The national corporate tax rate in Portugal in 2003 was 30%, down from 34% in 1999, but the effective rate fell from 37.4% to 33% because municipalities are allowed to impose a corporate income tax up to 10% of the national rate. Most municipal corporate tax rates have therefore fallen from 3.4% to 3% with the decrease in the national rate. Reform legislation in 2000 had originally targeted a reduction of the national rate to 28% by 2003, but this was delayed. Allowable deductions in calculating taxable corporate income include depreciation, interest payments, executives' salaries, and royalties. Capital gains are taxed at 30%. Dividends paid to parent companies by subsidiaries (owned at least 25% by the payee) are excluded from taxable income to avoid double taxation. Otherwise dividends are taxed at general income tax rates.
The progressive personal income tax schedule has six bands, not including a tax-exempt base. The schedule bands for 2003 were 15% (up to €4,100); 14% (on the next increment of income to €6.201); 24% (on the next increment to €15,375); 34% (on the next increment to €35,363): 38% (on the next increment to €51,251); and 40% (on the increment of income above €15,375). Social security taxes amount to 23.75% of nominal income. There are also taxes municipal taxes on the value of real estate.
The main indirect tax is Portugal's value-added tax (VAT) introduced 1 January 1986 with a standard rate of 16%, which was raised to 17% as of 1 January 1995 and to 19% as of 6 May 2002. There is also a reduced rate of 5% (applied to basic foodstuffs, water supplies, books, newspapers and periodicals, social housing, some medical equipment and drugs, hotel accommodations, repair and domestic services); an intermediate "parking" rate of 12% (applied to some foodstuffs, catering, and some fuels and lubricants); and exemptions from VAT (for social services, some medical and dental services, waste collection and disposal, transportation services, gold transfers to the central bank, and cremation). For the Azores and Madeira, the standard VAT rate is 12%, the reduced rate 4% and the parking rate 8%. Other transactions taxes include stamp duties and transfer fees.