Understanding Payroll in Portugal: What Global Companies Need to Know About Portugal's Payroll

Like many southern European countries, Portugal has experienced a turbulent time economically over the last decade or so. GDP has reduced from its pre-2008 peak and youth unemployment is running at over 25%, and that’s before the long-term impact of COVID-19 is taken into account. However, its range of primary industries including tourism, agriculture and energy, along with its long-standing position as a member of the European Union, make it a strong candidate for expansion for international businesses.

It’s also worth noting that Portugal has not developed as quickly as its neighbor Spain since the two countries transitioned to democracy in the 1970s, and this has some advantages: Portugal has the lowest average wages in western Europe and is very open to foreign investment. Compared to some other European countries, payroll in Portugal is not overly complicated, but it’s still important to stay abreast of the current rules and requirements. This guide covers the basics:


Getting Started

Businesses in Portugal can be partnerships, co-operatives, or limited companies in private or public forms. Private limited companies require a minimum capital investment of €5000 (approximately £4500; $5900) and for each shareholder to pay at least €100 (approx. £90; $120) per share; public limited companies require at least five shareholders and a minimum start-up capital of €50,000 (approx. £45,000; $59,000).


New limited companies can be set up very quickly, either online in 1-2 business days, or in-person in just one hour if all the relevant representatives and documentation are present. Both of these services cost €360 (approx. £325; $425). These processes cover all the relevant registrations, such as those needed with the tax, commercial registry and social security offices. Companies unable to use the online services can use the old ‘Criacao da Empresa’ method of conducting each registration step individually, which normally takes around 15 days.

Companies will need an in-country bank account in order to make payments to the tax and social security authorities. Banks typically make it easy to set up an account for businesses, so this step should not take very long.


Employment Requirements

Written contracts are mandatory in Portugal, and these must include information regarding all the terms and conditions for employment. Using temporary contracts for employees who are conducting permanent work is strictly forbidden. 

Working hour limits in Portugal are broadly in line with most other Western countries at 40 hours per week and eight per day. Typical timings may vary, however, as many businesses in Portugal still take a longer lunch break during the day, and so may operate from 9am until 1pm and then from 3pm until 7pm. 

Overtime is limited to a maximum of two hours on working days (paid at 125% of salary for the first hour and 137.5% for the second), and eight hours on rest days or public holidays (paid at 150% for all hours worked). Annual overtime limits of 150 hours for employees at larger businesses and 175 for those at smaller businesses also apply, although these can be extended to 200 hours with union agreement. 


Compensation and Severance

The minimum wage in Portugal is regularly adjusted, and is currently €8400 per year. The monthly level varies because many employees in Portugal receive 14 paychecks each year (the 12 months of the year, a holiday payment in June and a Christmas payment in December), in which case the minimum is €600 (approx. £540, $710) per payment. For employees who are paid 12 times a year, the minimum is €700 (approx. £630; $830) per payment. While there is no mandatory custom for wage growth or bonuses, employees and employers can discuss and come to terms with payment structures for the foreseeable future. 

Notice periods in Portugal vary depending on the length of service, starting at 15 days for those with less than a year of service, rising to 30 days at one year, 60 days at five years and 75 days at ten years. Severance pay is 20 days per year of service, plus certain seniority bonuses that may be applied, up to a maximum of 12 times salary plus seniority bonus or 240 times the minimum wage. Many employees, however, negotiate better severance packages than the statutory minimums, especially cases of mass lay-offs.


Tax and Social Security

Income tax contributions and social security payments are withheld at source by employers, and income rates in Portugal are relatively high. There are seven progressively increasing bands: the first of 14.5% applies to the first €7,112 (approx. £6400; $8400) of annual income; the highest of 48% applies to all earnings about €80,882 (approx. £73,000; $96,000) per year. Non-residents are taxed at a flat rate of 25%.

Social security contributions are 23.75% of gross pay from employers and a further 11% from employees. Portugal does, however, have agreements with some other countries regarding social security ‘totalization’, including with the United States. In the case of the US, employees of American companies who are sent to work in Portugal for less than five years only have to pay US social security.

Portugal’s corporate tax rate is 21%, although lower rates apply in Madeira and the Azores (20% and 16.8% respectively). Additionally, small and medium enterprises can enjoy reduced rates on the first €25,000 of their annual taxable income: 17% in most areas, and 12.5% in certain inland regions.


Holidays and Leave

Employees in Portugal are entitled to 22 working days of paid leave each year, although these are normally taken in one or two large blocks. New employees can accrue two days of leave each month through the second half of their first year. Portugal has 13 paid public holidays, and employees who are required to work on these days must be given an alternative day of.

Most paid maternity and paternity leave can be shared between mothers and fathers, but the rules around them are complex in terms of when each parent can take time off and for how long. The fundamental rules are that pregnant women can take off 30 days before and six weeks after childbirth, fathers can take off 20 days including the five immediately after the birth, and that the sharing of leave depends on certain conditions being met.

Sick leave entitlement is 30 days over a 12-month period, paid by the employer for the first three days and by social security thereafter. Employees suffering from long-term illnesses can receive pro-rated social security benefits after the 30-day period has elapsed.


In Summary

Portugal does not have the most complicated payroll requirements in the world by any means, but neither are they straightforward. Getting to grips with them, therefore, may act as a distraction for any business at a time when they need to focus on establishing themselves in Portugal. It’s for that reason that a global payroll solution, delivered by an expert provider, can be a tremendous aid as a helping hand with all payroll regulatory matters.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.


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