With a total area of 92 072 km² and a population of over 10 million people, Portugal is a medium-sized European country.
Despite its size, the country boasts a great diversity of geographical features and its location, along the Atlantic coast of the Iberian Peninsula in south-western Europe, allows it easy access not only to other European countries, but also to the American and African continents.
The Portuguese language is spoken by more than 200 million people on several continents, including Europe, Africa and America, and this has contributed to deepening historical and cultural ties between Portugal and the world.
Portugal is a founding member of NATO and joined the EEC (later the EU) in 1986.
Following the eruption of the sovereign debt crisis in 2011 and the subsequent implementation of an economic adjustment programme between May 2011 and June 2014, Portugal has remained on the road to recovery in 2016, having started out along this road in 2013. GDP has been growing in year-on-year terms since the fourth quarter of 2013 and it is expected to maintain its positive course. Furthermore, the unemployment rate continues to decrease (standing at around 10.5% at the end of 2016).
Although Portugal has tackled its external imbalances head on, the rebalancing is still a work in progress.
Exports have increased substantially over recent years, principally due to improved efficiency and product quality. However, the net international investment position is still negative and further work needs to be done to attract more foreign direct investment.
Despite the significant progress to date in adjusting its external and internal imbalances, the adjustment is not complete and large external liabilities still represent a major source of concern.
According to the Bank of Portugal’s Projections for the Portuguese Economy 2015–2017, “the growth of the Portuguese economy should be based on sustained robust growth of exports, in parallel with a recovery of domestic demand.”
Doing business and investing in Portugal
According to the World Bank’s report “Doing Business 2017” (DB2017 Report), Portugal stands at 32 in the ranking of 190 economies on the ease of starting a business. The same report ranks Portugal in the top 25 of the world’s most attractive locations to do business.
Foreign investors can engage in all types of activities under the same conditions as local investors. Investment projects that are of particular interest to the Portuguese economy (“PIN Projects”), especially those creating jobs, allowing industrial reconversion, ensuring the development of a priority region or introducing new technologies, can apply to benefit from a special investment procedure managed by a special commission (the “CPAI”).
Incorporating a company or opening a branch in Portugal can take no more than one day (on-the-spot company) and most of the steps necessary to set up a business can be taken on the Internet.
The Portuguese tax system offers interesting opportunities for non-habitual tax residents, with a flat income tax rate of 20% for certain Portuguese employment and self-employment sourced income.
Portuguese companies can take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties. They can also benefit from the more than 60 double taxation treaties that Portugal has signed. Portugal is also party to more than 50 investment protection agreements, offering interesting opportunities in a tax-friendly environment.
Companies registered at the Madeira International Business Centre (IBC), including branches of non-resident companies, can benefit from a reduced corporate tax rate of 5% until 2017. Additionally, companies that take advantage of this scheme will benefit from the withholding tax exemption on dividend payments, interests, and royalties.
In 2014, the European Commission and Portugal entered into a partnership agreement on the use of European Structural and Investment Funds (ESIFs) for the period 2014–2020.
The programming and implementation outlined by the partnership agreement have been developed around four themes: (i) competitiveness and internationalisation, (ii) social inclusion and employment, (iii) human capital, and (iv) sustainability and efficiency in the use of resources.
Under this incentive programme, Portugal will be allocated EUR25,000 million of structural funds and this will undoubtedly be an important instrument to increase investment and competitiveness, and boost the Portuguese economy.
Future challenges and opportunities
Benchmark analysis demonstrates that Portugal fares well on most business environment indicators, particularly as a result of reforms in competition law, employment law and licensing procedures.
Furthermore, the extremely effective e-government infrastructure that allows most interactions with administrative, governmental and judicial entities to take place online is an important tool in reducing operational time and costs.
All these factors, together with the recognised competitive advantages of the country itself, such as location, climate, international access and safety records, serve to make Portugal attractive to investors as an investment location.
Recent enquiries show the tourism, real estate and IT sectors as drivers of Portugal’s growth in the immediate future, and R&D, manufacturing and logistics as key areas that are most likely to attract foreign investment.
In order to truly succeed in the coming years, Portugal must continue to pursue an ambitious reform agenda. While the employment market reforms adopted during the adjustment programme are increasingly starting to deliver results, the reform effort needs to continue, because long-term and youth unemployment remain high.
Overall, the key is still the important task of increasing the flexibility and competitiveness of the Portuguese economy to underpin the gradual economic recovery, strengthen its resilience to shocks and improve potential growth prospects.