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Portugal’s Recovery – Beset With Problems At Every Turn

Enticing Tax and Real Estate Investment Incentives Not Enough To Arrest The Slide?

by Xavier Basil


Madeira – Not Just For Drinking

In what appears to be a cross between glossy digital brochures and slideshows, international accounting firm PWC’s Portuguese office last year uploaded a promotional series on Portugal entitled ‘Europe’s Best Kept Secret’. The one which caught our eye carries the byline ‘Why Portugal is your top tax choice 2012’. And pride of place in that thesis goes to the recently-introduced new tax regime for foreign companies setting up shop in MIBC – the Madeira International Business Centre.

Madeira? It’s about as far west as you can get in the European Union from its centre (Berlin, say) and it’s also quite a way – 900 kilometres or thereabouts – from Lisbon. You can’t drive to Madeira of course, it’s an island – actually an archipelago – closer to the African than the European continent but a fully functioning ‘autonomous region’ of República Portuguesa nonetheless (one of two, the other being the Azores).

A business which sets up shop in the MIBC – in Funchal, the region’s only city to speak of (population around 112,000 – something less than half of Madeira’s total) – will pay just five percent corporate income tax from this year out till 2020 on taxable income up to an amount determined by the number of jobs created. A virtual ‘one-man (or woman – or both) band’, with up to two staff, gets that very concessional tax rate on income up to a generous €2 million per annum. Whereas an SME with between six and 30 people on the payroll can earn up to €16 million before tax at the five percent rate. And for a large-scale operation with more than 100 workers, the threshold is €150 million. Once the thresholds are reached, corporate tax climbs to a flat 25 percent. On the face of it, it’s an excellent deal.

Beautiful Beaches – And Ronaldo

For most foreigners looking for a convivial investment climate, Madeira is probably best known for its wine, for its lovely beaches and for its most famous son, at least in the modern era – one Cristiano Ronaldo dos Santos Aveiro, lately of Real Madrid Club de Fútbol. But this new business tax regime is another good reason to take a close look at this far-flung outpost of the European Union. At five percent, it’s far and away the lowest corporate tax rate to be had anywhere in the EU, half of that in Bulgaria and – though for not much longer – in Cyprus. In the latter case, the 10 percent rate is being increased to 12.5 percent as part of the country’s Eurogroup bailout.

Especially if you’re from outside the EU – being Russian, say, or American – because there’s another recently-introduced incentive you might want to know about, which applies across Portugal. Since late last year, a non-EU citizen investing at least half a million euros in Portuguese real estate has qualified for a ‘Gold Visa’, entitling unrestricted residence for a minimum of five years. It’s perhaps too early to tell, but this particular incentive, coupled with the MIBC tax regime described above, may be putting the little archipelago firmly in the sights of a Russian diaspora now somewhat disaffected with life in Cyprus and looking for a new EU-home away from home.

Repo Housing At Knock-down Rates

And there’s property to be had in Portugal, at bargain rates by all accounts. You can of course go top-end, such as the renovated 3-bedroom apartment in Lisbon’s prestigious 30-year-old Amoreiras Towers complex featured in the New York Times’ International Real Estate section back in February with an asking price of $1.15 million. A not-outrageous €5,200 per square metre or around $635 per square foot. Or you could go bargain-hunting at any of the country’s main banks, because they’ve all got distressed housing for sale. Just a week ago, Bloomberg ran a story headlined ‘Portuguese Banks Slash Repossessed Home Prices to Revive Market’, reporting that local banks are expected to put around 10,000 repo properties on the market this year – over 20 percent of total anticipated volume – at discounts of up to 12 percent on market values.

Housing values have been falling year-on-year since the full extent of Portugal’s fiscal woes emerged in 2010, with just three of the 12 quarters to June 2012 registering gains, albeit modest, and an overall decline of 12.33 percent, according to data compiled by And Portuguese homeowners are being forced from their homes in increasing numbers by draconian forfeiture laws.

The Other Side of the Coin

Which brings us – inevitably - to the less-positive side of things in Portugal: its continuing, and as seems apparent growing, economic woes since going cap in hand to Brussels back in 2011, seeking EU assistance in paying its bills. A bailout was duly forthcoming – some €78 billion repayable over three tranches – but with stringent austerity measures attached. For a while there it looked as if the bailout was working – while turmoil reigned elsewhere in the Eurozone’s ‘south’, with Greece and Italy slipping in and out of crisis, Portugal and Ireland were keeping their heads down and seemingly getting on with the job of climbing back from the abyss. The centre-right government of prime minister Pedro Passos Coelho, formed in June 2011 on the back of the bailout, appeared to enjoy widespread support for its plans to revive a moribund economy and the Portuguese people seemed ready and willing to take austerity on the chin.

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