VAT - Guide for Companies in Portugal

Welcome to our complete guide to Value Added Tax (VAT): a key element in the Portuguese business world. This tax, which is present in our daily lives, is fundamental to the functioning of companies and has a direct impact on the economy.

In this article, we'll break down VAT and explain it:

• What is VAT?
• How it is applied to companies;
• What are the different VAT rates and regimes?
• What are the new VAT rules for e-commerce in the European Union?
• How to manage VAT in the best way for your company.

Whether you're an experienced entrepreneur or an accountant - or even someone who's just starting to understand the world of business - this guide is for you.

With clear and objective language, we aim to make VAT an accessible topic for everyone, demystifying technical terms and focusing on what really matters to your business!

VAT: What is it and how is it applied to companies?

Value Added Tax, better known as VAT, is an indirect tax levied on most goods and services, including transfers of goods. In simple terms, it is a tax that companies charge their customers on the value of the products or services they sell, which is then passed on to the state.

It makes companies a kind of middle man! 

This tax is applied at various stages of the production/distribution chain and its value is proportional to the sale price of the good or service.

But how does VAT work for companies?

When a company sells a product or provides a service, it adds VAT to the price.

For example: if a store sells a product for 100 euros and the VAT rate is 23%, the final price for the customer will be 123 euros. Of these, 23 euros go towards paying VAT, which is paid to the state. 

Companies also pay VAT on the products or services they buy. However, they can deduct this amount from the VAT they have to pay to the state.

For example: if a company pays 15 euros of VAT on a purchase - and charges 23 euros of VAT on a sale - it will only have to hand over 8 euros to the state.

What are the VAT rates in Portugal?

But in Portugal, there are different VAT rates that apply depending on the nature of the goods or services. These rates are classified as Normal, Reduced and Intermediate. Let's explore each one to better understand how they are applied.

Normal VAT rate

The standard VAT rate is the highest and applies to most goods and services. In 2024, this rate stands at 23%. This is the standard rate used, unless a good or service qualifies for a reduced or intermediate rate.

For example, when you go to a restaurant or buy a household appliance, you are usually paying this 23% tax on the value of the service or product.

Reduced VAT rate

The reduced VAT rate is applied to certain goods and services considered essential. In 2024, this rate will be 6%. Some examples of products that fall into this category include:

• Basic foods like bread and milk;
• Books;
• Some medical services.

This lower rate aims to make these goods and services more accessible, recognizing their importance to people's daily needs.

Intermediate VAT rate

Finally, the intermediate VAT rate, which is a sort of middle ground between the normal and reduced rates and applies to a very specific set of goods and services. In 2024, the rate is 13%. Some examples of items that fall into this category include:

• Meals in restaurants (except alcoholic beverages);
• Some agricultural products;
• Hotel accommodation.

What about goods and services that are exempt from VAT? Do they exist in Portugal? If so, what are they? That's what we'll find out in the next chapter.

How do VAT exemptions work?

VAT exemptions are specific situations defined by tax legislation in which certain goods or services are exempt from VAT.

These exemptions are important because they affect both the way companies price their products and services and their tax accounting. Let's explore two of the most relevant exemptions in Portugal: those provided for in Articles 53 and 9 of the VAT Code.

Article 53 of the VAT Code

Article 53 of the VAT Code refers to the exemption for small traders, which applies to taxable persons. This exemption applies to taxable persons with an annual turnover that does not exceed a certain threshold - which in 2024 is set at 12,500 euros.

This provision aims to support small business owners and freelancers by reducing their administrative and tax burden. It is important to note that by opting for this exemption, companies cannot deduct the VAT incurred on their purchases and investments.

Article 9 of the VAT Code

Article 9 of the VAT Code deals with transactions exempt from VAT. This exemption applies to a variety of activities, including:

• Certain medical and paramedical services;
• Educational services;
• Cultural services;
• Insurance;
• Real estate transactions (companies with profits from real estate activities should be aware of the Municipal Property Tax and how it integrates with VAT);
• Banking operations.

The aim of this exemption is to reduce the cost of this range of services - considered essential for the population - and to encourage activities that are considered to be in the public interest.

But this section was about what companies have to pay... What about receiving? What does it mean to be able to deduct VAT and how can you take advantage of this tax mechanism? Read on to find out.

VAT deductions: what are they and how do they work?

In the Portuguese tax system, VAT deductions are a mechanism that allows companies to recover part of the tax that has been paid on their purchases and business-related expenses.

In theory, this process is fundamental to ensuring that VAT is effectively a tax on the consumption of products, particularly essential products - and not an additional cost for companies. 

How do VAT deductions work?

When companies purchase goods or services subject to VAT, they pay that VAT to the supplier, right? Well, this amount can be deducted from the VAT that companies charge their customers.

Sounds confusing? Let's look at a practical example:

• A company sells products worth 10,000 euros at a VAT rate of 23% (2,300 euros of VAT);
  
  
• He then buys goods worth 5,000 euros at the same VAT rate of 23% (1,150 euros of VAT);
  
  
• Then the company only needs to hand over the difference to the state, which in this case would be 1,150 euros (2,300 - 1,150). Simple! 

Tip: VAT deductions on transportation and representation expenses are crucial, especially for medium-sized businesses - and can include payment on account!

Requirements for VAT Deduction

VAT must be deductible: 

1. Adequate documentation: the company must have invoices or equivalent documents proving the purchase of goods or services and the payment of the respective VAT;

2. Relation to Business Activity: expenses must be directly related to the company's activity. Personal expenses or expenses not related to the business activity are not eligible for deduction; 

3. Adjustment of Deductions: in certain cases, such as changes in the use of goods or services, it may be necessary to adjust VAT deductions made previously.

Limitations and Exceptions to VAT Deduction

Remember that some expenses have limitations on VAT deduction. For example, expenses for passenger cars and fuel have specific deduction limits.

Also, remember that companies exempt from VAT, such as those covered by Article 53 of the VAT Code, are not entitled to deduct the VAT paid on their purchases!

What to do to make the most of VAT deductions

The answer naturally depends on the sector of activity in which you operate and the specific circumstances of each company. But in general, these are the practices to watch out for:

Trade and Industry

• Deduct VAT on all raw materials, components and packaging
• Deduct VAT on production goods, industrial equipment and tools
• Deduct VAT on energy, water and communications costs

Services Sector

• Deduct VAT on the cost of renting office or retail space
• Deduct VAT on marketing, advertising and public relations services
• Deduct VAT on travel and representation expenses

Construction and Real Estate

• Deduct VAT on all building and finishing materials
• Deduct VAT on subcontracting services
• Deduct VAT on safety and protection equipment at work

Tourism and Catering

• Deduct VAT on kitchen utensils and restaurant furniture
• Deduct VAT on reservation systems and management software
• Deduct VAT on tourism promotion expenses

Transportation and Logistics

• Deduct VAT on navigation and communication systems for vehicles
• Deduct VAT on insurance services and vehicle leasing
• Deduct VAT on cargo handling equipment

Education and Culture

• Deduct VAT on audiovisual and technological equipment for teaching
• Deduct VAT on expenses for cultural and educational events
• Deduct VAT on materials and equipment for artistic activities

Health

• Deduct VAT on medical and laboratory consumables
• Deduct VAT on medical equipment maintenance services
• Deduct VAT on health insurance costs for employees

Accessory VAT Obligations

But that's not all. Have you heard of ancillary obligations? These are administrative and fiscal duties that companies must fulfill in addition to paying taxes.

In the context of VAT, these obligations are crucial to ensuring transparency and correct tax administration. They include keeping proper records, issuing invoices and submitting periodic declarations, among others. 

1 - Record keeping

Companies must keep a detailed record of all transactions that affect VAT. This includes all sales and purchases, with invoices or equivalent documents proving each operation.

Remember that these records are essential for the correct calculation of the VAT to be paid or deducted.

2 - Issuing Invoices

Issuing invoices is a fundamental obligation for all commercial transactions. They must include details such as:

• The description of the good or service;
• The value;
• The applicable VAT rate;
• And the total VAT charged.

Invoices are key documents, both for the company that issues them and for the one that receives them. Without them, there is no basis for deducting VAT.

3 - Periodic VAT returns

Companies are obliged to submit periodic VAT returns, usually on a monthly or quarterly basis, depending on their turnover.

These declarations summarize the total VAT charged on sales and the total VAT deductible on purchases, resulting in the amount of VAT to be paid to the state or refunded to the company.

VAT refund: how does it work?

This is the most interesting part of the article! 

A VAT refund is a process by which companies can recover the amount of VAT they have overpaid. Please note: if you still don't understand what "excess" means, please re-read the chapter above on "How VAT deductions work".

But in short: this excess happens when the deductible VAT (the tax paid on purchases) is greater than the VAT due (the tax charged on sales). 

VAT refunds are even more common for companies that export goods or services, as they often charge VAT at a rate of 0% on their sales abroad, but continue to pay VAT on their purchases.

It also often occurs when the company is facing periods of major investment: where purchases outstrip sales. Or in businesses with periods of low commercial activity. But how do you apply for a refund?

Refund Request Process

To request a VAT refund, the company must submit a VAT return showing a negative balance. This request is made through the Finance portal, where the company submits its periodic VAT return, indicating the amount to be refunded.

Deadlines and conditions

The deadline for processing the VAT refund depends on several factors, including the correct submission of all the necessary information and the company's tax situation.

In Portugal, the legal deadline for VAT refunds is generally 25 days after the application is submitted, for companies with a history of tax compliance. However, this deadline can be extended if there is a need for a tax inspection.

Audits and inspections

But if you're overly enthusiastic about this possibility, it's important to note that VAT refund requests can lead to greater scrutiny by the Autoridade Tributária, our country's tax authority.

Companies must be prepared to justify their VAT deductions in the event of an audit!

Corporate VAT in Portugal - Everything you need to know

This section provides a practical and specific guide to understanding how VAT applies to different sectors and business activities in Portugal.

What VAT rate is my activity subject to?

VAT rates in Portugal vary according to the type of product or service. I'll give you a detailed list of the rates in the most typical sectors of our economy:

Standard rate (23%)

• Electronics and household appliances
• Clothing and footwear
• Furniture and decoration
• Cars and fuel (except for specific cases with a reduced rate)
• Alcoholic beverages and tobacco
• Telecommunications and internet services
• Restaurant and catering services (including alcoholic beverages)
• Cosmetics and toiletries
• Cleaning and maintenance services
• Legal and consulting services

Reduced rate (6%)

• Basic foodstuffs (rice, pasta, bread, milk, eggs) i.e. essential goods and foodstuffs that are important for people's daily lives.
• Water
• Medicines and pharmaceutical products
• Medical and orthopedic equipment medicines for therapeutic purposes
• Books, newspapers and periodicals (including digital formats)
• Medical, dental and nursing services
• Public transportation
• Renting social housing
• Vocational training services

Remember: there may be other items that fall under complete exemptions. This list is just a starting point! 

And very importantly: autonomous regions such as Madeira and the Azores will, as a rule, benefit from lower VAT rates.

Intermediate Rate (13%)

• Agricultural and food products (meat, fish, olive oil; wood for construction)
• Restaurant meals (excluding alcoholic beverages)
• Tourist accommodation services (hotels, hostels)
• Tickets for cultural shows and sporting events
• Flowers and ornamental plants
• Some passenger transport services
• Other (such as services offered by travel agents or tickets to public aquariums)

VAT Code: which tax regime applies to my business?

But one thing is the rate that affects our sector of activity: another is the regime under which we fulfill our legal obligations related to VAT. Shall we learn more about this?

Normal Regime

The normal VAT regime is generally applied to companies engaged in the provision of services, with an annual turnover above a certain threshold (in 2023 it was 650,000 euros). This regime requires more detailed tax management, including:

• Monthly or Quarterly Declaration: depending on turnover, companies must submit VAT declarations either monthly (for companies with a turnover of more than 2,012,500 euros) or quarterly;
  
  
• Right to Deductions: companies can deduct the VAT incurred on their purchases and business-related expenses;
  
  
• Organized accounting: it is necessary to keep organized accounts, with a record of all transactions, in order to justify VAT deductions and payments.

Simplified regime

For companies with a turnover of up to 200,000 euros.

The simplified VAT regime is aimed at small businesses or self-employed people with an annual turnover of up to 200,000 euros. This regime simplifies VAT management, but has some limitations:

• Simplified calculation of VAT payable: VAT payable is calculated on the basis of a predefined coefficient, applied to turnover, without the need to account for VAT on each transaction individually;
  
  
• Limitations on Deductions: does not allow the deduction of input VAT on purchases and expenses for taxable persons under this regime, which can be a disadvantage for companies with significant expenses.
  
  
• Fewer accounting obligations: recording and accounting obligations are less demanding than under the normal regime.

Exemption scheme (Article 53)

The VAT exemption regime, provided for in Article 53 of the VAT Code, applies to small businesses or self-employed workers with an annual turnover not exceeding 12,500 euros. This regime is ideal for taxable persons such as self-employed workers and has specific characteristics:

• Exemption from charging VAT: companies covered by this scheme are exempt from charging VAT to their customers. This means that the prices of products or services are presented without the addition of VAT;
  
  
• No VAT Deduction: companies under this regime cannot deduct the VAT incurred on their purchases and expenses. This can be a disadvantage for businesses with significant operating costs;
  
  
• Administrative Simplification: this scheme offers major administrative simplification, reducing tax and accounting obligations;
  
  
• Suitable for Small Businesses: it is ideal for taxable persons such as small businesses or freelancers who have a low turnover and limited operating expenses.

If in doubt: how to choose?

The choice between the normal regime, the exemption regime and the simplified regime is not really a choice: it depends not only on turnover, but also on the nature of the business activity and operating expenses.

Companies with high deductible expenses may benefit more from the normal regime, while small businesses with lower expenses may find advantages in the simplified regime. You know what I'm going to say, right? Talk to your accountant! 

Where can I find VAT legislation?

For companies and professionals who need detailed and up-to-date information on Value Added Tax (VAT) in Portugal, it is crucial to know where to find the relevant legislation. Here are the main sources:

Finance Portal

• Official Website: the Portal das Finanças (www.portaldasfinancas.gov.pt) is the primary source for all tax-related information in Portugal, including VAT;
  
  
• Legislation and Technical Information: the portal offers access to up-to-date legislation, circulars, information on taxes, regimes and tax obligations;
  
  
• Guides and Simulators: there are also practical guides, FAQs and simulators that can help you better understand the application of VAT.

Electronic Official Gazette

• Official Publications: the Electronic Official Gazette (www.dre.pt) is where all laws and regulations are officially published. Here, you can find the original legislation and its updates;
  
  
• Search by Legislation: it also allows you to search specifically for VAT-related legislation, including recent amendments and regulations.

Tax and Customs Authority

• Assistance and clarifications: the Tax and Customs Authority offers face-to-face and telephone assistance for specific clarifications on VAT and other tax issues;
  
  
• Training and Workshops: events, training and workshops are often organized on tax issues, including VAT, which can be very useful for entrepreneurs and accountants.

Tax Consultants and Certified Accountants

• Personalized Advice: for complex issues or specific situations, it may be advisable to consult a tax advisor or certified accountant. They can offer personalized and up-to-date advice.

How do VAT rates compare in Portugal and Europe?

Comparing VAT rates between Portugal and other European countries offers an interesting perspective on the different tax approaches adopted in the European Union. Let's analyze the standard, reduced and special rates in some European countries in relation to Portugal.

Standard VAT rates

• Portugal: the standard VAT rate in Portugal is 23%, which is one of the highest in Europe;
  
  
• Countries with high rates: countries like Denmark, Sweden and Hungary also have high standard rates, around 25%;
  
  
• European average: the average standard VAT rate in the European Union is around 21%, which puts Portugal slightly above the average;
  
  
• Countries with lower rates: some countries, such as Luxembourg, have significantly lower standard rates, around 17%.

Reduced VAT rates

• Portugal: offers reduced rates of 6% and 13% for certain goods and services, such as basic foodstuffs, books and some health services;
  
  
• Variation in Europe: most European countries apply reduced rates to similar categories of goods and services, but the percentages vary. For example, the United Kingdom has a reduced rate of 5% for some specific goods and services;
  
  
• Exemptions and Zero Rates: some countries, such as the UK and Ireland, apply a 0% VAT rate to certain items, such as food and children's clothing.

Special Rates

• Portugal: applies special rates in the autonomous regions of the Azores and Madeira, which are lower than on the mainland (6%);
  
  
• Other countries: countries like Spain and Italy also have special rates for certain regions or islands, reflecting specific economic conditions or costs of living.

VAT: the new rules for e-commerce in the EU

Before we say goodbye, I'm going to address a topic that has been the subject of increasing discussion among businesspeople and accountants: what about e-commerce between countries? What rules apply? 

Recently, the European Union implemented new VAT rules to simplify and modernize the process of collecting and declaring VAT in e-commerce. These changes aim to create a fairer and more competitive environment for all businesses, as well as facilitating cross-border shopping for consumers.

Let's explore the main points of these new rules.

One-Stop Shop (OSS)

• Simplification of declarations: the OSS allows e-commerce companies to register and declare VAT on all sales in the EU in a single electronic portal, regardless of the country where their customers are located.
  
  
• Reduced bureaucracy: previously, companies had to register for VAT in each EU member state where they sold goods. With the OSS, this process is simplified, reducing the administrative burden!

Limit for Distance Selling

• New European Limit: a limit of 10,000 euros has been set for distance sales within the EU. In other words, sales below this amount may be taxed in the seller's country of origin;
  
  
• Over the Limit: for sales over 10,000 euros, VAT must be charged at the rate of the consumer's country of destination.

Marketplace Responsible for VAT

• Marketplaces' responsibility: e-commerce platforms such as Amazon and eBay are now responsible for collecting and declaring VAT on sales made by companies not established in the EU;
  
  
• Simplification for Non-EU Sellers: this paradigm simplifies the process for companies that deliver goods via e-commerce outside the EU, as they do not need to register for VAT in each EU country where they sell their products.

Small Value Imports

• End of Exemption for Small Imports: the VAT exemption for small value imports (up to 22 euros) has been abolished. All imports are now subject to VAT, regardless of their value;
  
  
• Import One-Stop Shop (IOSS): IOSS was created to simplify the declaration and payment of VAT on imports of up to 150 euros. Click on the acronym to find out more about this possibility!

Conclusion

With this information in mind, the next step is to look to the future. This means proactively adapting to changes in VAT legislation and integrating more efficient tax practices. Companies should explore emerging technologies to simplify tax management and be aware of global trends, especially in e-commerce.

Remember: implementing innovative tax strategies and investing in continuing education will be crucial for companies to remain competitive and compliant. And in this constantly evolving business environment, BTOCNET is here to help!