Portugal Trims Corporate Tax to 19%, Sparking Budget Jitters

A 19% Headline Rate in 2026

Portugal’s taxpayers woke up this week to learn that the headline corporate-tax rate will slip to 19 % next year, shaving roughly €199 million off direct Treasury income. The Finance Ministry calculates that, once municipal surcharges and special regimes are included, the overall fiscal gap could swell to about €300 million—a shortfall the government intends to cover largely with savings in the National Health Service. Government officials insist the cut is a calculated bet on stronger private investment, while business confederations argue the move is too timid.

Why the Government chose another rate cut

Finance minister Margarida Santos has framed the 1-point descent from 20 % to 19 % as “the next step in a long-term competitiveness agenda.” She points to OECD data showing Portugal’s businesses still pay a higher headline rate than counterparts in Ireland (12.5 %) or Hungary (9 %), and reminds critics that foreign direct investment stalled in early 2025. The ministry believes a lower rate will widen post-tax profit margins, enabling companies to reinvest locally, lift productivity and keep skilled workers from migrating. Officials also stress that indirect-tax receipts—especially VAT—are running ahead of projections, giving Lisbon some breathing room to forgo part of its corporate haul now in exchange for broader growth later.

Reading the fiscal ledger

The draft Orçamento do Estado forecasts €9.532 billion in IRC revenue for 2026, a 2 % decline compared with the current year. Yet overall tax income is expected to touch €67.065 billion, up 4.4 % thanks to buoyant income-tax and consumption-tax flows. That offset underpins the government’s argument that Portugal can still deliver a deficit below 1 % of GDP even after accepting a smaller cheque from the business sector. The opposition counters that trimming receipts when public-debt ratios remain above 100 % is reckless.

Business reaction: cautious applause, louder demands

The largest employers’ lobby, CIP, labels the cut “positive but underwhelming.” Its president, Armindo Monteiro, says firms wanted a straight jump to 15 %, a target the previous government once floated. CCP, representing commerce and services, calls for an immediate two-point drop and a 10 % slash in autonomous taxation. Industrial heavyweights grouped under AIP cite a late-2024 survey where 92 % of respondents backed further relief, with 64 % asking for a nominal 15 % rate. Above all, the associations complain that Portugal’s paperwork burden still eclipses that of neighbours and that a mere one-point annual glide path leaves them paying higher effective taxes in 2026 than rivals in Spain or the Netherlands.

Europe’s shifting benchmark

While Lisbon inches downward, the EU average corporate levy sits near 21.5 %. Sweden plans to reach 20 % in January, and Germany is debating a drop in its federal share to 10 %—though local trade taxes would remain. At the other end, Estonia just lifted its distributed-profit rate to 22 %, and Slovenia will temporarily climb to 22 % until 2028. The panorama suggests an ongoing fiscal chess game in which capitals balance investment pitches against revenue needs. For Portugal, sliding to 17 % in 2028 would finally bring the country beneath the EU mean, yet still above the 15 % floor set by the global OECD Pillar Two agreement.

Plugging the €300 million gap

To square the books, the cabinet has authorised a 10 % cut in hospital purchasing budgets, curbing spending on medicines, devices and outsourced staff—measures expected to save up to €300 million. A separate State-Reform programme worth €140 million aims to streamline public services, generating medium-term savings. No new taxes have been floated to replace the lost IRC cash, a stance the finance ministry frames as proof of its commitment to an “efficient not extractive” state. Unions, however, warn that trimming health procurement when waiting lists are already long could backfire if citizens end up shouldering higher out-of-pocket costs.

SMEs: early winners or small consolation?

From January, the first €50,000 of taxable profit earned by micro, small and medium-sized enterprises will face 15 % tax, down from 16 %. Government spokespeople tout the measure as relief for the backbone of the economy—firms that supply over 60 % of IRC revenue. The CCP counters that the threshold should be €100,000 to cover a broader swath of the sector. Analysts at Nova SBE calculate that a typical 12-employee manufacturer would save about €500 annually, “useful but hardly transformational,” as one report puts it. Real change, they argue, will depend on whether smaller companies also secure easier access to credit and faster VAT refunds.

Next stop: Assembly of the Republic

The coalition has filed a legislative authorisation request empowering it to execute the full glide path—19 % in 2026, 18 % in 2027, and 17 % in 2028—without returning to Parliament each year. Left-wing parties vow to amend the bill, insisting on sunset clauses that would pause further cuts if growth undershoots expectations. Centre-right deputies appear broadly supportive but are negotiating for more generous depreciation rules to stimulate capital expenditure. A final vote is pencilled in for late November, after which the law would land on the president’s desk. Businesses, investors and municipal budget officers alike will be watching to see whether the promised tax certainty finally materialises—or gets reshaped again under the next economic gust.