an even more high-value and cost-effective approach.

Choosing the Right Business Structure in Portugal

Selecting the right legal entity is crucial for your business’s success in Portugal. The most common structures are:

1. Private Limited Company (LDA)

  • Ideal for Small to Medium-Sized Enterprises: Flexible management structure with minimal regulatory requirements.
  • Liability Protection: Shareholders are only liable up to the value of their share capital.
  • Tax Efficiency: Offers a straightforward tax structure suitable for most UK businesses expanding into Portugal.

2. Public Limited Company (SA)

  • Recommended for Larger Enterprises: Ideal for companies seeking greater access to capital.
  • Minimum Share Capital Requirement: €50,000 with at least five shareholders.
  • Stricter Regulatory Requirements: Enhanced transparency and reporting obligations, making it suitable for publicly traded companies.

 

Which Structure is Right for You?

Your choice depends on liability concerns, tax implications, and operational needs. Consulting with an English-speaking accountant and legal advisor ensures you select the most advantageous structure for your business goals

Legal and Regulatory Requirements: Simplified

Establishing a subsidiary in Portugal involves several legal and regulatory steps. However, the process can be straightforward with the right guidance from your legal and accounting team. 

To create a subsidiary you’ll need to work with an attorney or an accounting firm that works with an attorney on your behalf.  Here’s what you can expect:

  1. Select an Attorney or an Accounting Firm that works with an attorney on your behalf.  They will ensure that all documents are created, and registrations are complete and will activate your company with the Portuguese Tax Authorities.

     

  2. For the Legal business name, you can either choose a name from a list provided by the government or your own.  Choosing your own name will cost a few hundred euros more (government fees and increased legal costs), and the name will have to be reviewed and approved by the Portuguese government.  Typically you’ll be asked to provide 3-5 appropriate names for your business so that if one is rejected they can immediately validate your next most preferred name.

     

  3. Decide how much Social Capital to Invest: Social Capital is basically the initial investment you’ll be putting into the business.  This will appear on your documentation going forward and is often visible to clients and partners.  With an LDA your Social Capital can be as low as €1 (€50,000 for an S.A.), however, larger amounts provide credibility to your business.  Higher levels of Social Capital are perceived as more stable and credit-worthy, which can improve your access to bank loans, and investment opportunities, and improve your eligibility for contracts with public sector and international clients.  You can always increase your social capital in the future, so depending on your situation it may be wise to initially invest a moderate amount for Social Capital, and then increase it in the future.

     

  4. Unless you plan to be present for all documents and signings, you’ll likely be asked to sign a Power of Attorney form that gives the attorney permission to create the business on your behalf.  This is standard and recommended in most cases to make the process as simple as possible.

     

  5. Receive the documentation for your newly created legal entity.  This can take anywhere from a few days to a few months depending on whether your attorney physically goes into an office to create the business (quicker, but more costly as they may have to spend the entire day there), or if they submit the registration documents online (more common, but processing time depends on which field office your documents are assigned to and how fast that particular office is).

     

  6. Open a Corporate Bank Account: Once your Legal Entity is created, you have only 5 business days to create your bank account and deposit the social capital.

     

  7. Assign a Certified Accountant: Within 15 days of the creation of the Legal entity, you must assign a Certified Accountant in Portugal, who will then activate the business with the Tax Authorities.  In Portugal, by law, businesses must have a Certified Accountant representing the business, completing the bookkeeping, and submitting required tax declarations and other forms.  This accountant is in charge of ensuring that your company stays tax-compliant. 

Insider’s Perspective:

  • The role of an accountant in Portugal is typically different than an accountant's role in the UK. Generally speaking, Portuguese accountants are focused primarily on tax compliance, with little focus on the business’s financial management, financial advice, consulting, or sometimes even customer service in general. It’s very important to find an accountant who speaks English fluently, provides insights into your business, and delivers the level of service that you expect.

Transfer Pricing Considerations

Why Transfer Pricing Matters for Subsidiaries

Transfer pricing determines how profits are allocated among related entities operating in different countries. Proper transfer pricing strategies are crucial for:

  • Tax Compliance: Portugal follows OECD guidelines, requiring transactions between related entities to be at arm’s length.
  • Documentation Requirements: Mandatory for companies exceeding specific revenue thresholds.
  • Risk Management: Avoid penalties and double taxation by consulting an English-speaking accountant to develop compliant and optimized pricing strategies.


In practice, this means that a defined approach must be used to determine how the subsidiary and parent company will invoice each other.  This defined approach needs to be documented and then followed consistently.  There are many ways to approach transfer pricing, but here are the most common:

  • Cost Plus Method:  Calculates the transfer price by adding an appropriate markup to the costs incurred by the supplier of goods or services. In other words, you’ll multiply the total costs of the subsidiary by a predetermined markup percentage, and this is the amount that will be invoiced to the parent company each month.  This is the most common approach for subsidiaries that are created to add a team of Portuguese employees.  For example, if the total expenses of the company in a given month (labor, office lease, etc.) is €10,000 and your transfer pricing markup is 12%, a sales invoice will be given to the parent company for €10,000 x 112% = €11,200.  Your accountant can help you in calculating and creating these invoices.

  • Comparable Uncontrolled Price (CUP) Method: Compares the price of goods or services in a controlled transaction to the price charged in a comparable uncontrolled transaction under similar circumstances. It is the most reliable method when identical or very similar products are sold in open markets.

  • Resale Price Method (RPM):  Determines the transfer price by subtracting a gross margin from the resale price at which a product is sold to an independent third party. It is commonly used when the reseller does not add significant value to the product.

Hiring and Employment in Portugal

Employment Contracts

  • Mandatory Contracts: All employees must have a contract outlining job roles, compensation, working hours, and termination clauses.
  • Due to frequently updated labor laws, an attorney will draft these employment contracts for you. Social Security and IRS Contributions
  • What the Employer Pays: 23.75% of the employee’s gross salary to Social Security.  Whatever salary you agree with your employee on, always factor in this additional 23.75% cost as part of your budget.
  • What the Employee Pays: 11% Social Security Tax will be deducted from their salary, plus Personal Income Tax (IRS) which is withheld from their paycheck and is calculated based on progressive tax rates.

 

Key Employment Rules

  • 14 Months Pay: In Portugal, employees earn two extra months of salary each year – one in December for the Christmas holidays and one at the end of July for the summer holidays (you and the employee can choose to have these payments spread out across their normal 12-month salary).  This means that in effect, you’ll be paying 14 months of salary annually.  Be sure to keep this in mind, especially when discussing a “monthly salary”, in which case the candidate will be assuming 14 months.
  • Termination Process: It is more laborious and costly to terminate a contract with a Portuguese employee than it is in the UK.  The process is regulated and required justified reasons, notice periods, and severance payments.  Terminating an employee can take longer and cost more than you are used to.
  • Holidays: Workers are entitled to 22 paid holidays each year.  This is the minimum and typically the standard number of holidays given.
  • Lunch Subsidy: While not legally required, it is common for employees to be given a “lunch subsidy”, typically of €6 per work day.  This “allowance” has tax benefits which is one of the reasons it is so commonly included.

Why Shouldn’t I Open a Business in Portugal?

Portugal can be a great place to do business.  That being said, it’s not all roses.  Here are the biggest complaints and issues that international owners typically face when doing business in Portugal:  The biggest complaint – and process you’ll need to adapt to – is the higher administrative load.

  • Without proper documentation for every single business purchase, the expense can not be deducted (taxable profits increase, VAT can not be recovered, and in some cases, additional taxes can even be levied on the undocumented amount).

  • Labor Laws: In the UK it’s much easier to hire someone, and if it isn’t working out, terminate their employment.  As previously described, Portugal has much stronger labor protection laws that make hiring a new employee more cumbersome and terminating an employee more time-consuming and costly. 

  • Ease of Ownership: In the UK you can start a limited company easily, let it sit dormant, and close it easily.  This is not the case in Portugal, where the startup process typically requires an attorney and can take several weeks, the company must always be actively managed by an accountant, and closing the company requires a notary or attorney and typically takes several weeks.

  • Lack of Loopholes: Generally speaking, Portugal is very effective at closing tax loopholes.  Whereas in the UK you may be used to using “creative” approaches to legally lower your tax burden, in Portugal these rarely exist. 
     
  • Sales Invoices: Must be created using software approved by the Portuguese government, which will be built specifically for Portugal – common international invoicing programs typically aren’t allowed, or must be connected to a Portuguese invoicing platform to create the “official” invoice.

  • Expense Invoices: The Portuguese Tax Authority requires businesses to have their Fiscal ID number (called a NIF or NIPC) on every expense invoice.  The paper or digital copy of these invoices must then be submitted to your accountant so that it can be uploaded to your bookkeeping software.  Without this, the expense will not decrease your taxable income (making your profits seem higher) and you cannot recover the VAT.  This sounds simple but ensuring that every document is completed properly and not lost requires very intentional effort and has a huge impact to your after-tax profits.

  • Accounting Software: Must be made for and approved by the Portuguese government (Xero, QuickBooks, and other common international software are not allowed).  That means that your Portuguese accounting will be done in a different system than you use today.  At Elevate Accounting we offer a service that replicates your Portuguese bookkeeping (done in the Portuguese software) into our client’s choice of Xero or QuickBooks, however, this is not a common service in Portugal.

Conclusion: Should You Open a Subsidiary in Portugal?

Expanding your UK business into Portugal offers incredible growth potential, but navigating the cultural, legal, tax, and employment landscape requires expert guidance. At Elevate Accounting, our team of English Speaking Accountants and Business Experts focuses entirely on supporting expats and foreign companies to open and manage Portuguese businesses.  Why?  Because we’ve been in your shoes.  Our owner is an American entrepreneur who realized the gap in accounting services between the top-notch firms he was used to working with in the US, and the expectations of services from accounting firms in Portugal.   

At Elevate we’ll provide:

  • Seamless business creation services, give you a one-stop-shop to have your business legally created – no need to coordinate work with a law firm (although we’re happy to work with your law firm as well). 
  • Seamless Financial Management: Telling you what you need to know to set your business up for success in Portugal.
  • Regulatory Compliance: Avoiding legal pitfalls and ensuring full compliance with Portuguese laws.
  • A Familiar Approach: We have many UK and US business clients and understand the common goals, issues, and frustrations you’re likely to encounter.  Elevate was specifically created to provide a UK/US accounting style in the Portuguese marketplace.

At Elevate Accounting, we specialize in helping UK businesses establish and grow their subsidiaries in Portugal. Our team of experienced, English-speaking accountants provides end-to-end support, ensuring a smooth and successful expansion journey.

Ready to take the next step? Contact us today to learn how we can help your business thrive in Portugal.

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