Did you know that paying IRC (Corporate Income Tax) is one of the main tax obligations of Portuguese companies? For some businesses, however, this tax can be difficult to understand and calculate.
This is mainly because its calculation involves several different components, which may seem complex to those who are not familiar with corporate taxation.
In this article, we explain this tax obligation in greater detail and clarify how it applies to companies operating in Portugal.
IRC: Who Is Subject to It and How Is It Calculated?
IRC (Corporate Income Tax) is a tax levied by the Portuguese State on profits generated by companies. It applies, in particular, to businesses carrying out commercial, industrial or agricultural activities in Portugal.
It is important to note that foreign companies operating in Portugal but headquartered in another country may also be subject to IRC. In such cases, taxation applies to income sourced in Portugal.
This tax has been in force since 1989 and is regularly subject to changes and updates.
Does My Company Have to Pay This Tax?
To make it easier to understand which entities are subject to IRC, the following are among the main taxable entities:
- cooperatives;
- commercial companies and civil companies incorporated under a commercial legal form;
- public companies;
- commercial or civil companies without legal personality or incorporated under a commercial legal form;
- foreign entities, with or without legal personality, operating in Portugal whose income is not subject to IRS;
- legal entities governed by public or private law.
How Is IRC Calculated?
Calculating IRC can be somewhat complex because it involves several stages, including determining the company’s taxable profit and taxable income.
The applicable IRC rates are then applied according to the company’s taxable profit.
To make things clearer, below we explain the main elements taken into account when calculating this tax.
Taxable Profit
Taxable profit is determined based on the company’s accounting result, adjusted for the relevant positive and negative changes in equity and the tax adjustments required by law. It is reported in Box 07 of Modelo 22.
Taxable Income
Taxable income is determined based on taxable profit, after taking into account applicable tax benefits and tax losses that may legally be deducted.
It is reported in Box 09.
IRC Rates
For companies resident in Portugal, the standard IRC rate is 21% on taxable profits.
In addition, companies may be subject to municipal surtax (“derrama municipal”), with a rate of up to 1.5% of taxable profit, depending on the municipality where the company operates.
Small and medium-sized enterprises (SMEs) may benefit from a reduced 17% rate on an initial portion of taxable income, with the standard 21% rate applying to the remaining amount, subject to the applicable legal requirements.
Where taxable profit exceeds certain thresholds, an additional state surtax (“derrama estadual”) may also apply.
The applicable rates and thresholds depend on the level of taxable profit and the legislation in force for the relevant tax year.
SMEs May Benefit from a More Favourable Tax Rate
Small and medium-sized enterprises may, subject to certain conditions, benefit from a reduced IRC rate on an initial portion of taxable income.
It is therefore important to check the applicable thresholds and rates each year in order to determine the correct amount of tax payable by your company.
Do you now have a better understanding of how IRC works?
At ACCM, we specialise in accounting and tax support for businesses, helping you ensure compliance with your legal and tax obligations.
Contact us and benefit from professional support in managing deadlines, tax returns and the amounts that need to be reported to the tax authorities.