Every year in May all companies have an obligation to pay their company tax from the previous year. All of us can ask ourselves the following questions: Should the company tax rate be higher or lower? Is it better to have a lower rate and therefore reduce fiscal evasion? Should the government keep the rate high and invest in methods to reduce fiscal evasion? All these issues must be balanced, and obviously it is very difficult to obtain quick answers.
Firstly, we need to know how the system works, and how companies pay their yearly tax. Currently there are two different ways to pay it. There is a general regime, which is the most common and there is a simple regime (Regime Simplificado).
Only companies that invoice less than 149,639.37 euros per year can use the simple regime. This regime has a tax rate of 20 per cent – not on profit but on annual income. It is calculated using a percentage that the government fixed – 20 per cent of sales income and 45 per cent of service income.
The general regime is payable according to the profit of the company. The rate of company tax in this case is 25 per cent for 2004. This rate is being reduced, in 2003 it was 30 per cent. The tax is calculated according to all adjustments for fiscal purposes, as some of the costs are not fully deducted for those purposes. Also, in the general regime all companies that have representation costs and car expenses will have to pay a tax on these. In 2004 the tax rate was 6 per cent. Companies on the simple regime don’t pay this tax.
Example of simple regime
A company invoiced the following in 2004: Sales – 100,000 euros and services 25,000 euros. Calculation:
The company in this example had an estimated profit of 31,250 euros. Therefore the company has to pay a tax of 6,250 euros. On the simple regime there is a minimum profit, which is 6,250 euros, and consequently a minimum tax of 1,250 euros.
Example of general regime
A company has a profit of 50,000 euros, and invoiced the following: Sales – 100,000 euros and services 25,000 euros. Calculation:
The tax is always payable according to profit, and not according to income as in the simple regime.
In both regimes there is an additional tax to pay, which is a municipal tax, called “Derrama”, the rate in this case is not fixed, and will depend on where the head office of the company is located. Additionally, all companies have to pay their taxes in advance, the government receives the money, and the adjustments will be made yearly on “MOD.22”, which is the form used to declare the amount payable, payments already made and other fiscal information for the year that is being submitted.
Regarding payments in advance there also two types: payment in advance on profit (PAP) and special payment in advance (PEC). The special payment in advance is the most controversial, as it needs to be paid even if the company has no profit. This payment is calculated according to the income. There is also a minimum amount to pay, and can be paid twice a year (March and October), or all at once in March.
Example of special payment in advance (PEC)
A company invoiced the following in 2004: Sales and services – 125,000 euros. Calculation:
The amount in this example is the minimum. The maximum PEC payable is 40,000 euros. When a company pays in advance on profit, the amount paid is deductible on the PEC, and if the PEC calculated is lower than the payment in advance on profit the company doesn’t have to pay. Companies on the simple regime don’t pay PEC.
Example of payment in advance on profit (PAP)
A company had a profit of 50,000 euros, and invoiced the following: Sales – 100,000 euros and services 25,000 euros. Calculation:
The PAP is 75 per cent of the tax payable in three payments in the months of July, September and December. In this example the company will have to pay 3,125 euros three times. However, if the company invoices more than 498,797.90 euros the PAP to pay is 85 per cent of the tax.
The information mentioned above is for companies that are resident in Portugal. Non resident companies that have income in Portugal also need to pay company tax, but with specific rules. The income that is included in company tax for non residents is: rents of properties located in Portugal owned by companies with their head offices abroad, as well as the capital gains on those properties when they have been sold; capital gains on the sale of shares; income from intellectual and industrial property.
With this information we still don’t have answers to our questions above. However, I am sure that the information written will give us an idea how the system works, and therefore you may still think that in some cases it is high, and in other cases it is not.