Permanent establishment risks in Portugal

Hiring an employee in Portugal without incorporating a local entity can expose a foreign company to the risk of a permanent establishment (PE).

Under Portuguese tax law, following OECD standards, a permanent establishment (PE) arises when a company has a fixed place of business or a dependent agent in Portugal who habitually concludes or negotiates contracts on its behalf. Even a single remote employee — especially if they play a key role in business development, sales, or management — can trigger a PE if their activities suggest the company is effectively operating in Portugal.

If a PE is deemed to exist, the foreign company becomes liable for Portuguese corporate income tax on the profits attributable to its activities in Portugal. It may also be subject to VAT obligations, payroll tax compliance, and reporting requirements. The presence of a home office, routine local operations, or a country manager with broad authority are red flags. Tax authorities evaluate substance over form, meaning that even informal arrangements can be scrutinized if they appear to constitute a permanent business presence.

To mitigate PE risk, companies should limit the employee’s authority and avoid providing a fixed place of business. However, each situation must be assessed individually, and foreign companies are strongly advised to seek legal and tax counsel before hiring locally to ensure compliance and avoid unintended tax exposure.

Our Employment Law guide is available for download here.

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