Portugal’s proposed 2026 State Budget introduces a series of tax reforms designed to enhance competitiveness, encourage wage growth, and align fiscal policy with evolving economic realities. For companies planning to establish, expand, or restructure operations in Portugal, understanding these measures is essential for effective strategic planning.

1. Corporate Tax Reforms and Investment Incentives

While the headline corporate income tax (IRC) rate remains unchanged in the budget proposal, a separate legislative initiative outlines a gradual reduction: 19% in 2026, 18% in 2027, and 17% in 2028 (with a projected effective rate of 10% by then). In Madeira, the corresponding rates will be 13%, 12.6%, and 11.9%. This trajectory signals a continued effort to position Portugal as an attractive destination for EU-based investors.

SMEs will further benefit from a reduced 15% tax rate on the first €50,000 of taxable income, supporting profit retention and reinvestment.

On sustainability, the government continues to encourage cleaner fleet management. Plug-in hybrid vehicles meeting Euro 6e-bis standards and offering at least 50 km of electric range will qualify for lower automobile tax rates—an incentive aimed at reducing long-term operating costs while advancing environmental goals.

2. Fiscal Support for Wage Growth

A key measure in the 2026 proposal is the wage growth incentive, allowing companies to deduct 200% of salary-related expensesif the average base wage rises by at least 4.6%. This deduction also applies to employees earning the company’s average wage or above, directly linking tax benefits to real wage increases.

For employers, this measure can offset the cost of wage adjustments while enhancing workforce stability and productivity—a particularly relevant incentive amid tightening labor markets.

3. Personal Income Tax Adjustments

Personal income tax (IRS) brackets will be updated: general thresholds will rise by 3.51%, while rates for the second to fifth brackets will be reduced by 0.3 percentage points. The goal is to maintain purchasing power under moderate inflation.

Performance and productivity bonuses will continue to be exempt from IRS and social security contributions, provided employers meet the wage growth conditions and the exemption does not exceed 6% of the employee’s annual base salary. These measures are expected to support disposable income and incentivize performance-driven compensation structures.

4. Real Estate and IMT (Property Transfer Tax) Updates

Real estate remains a central pillar of investment in Portugal. The 2026 Budget adjusts IMT thresholdsupward by approximately 2% to reflect current market values. For primary residences, the zero-rate threshold rises to €106,346, while properties valued above €1.15 millionwill incur a 7.5% tax rate.

Although moderate, these adjustments maintain progressivity and better align tax brackets with actual transaction prices. Investors should assess how these updates may affect acquisition costs and portfolio structures in 2026.

5. Rising Indirect Tax Burden

Despite targeted relief for companies and households, Portugal’s indirect tax burdenis projected to reach 53.5%of total tax revenues in 2026—the highest in five years—driven primarily by growth in VAT and excise revenues.

According to government estimates and analysis by Público, indirect taxes accounted for 52.1%of total tax revenue in 2024 and are expected to reach 52.9%by the end of 2025. Economists note that successive administrations have relied on indirect taxation due to its lower perceived impact on consumers, though VAT alone generated nearly €24.2 billionfor the central government last year—around 72% of indirect tax revenues.

Outlook

Portugal’s 2026 Budget reflects a balanced approach between fiscal prudence and competitiveness. Gradual corporate tax reductions, wage-linked incentives, and updated property thresholds offer a more investment-friendly framework, while the sustained reliance on indirect taxation underscores the government’s focus on stable revenue generation.

As these measures remain legislative proposals pending parliamentary approval, investors should monitor developments closely and assess their implications within broader tax planning strategies—especially when considering regional frameworks such as the Madeira International Business Centre (MIBC).

This summary is based on the proposed 2026 State Budget presented on October 9, 2025. The information reflects draft legislation subject to change and does not constitute legal or tax advice. Professional consultation is recommended before making investment or fiscal decisions.