The Impact of Regulation on International Investment in Portugal

Report

20 March 2023

4. The perspective of foreign investors in Portugal

Abstract

This chapter complements the assessment of Portugal’s regulatory framework for investment and broader business environment by conveying the findings of consultations held with foreign-owned businesses and foreign and domestic chambers of commerce in Portugal. It briefly discusses the motivations of foreign investors for choosing Portugal as an investment location. The chapter then reports businesses’ perceptions on various aspects of Portugal’s regulatory framework and business environment identified as potential obstacles in Chapter 2. This chapter also maps out consulted businesses’ use of government funding and incentives, describes the impact of the COVID‑19 pandemic and Russia’s war of aggression against Ukraine on their business activity and relays investors’ thoughts on how the government could better support companies in Portugal in their digital transformation and green transition.

Key findings

Portugal’s skilled labour force was the leading driver of consulted investors’ decision to invest or expand in Portugal. Other highly important drivers included lowering production costs (for greenfield investors) and diversifying risk (for M&A investors).
Reflecting Portugal’s regulatory openness to foreign investment, the business consultation did not reveal specific obstacles related to foreign ownership or direct discrimination against foreign-owned companies. Yet, several regulatory areas, affecting all firms operating in Portugal regardless of ownership structure, were viewed as relatively burdensome by investors of different size and origin, across economic sectors and regions.
Interactions with public administration were often described as complicated and time‑consuming, with little predictability regarding process stage and timeline. The most emblematic cases were in licensing and permits and exchanges with tax authorities.
In terms of regulatory policy, many investors cited frequent changes in legislation as an obstacle, particularly in taxation. Tax regulation was also perceived by many as unnecessarily intricated.
Highly skilled labour and the quality of higher education institutions were viewed as Portugal’s advantages in attracting FDI. However, many investors experienced challenges in attracting and retaining talent and bottlenecks in the entry process of third-country professionals.
Businesses perceived rules on hiring and firing as a significant obstacle, likely reflecting the relatively high level of employment protection in Portugal, particularly in terms of dismissals of individual employees.
Long delays in the judicial system, as well as the prevalence of late payments and difficulties in collecting them, were seen as some of the main challenges of Portugal’s business environment.
Portugal’s R&D tax incentive was viewed by many investors as effective. However, there might be room to better target other funding opportunities and incentives and increase investors’ awareness of initiatives to train employees and support the digital and green transitions.

4.1. Introduction

A country’s regulatory environment is but one of several factors determining its attractiveness as a foreign directi investment (FDI) location. Yet, this is one of the few such aspects that governments can influence in the short-to-medium term. In addition to any explicit limitations to foreign ownership and directly discriminatory rules against foreign investors, addressing a broader range of measures that affect the cost of doing business can improve the investment climate and indirectly tilt FDI decisions.

By factoring in the views and experiences of local foreign investors, this chapter complements the rules-based and comparative regulatory assessments in the previous chapters. It does so by summarising the outcomes of a consultation with foreign-owned companies of different sizes and origin, operating in Portugal across selected sectors and regions.

The business consultation served to refine the understanding of which aspects of Portugal’s regulatory framework discussed in previous chapters matter the most for investors and which aspects identified as comparatively stringent are, in practice, less problematic than expected. As foreign investors in Portugal benefit from a comparatively open regulatory framework with few statutory barriers to FDI (see Chapter 2), discussions with the consulted firms centreed around regulatory aspects shaping the country’s broader business climate and applicable to all firms, irrespective of their ownership structure. The consultation also highlighted deficiencies in the implementation of government policies and other non-regulatory challenges in the business environment. Moreover, these exchanges revealed certain sector-specific challenges in Portugal’s priority sectors for investment, complementing thereby the regulatory assessment of Chapter 2.

This chapter is structured as follows: a first section provides a brief description of the profile of the investors that participated in the business consultation. A second section presents the main drivers behind respondents’ decisions to invest in Portugal, while a third section provides insights from investors and business associations on regulatory challenges identified in previous chapters. A fourth section discusses investors’ use of available funding and incentive mechanisms. The last section presents a brief overview of the impact of the pandemic on consulted firms’ operations and their perceptions of short-term threats in Portugal. Companies’ digital transformation and green transition efforts, as well as how the government could further support businesses in both areas, are also covered in this last section. The methodology behind the company selection and the structure of the business consultation are described in Annex 4.A.

4.2. Respondent profile

Foreign-owned companies with different profiles across key characteristics, such as sector and activities, size and location in Portugal, investor origin and type of investment, were selected for the business consultation. The process consisted of an online questionnaire, completed by 32 senior executives of foreign-owned firms based in Portugal, and a series of semi-structured interviews covering 25 companies and ten chambers of commerce and industry federations. Although the consultation was not meant to be exhaustive and representative of all foreign investors in Portugal, the insights shared by respondents echo the findings of other recent business surveys with larger respondent pools, as further discussed below.1 Comments from individual respondents are reported when they help provide further details or illustrate practical examples on issues identified in the online questionnaire or the analysis of previous chapters as (potentially) important for investors.

Particular attention was accorded to Portugal’s FDI priority sectors and activities, namely: life sciences, automotive/mobility, aerospace, smart materials, food industry, software and information technology (IT) services, business services, renewable energy. Companies operating in key upstream and auxiliary sectors (e.g. health, telecommunication, financial services, construction and real estate, power generation and distribution, water services, logistics, road transportation and auxiliary mobility services) were also consulted.

The sample includes companies of different sizes across all seven regions of Portugal. Although most respondents have their head offices in the Lisbon area or in Northern Portugal, half of the firms also have industrial, production or research facilities, or other kind of physical presence, in one or several other regions (Table 4.1). Close to 60% of the consulted firms are large companies with a headcount of 250 or more, a quarter are medium-sized companies, and the remaining 16% are small companies (less than 50 employees).

The sample of respondents is nearly equally split between ultimate investors from within and outside of the European Economic Area (EEA), the latter including countries as Brazil, the People’s Republic of China (hereafter ‘China’), Japan, Peru, Singapore, South Korea, the United Kingdom and the United States. Fifty-three percent of respondents come from companies having entered Portugal via greenfield investment projects, while Portuguese firms acquired by or merged with a foreign company or private equity fund make up the remaining part. All respondents have invested (at firm or group level) also outside Portugal, 44% of them in countries outside the European Union (EU). Several firms have invested in one or more selected peer countries,2 most commonly in Spain (28% of respondents), the Czech Republic (25%) or Poland (25%).

Almost all the consulted businesses engaged in trade. Seventy-eight percent of the respondents sold products or services in other EU countries, most commonly in France, Spain and Germany, and 59% sold to countries outside the Single Market. Twenty-two percent had exclusively foreign sales, with no products or services sold in Portugal. A large majority of respondents sourced some inputs locally from Portugal, but most of them also from foreign markets. Close to half of them sourced at least a quarter of their inputs from abroad, most commonly from Spain, France, China and Germany.

	Share of online questionnaire respondents
Sector of activity	Industry (47%), services (53%)
Region of headquarters in Portugal	Lisbon (59%), Northern Portugal (19%), Central Portugal (13%), Alentejo (9%)
Region(s) with other physical presence in Portugal	Lisbon (19%), Northern Portugal (21%), Central Portugal (21%), Algarve (12%), Alentejo (14%), Madeira (7%), Azores (7%)
Size (as per headcount in Portugal)	Small (16%), medium (25%), large (59%)
Ultimate investor origin	EEA country (47%), non-EEA country (53%)
Entry mode	Greenfield investment (53%), cross-border M&A (47%)
Trade profile: Source(s) of inputs	Portugal (84%), other EU countries (63%), non-EU countries (53%)
Trade profile: Destination(s) of sales	Portugal (78%), other EU countries (78%), non-EU countries (59%)

Source: Own calculations based on the online questionnaire.

4.3. Drivers of FDI to Portugal

Accessing a pool of local skilled labour was the leading driver of consulted firms’ investment in Portugal, regardless of investment type (Figure 4.1). The skilled labour force was a particularly strong driver for firms entering via mergers and acquisitions (M&A), all of whom ranked it as important for their decision to invest or expand in Portugal, compared to 89% of greenfield investors.

Figure 4.1. Access to Portugal’s skilled labour is the leading motivator of FDI decisions

For greenfield investors, lowering production costs was the second most important reason for choosing Portugal (88% identifying it as important), whereas this aspect was less relevant for M&A investors (30%). Many greenfield investors also reported access to the Portuguese and EU markets, and access to technology and knowledge as important drivers. For M&A investors, the most significant drivers of investment after access to skilled labour were diversifying risk (88%) and access to the Portuguese market (64%), while access to the EU market was a less important driver (40%). Additionally, Portugal’s strategic geographical location, e.g. for transatlantic trade, was raised as an important consideration in the investment decision of some companies.

Although access to a local talent pool was identified as the top driver for investment, and Portugal’s skilled labour and the quality of its higher education institutions received positive comments from several investors, many consulted businesses reported experiencing skill shortages (see Section 4.4.3). In fact, difficulties recruiting skilled workers was one of the two main reasons cited by those investors who were uncertain of making further investment in Portugal in the next three years, with a non-conducive regulatory environment being the other most indicated reason for uncertainty.3

4.4. Regulatory challenges affecting the business environment in Portugal

This section describes foreign investors’ views on several regulatory aspects, many of them identified in Chapter 2 as potentially affecting foreign investors in Portugal. The section explores the main topics of concern for consulted investors and business associations, namely: lengthy and burdensome administrative processes, including in licensing and permitting; complicated and frequently changing legislation, particularly in taxation; difficulties attracting and retaining talent; excessively rigid labour regulation; long delays in the judicial system; and late payments. It also addresses other aspects of Portugal’s business environment, perceived as burdensome by some investors, but to a lesser extent.

The challenges identified in some of the above‑mentioned areas seem to have persisted over some time. Since 2014, the judicial system, licensing and taxation have consistently arisen in Portugal’s business surveys as the areas where companies, and particularly small and medium-sized firms, identify the most important negative effects on their operations due to rules, procedures, actions and omissions not attributable to the firm or investor themselves (INE, 2022[1]).4 While generally perceived as a lesser obstacle to business activity, administrative burden (in terms of, e.g. the frequency and complexity of requests from authorities) was relatively more often considered as penalising by large firms and companies in industry sectors (INE, 2022[1]).

Except for obtaining licenses and permits to start or operate a business, other aspects related to setting up a business, such as registering a branch of a foreign company, were generally not perceived as obstacles by the consulted firms. Similarly, the screening of certain foreign acquisitions did not come up as a specific concern for non-EU foreign investors, none of which had experienced it. This result reflects the understanding that no acquisitions have been opposed under the Portuguese foreign investment screening mechanism so far (see Chapter 2). Nonetheless, it is possible that screening may become a more important consideration for foreign investors in the future, should the legal framework or its implementation in Portugal undergo changes that reflect the increasing attention accorded to the policy area in recent years, including at the EU level. More broadly, the consulted businesses did not report any discriminatory treatment towards companies with foreign ownership.5

4.4.1. Administrative processes are seen as lengthy and burdensome across the board

Burdensome interactions with public administration were one of the most critical issues raised by investors about Portugal’s business environment. Seventy-seven perfect of respondents considered administrative delays and other red-tape as a very important or moderately important obstacle to their operations in Portugal (Figure 4.2). Most firms also signalled discretion of the bureaucracy (73% of respondents) and lack of transparency and predictability in dealing with public administration (65%) as obstacles. Difficulties understanding regulation and frequent changes in legislation (see Section 4.4.2) were considered to exacerbate the above‑mentioned challenges.

Figure 4.2. Regulatory transparency and red-tape

Based on clarifications obtained in interviews with investors, two-in-three companies had experienced one or several burdensome aspects in licensing and permits. However, long waiting times, difficulty predicting how long processes would take, lack of communication on process timelines, complexity of procedures and requirements and absence of standardised operating procedures were commonly perceived shortcomings also in other processes, such as interactions with the tax authority (see Section 4.4.2). Overall, investors perceived a high level of bureaucracy in Portugal, requiring firms to allocate significant time and resources to interactions with public administration. In a large law firm’s experience, companies cannot generally expect most applications and requests to be processed on time. It was also noted that although most applications and requests can be submitted online, the availability of electronic applications is no guarantee for a quick processing time, once submitted.

A few investors in different sectors (e.g. automotive, food, health) considered that dealing with public administration is unnecessarily difficult in Portugal, sometimes more so than in other countries where they operated, and to the point that external legal and consulting services are needed to navigate the processes. Nine interviewed firms and chambers of commerce, however, thought that delays and other challenges with public administration stem not from difficult procedures, but from a general lack of efficiency in their execution. Insufficient human resources, poor internal organisation and inter-agency co‑ordination and lack of accountability were mentioned as examples of factors contributing to public administration’s difficulties in delivering services to the standard expected by investors.

Slow and unpredictable licensing and permitting represent obstacles for operations

As discussed in Chapter 2, Portugal has made efforts to simplify business licensing in recent years. Reforms undertaken as part of the Simplex+ programme, such as the introduction of the Single Environmental Title and expanding the scope of the digital point of single contact for licensing, are estimated to have reduced administrative burden for companies and resulted in time saving in public administration (EY, 2019[2]). Yet, there remains room to further develop online public services for businesses and increase their uptake compared to best-perfoming EU countries (see Section 2.2.1).

Despite simplification measures, more than half of the respondents considered complicated licensing procedures and delays in obtaining the necessary permits and approvals as important obstacles to starting or expanding operations in Portugal, citing as main issues delays, lack of predictability on the process timeline and communication of the stage of the process, and burdensome requirements or procedures across different sectors of the economy and in different licensing and permit processes. To a great extent, these findings corroborate and exemplify in a more concrete manner some of the findings of other large‑scale enterprise surveys (Box 4.1).

Box 4.1. Operating license procedures are more burdensome in Portugal than in peer countries

Overall, firms in Portugal report that it takes close to 90 days on average to obtain the necessary licenses and permits to operate a business; more than twice the time it takes in peer economies (Figure 4.3). About 12% of firms in Portugal report this as a major constraint for their operations, compared to around 9% in the EU. If considering only the responses of medium-sized firms, the average number of days required to obtain such licenses and permits is much higher (114 days). Unfortunately, data are not reported for small-sized firms. As for construction permits, although the time required to obtain a permit may at times be considered high for business, it is roughly aligned with peer countries. The opportunity cost associated with such delays may, however, be quite important for individual investors, particularly for small and medium-sized enterprises, which generally have fewer resources to cope with long delays.

Figure 4.3. Portugal has the longest delays in operating licensing among peers

Some investors partly attributed delays in licensing to insufficient levels of human resources in public administration, but non-enforcement of procedural deadlines set for authorities was also perceived as affecting investors in specific sectors (e.g. health, life sciences, pharmaceuticals) and more broadly businesses operating in Portugal (according to a Portuguese and a foreign chamber of commerce).6 The possibility of tacit approval is foreseen in the Code of Administrative Procedure,7 and silence from the part of the administration can, in principle, result in tacit approval in cases expressly provided for by law or regulation (e.g. industrial licensing,8 certain environmental licensing processes9 and certain acts in urbanisation and construction10). However, investors raised that it can be hard to benefit from existing rules foreseeing tacit approval due to difficulties presenting proof that tacit approval has been justified.11

Additionally, according to respondents, public entities sometimes use the possibility of sending multiple requests for additional information to extend the time limits imposed on their decision-making. Insufficient administrative co‑ordination (where a process is being put on hold while a response from one of the public entities involved is still pending), lack of standard operating procedures and insufficient technical expertise were also cited as potential sources of delays across different licensing and permit processes.

A scoped sectoral reform of environmental licensing, which is expected to serve as a basis for other licensing and permit reform processes, is set to address some of the above‑mentioned challenges faced by businesses (see Box 4.2). Environmental licensing, as well as construction and occupancy permit processes, were commonly cited as examples of burdensome and lengthy processes affecting a wide range of investment projects. While extensive documentation is often required in environmental licensing to ensure the protection of environmental standards, investors perceived the documentation requirements in Portugal as excessive and requiring specialist help to fulfil.12 Some level of simplification may likely be welcome, but only if achieved without jeopardising the authority’s capacity to ensure business compliance with environmental standards.13

Box 4.2. Scoped reform of environmental licensing intends to address process bottlenecks

After extensive stakeholder consultation, a legislative package to amend environmental licensing was approved by the Government of Portugal in December 2022, but the final text had not yet been published as of early January 2023.¹The reform is a first step of a wider effort to reduce administrative burden and costs for businesses in licensing, as foreseen in Portugal’s Recovery and Resilience Plan (Portugal Government, 2021[5]).²It is intended to remove some administrative requirements that are considered to create unnecessary costs for businesses without environmental value added. Some civil society organisations have, however, expressed concerns with certain proposed amendments during a public consultation, arguing that they could impair effective compliance with environmental protection standards; they call instead for increased resources to allow the public administration to expedite licensing procedures.^3.

Among the reform measures proposed in the draft law are: a reduction in the scope of situations in which an environmental impact assessment is required, the elimination of the need to renew the environmental license after 10 years and the creation of “Single Environmental Reporting” to reduce time spent on reporting by consolidating existing reporting obligations and offering simplified and automatised filling.

Some proposed amendments are also directed at addressing procedural bottlenecks in licensing and permit processes more widely, beyond environmental licensing. For instance, to minimise delays in licensing, the draft law proposes stricter time limits for the issuance of opinions. The responsible authority would request all opinions simultaneously and proceed with decision-making as soon as the deadline for opinions has lapsed, with opinions issued after the deadline being null and void.⁴Administrative entities would be able to request additional elements (i.e. documents or clarifications) from the applicant only once and the request would not suspend the time limit accorded for the licensing decision if the applicant responds within a ten‑day period.

A new certification mechanism is also proposed to enforce the policy of tacit approval. A designated administrative entity would be obliged to issue to an applicant, within three working days from the receipt of the applicant’s online request, a document acting as proof of a tacit approval of the applicant’s license or authorisation application in the an absence of response from the administration.

1. Ministerial Council communication, 7 December 2022; DL 169/XXIII/2022, 2 August 2022.

2. Simplification reforms are also foreseen (component 18) in urban and spatial planning, industry, commerce, services and agriculture.

3. Liga para a Protecção da Natureza, 16 September 2022; Observador, 16September 2022 and 17September 2022; ZERO, 18 September 2022.

4. Currently, the responsible authority must request opinions simultaneously “whenever possible”. Silence of an entity issuing a mandatory, binding opinion can slow down the process, as a final decision can be made without the issuance of such opinion only after an additional request from the responsible authority and an additional time limit of 20 days from such request. See Article 92 of Decree-Law No. 4/2015.

In construction and real estate, three businesses (including a law firm) and a chamber of commerce reported significant disparities in construction permit and occupancy permit process timelines depending on the location in Portugal, with particularly long delays in Lisbon compared to smaller municipalities. Additionally, a few businesses cited a margin of (political) discretion in municipalities’ decision-making in permit processes;14 at the same time, appeal against licensing decisions was not considered an option due to long processing times in Portugal’s courts (see Section 4.4.5).

Investors in health and life sciences also lamented long delays in sector-specific licensing. Two investors in the health sector considered that licensing is time‑consuming and more complicated in Portugal than in certain other European economies (Denmark, Germany, Poland or the United Kingdom) where they are present. A company in life sciences reported that obtaining the necessary product certification to participate in public procurement took considerable time and required specialist help. An investor in pharmaceuticals considered that Portugal’s competitiveness for clinical trials is negatively affected by the relatively long delays in the processing of applications.15

Portugal’s special regulatory regimes for investment, intended to streamline the licensing process of eligible projects (see Box 2.2 in Chapter 2), received mixed feedback. While a couple of businesses viewed the regimes as effective, a few others considered that obtaining a Potencial Interesse Nacional (PIN; for large‑scale projects) or Projeto de Investimento para o Interior (PII; for projects in interior regions) status for a project does not speed up the licensing process or increase its predictability. Several perceived drawbacks in the special regimes were also raised, such as the need to hire specialised help to obtain PIN or PII status for a project and lack of periodical follow-up with the investor on, for instance, the status of the licensing process.

However, several investors and foreign chambers of commerce reported positive experiences with Portugal’s investment promotion agency AICEP’s support, such as connecting the investor with regional licensing authorities, albeit some complained that AICEP’s support sometimes stops short as licenses and permits processes remain bound by local authorities’ capacity and efficiency. Small cities’ dynamic approach to licensing, in terms of quicker processes but also additional support, such as help finding suitable land at lower cost, was also appreciated by several businesses.

Being subject to fewer licensing requirements, investors in information and communication technology (ICT) and digital marketing services had no specific complaints in this regard.16 Likewise, some companies had not undergone licensing or permit processes due to their strategy of expansion via acquisitions of Portuguese firms with existing facilities.

4.4.2. Complex, unstable rules and regulatory divergence pose challenges to businesses

Most investors struggle to understand regulation and cope with frequently changing rules

Over 70% of the firms consulted identified difficulties understanding regulation and sudden changes in the legal framework as important obstacles to their operations in Portugal (Figure 4.2). Investors across different sectors, e.g. automotive, port services, food and manufacturing, as well as a foreign chamber of commerce, commented that due to the complexity of regulation, external help (lawyers and consultants) is vital to do business in Portugal.17

Particularly intricate regulatory frameworks were not limited to taxation (discussed below), but extended also to public procurement (see Section 4.4.6) and certain sector-specific legislation (such as the national transposition of the EU Electronic Communications Code; see below). Similarly, frequent changes in regulation were cited in taxation, as well as in the health, energy and tourism sectors, and with regard to the entry framework of non-EU nationals (see Section 4.4.3). Some firms and business associations considered that investors would benefit from improved availability of regulatory information in English.

Furthermore, as discussed in Chapter 2, there is likely room for Portugal to improve regulatory impact assessment and stakeholder engagement in law-making, compared to better-performing peers. While the private sector involvement in the drafting of regulation may not appear so problematic, a few investors and chambers of commerce argued that business perspectives and realities are not always sufficiently considered in the drafting process.18

However, the scoped reform of environmental licensing (see Box 4.2 above) was viewed as a positive development in stakeholder engagement by a Portuguese chamber of commerce having participating in the drafting process. More than 250 entitites contributed to the legislative package in environmental licensing,19 and extensive stakeholder engagagement is planned also for the preparation of other forthcoming licensing reforms foreseen in the Recovery and Resilience Plan (urban and spatial planning, industry, commerce, services and agriculture). The licensing reform process has been developed with the direct participation of various public entities20 and private stakeholders, and it involves stakeholder participation in every step of the drafting process, including the identification of potential simplification measures, design of policy alternatives and impact assessments.21

Tax regulation is considered as complex and difficult to comply with

Portugal’s tax system was perceived by many investors as unnecessarily complicated. Taxation has also arisen as an obstacle or a relatively unattractive factor for investors in past business surveys, not only in terms of a complicated legal framework, but also in terms of tax burden.22

A large number of exemptions was viewed by investors as contributing to the complexity of Portugal’s tax system. A 2019 evaluation identified more than 500 tax benefits dispersed across more than 60 different legal instruments, concluding that the system of tax benefits in Portugal was very complicated and lacking in transparency (Grupo de Trabalho para o Estudo dos Benefícios Fiscais, 2019[6]). Notwithstanding steps taken in recent years to reduce the use of special tax provisions (OECD, 2021[7]), consulted investors largely considered that tax regulation remains difficult to understand and comply with compared to other countries in which they have invested. One interviewed firm reported that even the Portuguese accountants enlisted by the company “sometimes struggle to understand tax requirements”; two others, as well as a Portuguese chamber of commerce, considered that the level and intricacy of reporting requirements in taxation have increased in recent years.

As alluded to above, six businesses and two foreign chambers of commerce also cited frequent changes in tax regulation, for instance regarding tax breaks. This instability was reported to result in increased tax compliance time and difficulties planning investment in the long term. In some investors’ experience, the tax authority has not been able to provide clarification on the interpretation of new rules prior to their entry into force, sometimes resulting in the postponement of their implementation and, hence, additional uncertainty for businesses.

Three investors, including a law firm, and a chamber of commerce also lamented that long delays in obtaining a binding opinion from the tax authority contribute to legal uncertainty in taxation. Such binding rulings on the correct interpretation and application of tax regulation can be particularly important for businesses in the case of highly complex transactions. Portuguese legislation imposes a general 150‑day time limit for the tax authority to respond to requests for binding information. Following a taxpayer’s “justified request” and payment of a fee, the tax authority may recognise the request for binding information as “urgent”, in which case a response must be provided within 75 days.23 However, based on the business consultation, it is unclear whether these time limits are complied with in practice. Tacit confirmation of the taxpayer’s interpretation of tax rules, following the silence of the tax authority after the prescribed time limit has lapsed, is only foreseen in the case of requests considered as urgent.24

Dealing with the tax authority was mentioned by consulted businesses as an example of particularly burdensome interactions with public entities, despite the fact that Portugal has put in place simplifying measures for tax compliance, such as prefilled tax declarations and online services.25 In INE (2022[1]), Portuguese firms overall indicated burdensome interactions with tax administration in terms of the frequency, complexity and time limits for responding to information requests; but particularly large firms, nearly half of which reported administrative burden as a high or very high obstacle in this regard. Tax administration was also perceived as an obstacle to a larger extent than in any of the peer countries in international surveys, with 47% of surveyed firms in Portugal identifying tax administration as a major constraint, compared to figures ranging from 3% in the Slovak Republic to 35% in Poland among the benchmark group (World Bank, 2019[3]; 2021[4]).26 According to World Bank (2020[8]), companies also spent more time preparing and paying taxes in Portugal (243 hours per year) than in any of the benchmarked countries (excluding Poland), with Estonia being the best performer in the group at 50 hours per year.

Due to extensive intra-EEA harmonisation, regulatory divergence is limited to specific areas

Overall, the divergence of Portuguese regulation from that of other countries of interest came out as a relatively small obstacle for consulted businesses. As discussed in Chapter 2, Portuguese regulation is, in many services sectors, mostly harmonised with Single Market rules.

Nevertheless, a few specific examples of regulatory divergence affecting foreign multinationals’ operations were raised in the consultation. In transport, consulted businesses mentioned the broad Iberian track gauge (used by railways in Portugal and Spain) compared to the standard gauge as a constraint. In taxation, differences in invoicing requirements between Portugal and other countries were reported to cause difficulties in compliance in the case of foreign suppliers with no presence in Portugal.

An ICT investor raised a few concrete examples of cases where Portuguese regulation might benefit from further harmonisation with the EU’s Digital Single Market rules. According to this investor, certain obligations imposed in a 2021 domestic act regulating financial services advertising are difficult to comply with and go beyond requirements observed in other EU countries.27 Moreover, the investor considered Portugal’s approach to the protection of copyright content in the digital environment to be an outlier among EU countries.28 Finally, the scope of obligations imposed on private network operators in the Portuguese domestic transposition of the EU’s Electronic Communications Code was perceived by the investor as unclear and diverging from transposition efforts in other EU countries, for instance regarding notification requirements.29

4.4.3. Difficulties attracting and retaining talent thwart efforts to mitigate skill shortages

Overall, foreign investors perceived Portugal’s highly skilled talent and the good quality of its higher education institutions as advantages. Access to a local pool of skilled labour was also the most important driver for respondents at the time of their decision to invest in Portugal (see Section 4.3). However, some consulted firms expect skill shortages to hinder their capacity to expand operations in the near future. Bottlenecks in the entry process of third-country talent and difficulties in talent attraction and retention experienced by some firms complicate companies’ efforts to mitigate skill shortages in specific sectors or for certain categories of workers. Improving conditions for talent attraction and retention is an increasingly important and distinguishing factor for FDI attractiveness, as skill shortages in certain high-demand fields (e.g. ICT) become more widespread and acute worldwide.

Investors experience skill shortages in certain sectors and professions

Overall, investors reported a good availability of talent for their operations in Portugal and considered Portuguese top managers very qualified. However, nearly half of the interviewed investors raised increasing skill shortages as a challenge, particularly in terms of IT and engineering professionals, but also with regard to technical professions (e.g. electricians, mechanics) in the automotive and aerospace industries.30 In the experience of a foreign chamber of commerce, firms across different sectors of the economy also struggle with finding qualified middle management and talent with high-demand language skills, such as French. An investor having sought talent with specific language skills for a service centre reported challenges identifying potential candidates within and outside Portugal, partly due to lack of data regarding the number of foreign students in Portuguese universities. In the case of French-speakers, it was considered “impossible” to attract talent from France due to wage differences between France and Portugal, leading some French groups to source French-speaking talent from Northern African countries.

The companies consulted had various ways of mitigating skill shortages, from providing employee training to establishing linkages with educational institutions or recruiting trainees and PhD students. An investor in Northern Portugal reported offering above‑average wages and other advantages, such as a relocation premium or compensating commuting costs. For many investors, sourcing talent from outside Portugal was reported as a way to deal with local skill shortages, but not without its own challenges.

Bottlenecks in entry processes slow down efforts to source talent from abroad

Many investors reported recruiting employees from outside Portugal, including at management level; 59% of respondents had foreigners in managerial positions. In addition to sourcing talent from countries within the Single Market (e.g. Czech Republic, France, Italy, Spain), interviewed firms also expressly mentioned hiring from third countries, in particular from Brazil, but also from Japan, Morocco and Pakistan.

Oftentimes, foreign investors’ efforts to mitigate domestic skill shortages by sourcing talent from third countries had been made less efficient by long delays in foreign workers’ visa and residence permit processes with the Portuguese Immigration and Border Service (SEF).31 Over 60% of the respondents considered residence permits for third-country foreign talent as particularly challenging for their operations in Portugal. The investors’ principal concern related to the long processing times of visa and/or residence permit applications, rather than to e.g. uncertainty regarding the outcome of the process.32 An investor in the ICT sector stated that long processing times make it difficult for the Portuguese subsidiary to compete for talent within the group. An investor and a chamber of commerce also reported four cases of non-EEA foreign investors giving up or putting their plans of setting up in Portugal on hold due to long and intricated visa and residence permit processes.

Some businesses mentioned having used the Tech Visa programme to bring highly qualified employees to Portugal. Although intended to streamline the entry of highly skilled and specialised workers (see Chapter 2), the effectiveness of the programme received mixed views from investors, half of those having experience with the Tech Visa considering that it had not (sufficiently) accelerated entry processes.

As discussed in Chapter 2, Portuguese legislation imposes maximum time limits for decisions on residence visa applications; however, it is unclear to what extent actual visa processing times remain within the statutory limits. Waiting time to obtain a visa appointment before submitting an application may add to the total length of the visa process beyond the statutory time limit. Several investors also considered that overstaying visa limits is common due to difficulties obtaining the necessary appointment with SEF to move forward with a residence permit process after arrival in Portugal. A foreign, third-country national is entitled to begin work based on the residence visa while the residence permit application for long-term stay is pending; nevertheless, consulted firms considered that delays in the issuance of the residence permit cause practical difficulties and uncertainty for employees, such as not being able to travel outside the Schengen Zone, including for work purposes, due to not having a valid visa or residence permit upon their return. However, Portuguese authorities note that, in practice, SEF considers the visa to be extended in situations where the residence permit application is pending.33

Although three investors perceived entry processes as unnecessarily burdensome or unclear for the applicant, most considered that the bottleneck lies in the processing of applications and internal organisation of SEF, possibly due to a lack of manpower to deal with the case flow. Four investors suspected that poor internal processes could be the source of the backlog and suggested the modernisation of SEF’s structure and/or accelerated digitalisation of processes.

Recently adopted simplification measures, such as the introduction of a job-seeker visa and the definite elimination of immigration quotas (see Chapter 2), were welcomed by the consulted firms and business associations. However, as highly qualified workers were already exempted from quotas under previously applicable rules, addressing bottlenecks in the processing of applications might be more beneficial to help businesses navigate domestic skill shortages. Some steps have been taken towards easing the administrative burden faced by foreign talent in the recent amendments to the Foreigners Act; for instance, a “pre‑residence authorisation” is to be issued together with the entry visa, containing provisional tax and social security numbers, as well as information on obtaining a residence permit.34 Moreover, foreign nationals entering Portugal with the new job-seeker visa type will automatically be assigned an appointment with SEF for the issuance of a residence permit.35

Many investors struggle with attracting and retaining talent

Nearly half of the interviewed businesses and chambers of commerce reported difficulties attracting or retaining foreign talent, often citing as main reasons Portugal’s relatively low wage level compared to other European countries and increasing costs of living, particularly around Lisbon and Porto. Personal income taxation was perceived to contribute to these challenges, although one investor in the ICT sector considered that Portugal’s non-habitual resident tax regime works well in attracting high-income individuals (see Chapter 2). Additionally, a foreign chamber of commerce considered that minimum thresholds for pension contributions, such as those in place in Portugal, can discourage the movement of certain foreign talent. As a general rule, employees must work in Portugal for 15 years to be eligible for old-age pension, despite social security contributions being deducted from salaries from day one.36

Several companies in different sectors also viewed attracting Portuguese diaspora back to the country as difficult, despite targeted tax benefits for those having resided abroad for three years (see Chapter 2). In their view, young Portuguese workers who left during the financial crisis are not coming back, unless they have a personal reason to return or a high-income position lined up. Perceived high personal income taxes were equally raised as a deterrent factor for attracting the diaspora who does not qualify for this preferential tax treatment. One investor in ICT considered that the scarcity of open top management positions contributes to the difficulty of luring the Portuguese diaspora back.

More advantageous salaries and/or taxation in foreign markets were also considered to draw high-demand workers (e.g. ICT professionals) abroad as part of a global competition for skills, making it challenging for businesses to retain talent in the country. An ICT investor reported that, in areas of high demand, it was equally an issue to retain non-EEA recruits in Portugal.37 Five investors also explicitly mentioned losing an increasing number of Portuguese IT and engineering talent to foreign multinationals offering remote work opportunities.

4.4.4. Investors call for more flexible labour regulation

Striking the right balance between employment protection and labour market flexibility can be challenging. Employment protection legislation (EPL) is central for productivity growth and social equity. It helps to protect workers against unfair dismissals and makes the company laying off an employee take on some of its social costs. Job security may also encourage firms and workers to invest in long-term training. Overly strict rules, however, may have unwanted consequences by potentially raising firms’ labour adjustment costs and by excessively incentivising the use of temporary contracts in relation to permanent ones.38 Through reduced labour mobility, stringent employment protection legislation may also limit productivity and innovation spillovers from foreign firms to Portuguese small and medium-sized enterprises (SMEs) in sectors and regions with low absorptive capacities (OECD, 2022[9]).

Portugal has high levels of employment protection standards, including regarding individual dismissals of employees with regular contracts (see Box 4.3). Likely reflecting difficulties experienced by the consulted companies in individual dismissals of employees with permanent contracts, the rules on hiring and firing came out as the single most important perceived obstacle by 85% of the respondents. Similarly, in EIB (2022[10]), 70% of firms in Portugal considered labour market regulation as an obstacle to investment, compared to 61% of EU firms. Several foreign investors consulted for the present assessment reported not being able to let go staff who no longer contribute to work, due to difficulties establishing that the legal requirements for a fair dismissal have been met. Dismissing an employee with a permanent contract on the grounds of performance was described by several respondents as effectively impossible unless the firm and the employee come to an agreement. Most benchmarked countries’ (except for Spain) regulatory frameworks foresee the possibility of dismissal on the grounds of insufficient performance (OECD, 2020[11]).

Box 4.3. Portugal has relatively high employment protection compared to most peer countries

Overall, Portugal has one of the highest levels of worker protection among OECD countries and the highest level among the peer group (except the Czech Republic) regarding both individual and collective dismissals of regular workers (OECD, 2019[12]). Employment protection regarding temporary contracts is also relatively high in comparison to peer economies and the OECD average (Figure 4.4).

Figure 4.4. Individual dismissals and temporary contracts are relatively strictly regulated

Strict hiring rules for temporary workers are needed where job protection is high for regular workers to avoid labour market segmentation (OECD, 2020[11]). In Portugal, however, temporary contracts, i.e. fixed-term contracts and temporary work agency contracts, still allow greater flexibility to employers than regular contracts, despite stricter rules introduced recently on contract duration and renewal.¹Further limitations to the renewal of temporary contracts are currently under discussion.^2.

Relatively low regulation of temporary contracts compared to regular ones helps to partly explain the high incidence of temporary employment in Portugal, where 16.9% of workers (and 59.2% of workers aged 15 to 24) were estimated to be employed under fixed-term contracts in 2021, one of the highest proportions among EU and OECD countries (OECD, 2023[13]). This market segmentation can be an extra obstacle to productivity growth and income equity, as it may curb incentives for investment in knowledge and skill development.

1. Labour Code (Law No. 7/2009), Articles 148 and 149. In 2019, the maximum duration of a fixed term contract was reduced from three to two years and the total duration of renewals was capped to correspond to that of the initial contract period. The maximum duration of an indefinite term contract was also reduced from six to four years.

2. Draft law 15/XV/1 of 6 June 2022.

Several consulted businesses reported negotiation of an agreement and severance pay with the employee as the “only” means for circumventing the difficulty of dismissals. Companies also reported giving particular attention to actions that help to mitigate the risk of hiring an unsuitable candidate, such as making use of referrals in the recruitment process or of the probationary periods foreseen in labour legislation, but also turning to sub-contracting or temporary contracts (see Box 4.3).

4.4.5. Long delays in the judicial system discourage investors from seeking justice

An inefficient justice system was perceived by the consulted firms as one of the most important challenges of Portugal’s business environment. Close to 80% of respondents considered the length and complexity of court proceedings as an important obstacle for their operations in Portugal. This perception was shared by investors across different sectors of the economy, and first-hand experiences of long delays were reported in different branches of justice, but particularly in administrative and fiscal courts.39 These results echo findings of Statistics Portugal’s surveys, in which the judicial system has continued to feature as the domain with the highest negative impact on firms’ activity (INE, 2022[1]).40

As discussed in Chapter 2, court proceedings remain considerably lengthy in Portugal compared to some peer countries, despite some recent improvements. The consulted businesses perceived numerous opportunities for appeals, procedural delays, limited human resources and insufficient specialist knowledge in technical cases as possible reasons behind delays. Some of these aspects were also highlighted as areas of further improvement in OECD (2020[14]), encouraging Portugal to strengthen human resources in court support functions,41 improve the resolution of insolvency and enforcement cases, consider simplifying procedural legislation and increase the use of out-of-court procedures.

Due to long proceedings, consulted businesses considered litigation as a last resort or abstained from legal recourse altogether. Some investors recounted positive experiences using out-of-court mechanisms for quicker dispute resolution, for instance arbitration in patent, tax and labour disputes.

Investors also reported difficulties collecting late payments, including from public entities, due to a time‑consuming and burdensome judicial process for debt collection. An investor active in various sectors cited the need to notarise agreements in order to prove their existence and insufficient electronic signature solutions (not necessarily available for all types of transactions or for foreign nationals) as practical difficulties in debt collection. Moreover, a large law firm mentioned shortcomings in Portugal’s legal framework for insolvency; in the firm’s experience, restructuring constitutes, in practice, a pre‑insolvency process, as “firms apply for restructuring only to delay insolvency”.42

4.4.6. Other burdensome aspects of the business environment

Beyond the above‑mentioned main concerns in Portugal’s regulatory environment, some firms reported difficulties accessing public procurement projects, as well as shortcomings in customs, port services and other infrastructure, as burdensome aspects, albeit to a lesser extent.

Challenges in public procurement participation were indicated by 60% of respondents. Based on follow-up interviews, difficulties accessing public tenders seemed to affect particularly ICT sector investors, but also firms active in life sciences, automotive and smart materials. Public procurement processes were described as lengthy and burdensome, sometimes with complicated requirements for participation, such as product certifications. An investor in life sciences reported no longer participating in public tenders in Portugal due to bureaucracy and described participation in large procurement projects as difficult for smaller firms in the sector.43 Moreover, several ICT firms perceived that some tenders were tailored, by reportedly imposing excessively stringent conditions for participation, which only one supplier would be able to fulfil. The investors’ perception was that such strict requirements were often used to secure the continuity of the supplier from one contract period to another. Portugal’s online public procurement platform, however, was thought to work well and have improved transparency in public tenders.

Portugal’s digital infrastructure received positive comments from investors, but some concerns were raised regarding physical infrastructure and port services. Back in 2018, the World Bank (2018[15]) already reported that the quality of Portugal’s trade and transport related infrastructure, e.g. ports, railroads, roads and information technology, was perceived to fall below the OECD average and the level observed in some benchmark countries, namely Spain and the Czech Republic. These challenges seem to have persisted over time. Interviewed firms in e.g. automotive, agro-food and port sectors called for more investment in the country’s railroads, roads, airports and ports. While Portugal’s Sines is identified as relatively well-performing compared to many other European ports in World Bank (2022[16]), some consulted investors pointed out a need to improve road access to Portuguese ports and expand their operating hours.44 Moreover, although outside of Portugal’s domestic policy making sphere, the prohibition of cross-border use of so-called gigaliners or mega-trucks in the EU was raised as hampering efforts to reduce transport costs and emissions in cross-border traffic in the Iberian peninsula.45

65% of respondents also considered lengthy and complicated customs procedures as an obstacle in Portugal, citing limited opening hours of customs in ports, excessive documentation requirements, insufficient degree of digitalisation and a lack of user-centric approach as the main practical problems. As discussed in Chapter 2, international surveys indicate that although Portugal’s customs regime is efficient compared to some peer countries, it is not on par with European best performers.

4.5. Funding and incentives

In addition to fiscal incentives (see Box 4.4), domestic and foreign-owned companies in Portugal may also qualify for various funds and grants and benefit from special investment regimes, such as PIN or PII status (see Chapter 2).

When inquired about their experience with some of such incentives and funding opportunities,46 two-in five respondents reported to have benefitted from Portugal’s research and development (R&D) tax credit (SIFIDE II, see Box 4.4), making it the most used incentive among the consulted firms. While a majority of users of SIFIDE II found it effective, the application process received mixed feedback, with some investors finding SIFIDE II easy to implement and others commenting that the process is unnecessarily complicated and time‑consuming. Unexpectedly, negative feedback was mostly received from large firms, reporting issues such as burdensome documentation requirements, lack of competence in the public administration to evaluate applications and time‑consuming application process (even with the help of external consultants). Nonetheless, SIFIDE II was considered by many firms as the best existing incentive in Portugal. Direct government funding for R&D in the form of grants and loans is also available, but accounts for a relatively small share of public support for business R&D in Portugal in comparison to the benchmark group (OECD, 2021[17]).47

The results of the business consultation suggest that there may be room for Portugal to further refine other incentives and funding opportunities and raise companies’ awareness of existing support mechanisms. Recent OECD analysis also suggests that Portugal could benefit from ensuring better communication of the support available for investors, as well as from avoiding potential redundancies to improve coherence among the various regulatory incentives currently in place across different parts of the government, such as PIN or PII status or special residence permits for investors and start-ups (OECD, 2022[9]). Incentives offered by the central government were also perceived as a relatively less attractive factor of Portugal’s investment climate in EY (2022[18]).48

Compared to SIFIDE II, investors reported having difficulties applying for support from various EU funds. Application processes under the Portugal 2020 and Portugal 2030 programmes were perceived as complicated, requiring external specialists. Long waiting times for grant decisions were seen as particularly problematic for this type of support as it imposes long delays on critical investment decisions.49 Other incentives mentioned by the consulted businesses, but used by much fewer of them, include the tax regime for investment support (used by two investors in manufacturing industries) and the Patent Box regime (see Box 4.4; used by one ICT investor).50 Several firms reported good experiences with AICEP’s support: AICEP had, for instance, helped investors to set up collaborations with local universities, made introductions to key persons in Portuguese firms and acted as an intermediary in discussions with regulators.51 Some firms had also benefitted from local support by cities, particularly in licensing and permitting (see Section 4.4.1).

Box 4.4. Fiscal incentives for investment

Portugal maintains various tax incentives for investment. The Investment Tax Code of 20141 seeks to promote the competitiveness of the Portuguese economy, job creation and maintenance, investment in less favoured regions, innovation and investment by SMEs, via the following incentives:

An R&D tax credit (Sistema de Incentivos Fiscais em Investigação e Desenvolvimento Empresarial, SIFIDE II) allows firms to recover a part of their R&D costs. Beneficiaries are resident corporate taxpayers with their principal activity in agriculture, industry, trade or services, and non-resident companies with a permanent establishment in Portugal.
The regime of contractual tax benefits for productive investment (benefícios fiscais contratuais ao investimento produtivo) applies to investment projects in specified economic activities, contributing to key development objectives defined in the legislation, job creation or maintenance and amounting to EUR 3 million or more. The benefits include: a tax credit of up to 25% of relevant investment, depending on the region where the project is located and the number of jobs created or maintained; exemption or reduction of stamp duty and municipal taxes on real estate transactions and ownership; and simplified customs procedures.
Under the tax regime for investment support (regime fiscal de apoio ao investimento, RFAI), investment projects in specified economic activities but which do not fulfil the eligibility conditions for the contractual regime above, may nonetheless be eligible for a tax deduction and stamp duty exemption or reduction on real estate transactions and ownership.

From 1 January 2023, the previously applicable regimes for the deduction of profits retained and reinvested (regime de dedução por lucros retidos e reinvestidos) and the conventional remuneration of share capital (remuneração convencional do capital social) are merged to create a new incentive for the capitalisation of companies (incentivo à capitalização das empresas, ICE) in an effort to simplify tax incentives.2 ICE consists of a tax deduction based on eligible capital increases.

Other fiscal incentives include the Patent Box regime (tax benefit for income derived from intellectual property) in the Corporate Income Tax Code3 and a reduced corporate income tax rate for companies in inland areas under the Tax Benefits Statute.4 The medium-term agreement on the improvement of income, wages and competitiveness also sets up a selective corporate income tax reduction for firms investing in R&D.^5.

1. Decree-Law No. 162/2014;

2. New Article 43‑D of Decree-Law No. 215/89;

3. Law No. 2/2014, Article 50‑A;

4. Decree-Law No. 215/89, Article 41‑B;

5. Acordo de médio prazo para a melhoria dos rendimentos, dos salários e da competitividade, 9 October 2022.

When asked about government support to firms for the reskilling of their employees, investors generally responded that they had either not used any training incentives or were not aware of any existing support mechanisms in this area. Only two interviewed companies indicated having benefitted from training initiatives, both reporting good results.52 For selected examples of Portugal’s training incentives, see Box 4.5. Training incentives, particularly in IT and digital, were perceived as necessary to encourage firms to continue qualifying their staff, due to a risk of trained employees subsequently leaving the firm or going abroad (see Section 4.4.3 on talent retention).

Box 4.5. Training incentives to reskill workers

Portugal has implemented several initiatives to reskill its workforce. Some of the incentives support companies in training their employees, while others focus on requalification of unemployed persons. Several training initiatives are co‑ordinated by the Institute for Employment and Professional Training (Instituto do Emprego e Formação Profissional; IEFP). Some examples of training support include:

A voucher (Cheque‑Formação) for professional training, including of employed persons. Employers can apply for financial support for training which their employees undergo with certified training entities.
Requalification trainings for unemployed and “at-risk” workers in industry, digital, green economy, trade and health, as part of PRO_MOV, led by private companies and IEFP and constituting a pilot project under the European-wide Reskilling 4 Employment initiative.
To support digital transformation, ICT training is provided to unemployed people under the UPskill programme in collaboration with higher education institutions and private companies.
A recent measure called Formação Emprego + Digital 2025 supports employers in their digital transformation efforts by providing training for employees in specific areas of digital skills, as foreseen in Portugal’s Recovery and Resilience Plan.

Source: Ordinance No. 229/2015; IEFP, PRO_MOV, consulted on 15 November 2022; Upskill.pt, consulted on 15 November 2022; Ordinance No. 246/2022.

Considering the skill shortages experienced by many investors (see Section 4.4.3), there may be room for Portugal to reassess the offer of employee training incentives, increase companies’ awareness of these initiatives and ensure that the content of trainings aligns with business needs. According to a large business confederation, member companies consider that the offer of training centres should be adapted to better match business needs. In aeronautics, for instance, an industry representative considered that it is difficult to accommodate for all sector-specific needs and requirements in the training curriculum at higher skill levels, making the training ineffective in practice. At the level of vocational training (e.g. technicians), the curriculum of reskilling programmes was considered to be well aligned with the needs of the aerospace industry; but attracting participants to this type of training was seen as a challenge, with reportedly less than half of training places being filled.53 Similarly, an investor in the ICT sector reported challenges in finding participants for IT re‑skilling programmes.

4.6. Investment outlook: COVID‑19 pandemic, digital and green transitions

This section briefly describes how the consulted businesses have responded to the effects of the COVID‑19 pandemic and Russia’s war against Ukraine. It also discusses investors’ perceptions on government support for companies’ digital transformation and green transition, identifying several aspects that may affect the shift towards the digital economy and net-zero emissions.

4.6.1. Impact of the pandemic and the war in Ukraine

The COVID‑19 pandemic affected businesses’ operations in Portugal in various ways. Most investors (63% of respondents) experienced increased revenues since the onset of the pandemic, but also increased costs (66%). Only 13%, however, reported a decline in total employment. Over 40% of respondents increased exports, while nearly a quarter saw their exports decline. Thirty-eight percent reported no change in foreign sales. Eighty-one percent of firms indicated having revisited their supply chains in some way in response to the pandemic and/or the war in Ukraine. Diversifying suppliers across multiple countries was the most important strategic consideration for coping with possible supply chain disruptions. Other strategic solutions mentioned were the adoption of automation, 3D printing or similar technologies to cut costs and nearshoring (switching to suppliers closer to or in Portugal).

Volatile energy and commodity prices, economic consequences of the war in Ukraine and rising inflation and interest rates were perceived as relatively significant (potential) threats, with more than a half of respondents expecting these aspects to affect their operations in Portugal severely or in a substantial manner in the next 12 months. Less than one-in-three investors considered health risks, cyber risks or climate change as important challenges in the short-term perspective.54 Despite the impacts of the COVID‑19 pandemic and the war on the economy as a whole, a majority (63%) of respondents were planning further investment in Portugal in the next three years.55

4.6.2. Cost of investment and lack of know-how slow down firms’ digital transformation

As highlighted in other recent corporate surveys, business in Portugal attach strong importance to digital transformation.56 Half of the consulted firms have have already gone through one or several kinds of digital transformations. Respondents in manufacturing industries mentioned automation, paperless solutions and advertising technology, among others, as examples of their digital transformation. Remote working tools and practices were mentioned by firms in pharmaceuticals, ICT and business services. Other digitalisation efforts included, for instance, moving to cloud services and the uptake of sales automation tools. Nearly half of the respondents considered that further digital transformations were needed for the company’s business model to remain competitive or economically viable in the medium term. Examples of such technologies included digitalisation and automation of processes (where possible), cloud computing, Internet of Things, artificial intelligence, big data and 5G.

Among the respondents, the cost of investment was the most commonly cited factor having prevented and/or inhibited firms’ digital transformation or technology uptake, followed by insufficient know-how, for instance in terms of availability of talent or partners with technical knowledge. As also observed in OECD (2021[7]), the prevalence of micro enterprises, which typically struggle more with digitalisation, in Portugal’s business fabric was seen as slowing down digital transformation. Some investors perceived the small domestic market and SME customer base as preventing factors, with a large business services firm observing difficulties by (smaller) Portuguese firms to grow online business internationally.

Portugal’s various policy instruments in digital transformation (see Box 2.5 in Chapter 2) and the investment and reforms foreseen in its Recovery and Resilience Plan set out expectations for the strengthening of digital skills and increased adoption of digital technologies, including within companies. In fact, Portugal offers government support mechanisms for companies’ digital transformation, but these measures received mixed feedback from investors. Some businesses were aware of training support in digital skills and technologies (see Box 4.5 above), R&D and innovation incentives and other financing, including support under the Recovery and Resilience Plan.57 Several firms, particularly those in manufacturing industries, considered that more support for companies’ digital transformation, as well as simpler and faster application processes, are needed. While firms in the automotive industry mentioned already investing in partnerships with universities and technical schools, it was considered that the government could further encourage such partnerships and incorporate more training on new technologies in the curricula of education institutes.

4.6.3. Companies ask for more government support for green transition

Portugal’s Recovery and Resilience Plan and the government’s carbon neutrality, renewables use and energy efficiency objectives more generally (see Chapter 1) set high expectations for the country’s green transition. A recent business survey indicates that many Portuguese firms already have or are planning investment to deal with climate change, and a higher share of Portuguese than EU firms perceive the transition to stricter climate standards and regulation as an opportunity rather than a risk (EIB, 2022[10]).58

Government support is available for companies’ green transition projects; for instance, under the Industry Decarbonisation system, introduced in 2021, businesses can apply for direct financial support for various low-carbon industry projects, including research and innovation.59 Two-in-three consulted firms, however, indicated that Portugal’s current policies and instruments are either insufficient or largely ineffective in influencing the firm or its stakeholders’ green transition, while only 13% of respondents viewed them as providing significant support. Some consulted businesses were aware of support for green energy transition, such as for installing solar panels, considered effective by an industry federation. However, firms in the automotive industry and a Portuguese chamber of commerce viewed existing support instruments as too difficult to apply for, while an investor in the ICT sector considered that incentives should extend to energy storage in addition to energy generation. Three investors in ICT and manufacturing, as well as a foreign chamber of commerce, considered that other (European) countries offer more support for companies’ green transition than Portugal does. Some businesses reported having already invested or planning to invest in, for instance, renewable energies, despite a perceived lack of government support or pressure from the government to advance towards carbon neutrality.

Respondents also reported some regulatory hurdles preventing or slowing down their green transition, particularly in renewable energies. A large firm reported that it could not sell back to the grid the energy surplus that could be generated during weekends or other times, e.g. when factories are closed. A respondent in crop and animal production also indicated obstacles in the sale of surplus energy obtained from solar panels, reporting that the concessionary in charge of managing the national grid (REN) “only appreciates the process from time to time and has no deadline for response”. A chamber of commerce considered that lack of control regarding whether buyers of grid capacity produce electricity and inject it into the grid contributes to Portugal’s relatively high energy prices; this because companies need to obtain a grid capacity reserve title prior to applying for a power production license and, according to the chamber, some companies were holding on to such rights to later resell them at a margin, impeding somewhat the entry of others into the market. However, as Portugal has recently amended its regulatory framework for licensing of electricity production and storage, it is possible that some of the concerns raised by investors reflect past legal situations.60

4.7. Conclusions

This chapter has mapped out foreign investors’ views on several aspects of Portugal’s regulatory framework and broader business environment, describing the results of a consultation held with foreign-owned companies and chambers of commerce in Portugal. The findings of the business consultation indicate that although some aspects of Portugal’s investment climate, such as company incorporation processes, skilled workforce and digital infrastructure, are viewed in a positive light by foreign investors, important challenges for business operations remain in several regulatory areas.

While the reported views may reflect only some experiences and the perspectives of consulted investors, their wide‑spread prevalence across the sectors of the economy and investors of different origin, size and location provide significant indication that aspects such as bureaucracy in administrative processes, lengthy and unpredictable licensing and permitting, long delays in the judicial system, relatively strict labour regulation and complicated tax regulation, may indeed be burdensome for businesses and make Portugal a less attractive FDI destination. Nonetheless, these findings are backed by other large‑scale surveys and should be kept in mind when considering ways to improve the local investment climate.

In addition to outlining investors’ perceptions of regulatory aspects, this chapter has mapped consulted businesses’ use of government funding and incentives. While Portugal’s R&D tax credit was used by several investors and considered by many as effective, there might be room to improve certain aspects of the incentive offering for the reskilling of employees, companies’ digital transformation and green transition and increase the business community’s awareness of existing incentives. This chapter has also provided some business perspectives on drivers of FDI into Portugal, concluding that access to a skilled labour force is still a leading factor for consulted M&A and greenfield investors’ location choices.

Building on the above findings and those from previous chapters, Chapter 5 offers a number of policy considerations to further improve Portugal’s regulatory set-up for investment and the broader business environment and to support the country’s efforts to attract and retain foreign investment.

References

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Annex 4.A. Methodology of the business consultation

In the context of this report, foreign investors’ perspectives about Portugal’s business environment were captured through a series of consultations comprising two main elements: (i) an online survey with selected foreign-owned companies in Portugal and (ii) follow-up, semi-structured consultations with selected foreign investors, as well as with foreign and domestic chambers of commerce present in Portugal.

To secure a broad representation of different investor profiles, foreign-owned companies considered for the consultations were those having invested in Portugal in the last five years and matching certain pre‑defined characteristics in terms of firm size, sector of activity, regional location in Portugal, investor country of origin and investment entry mode (greenfield vs. M&A). A set of firms matching these characteristics were identified using commercial databases on greenfield investment projects and M&As, respectively the Financial Times fDi Markets and the Refinitiv M&A databases, and based on AICEP’s contacts database. The company selection also aimed at securing the participation of companies operating in Portugal’s priority sectors for investment, not only in sectors specifically assessed in the comparative regulatory assessment of Chapter 2.

With AICEP’s support, a set of some 100 companies were initially invited to participate in the consultations; about half accepted the invitation. A few additional investor contacts were also sought via foreign chambers of commerce in Portugal. These firms were then invited to respond to an online questionnaire from June to August 2022. Full responses were received from 32 senior executives. The online questionnaire consisted of eight groups of questions, collecting information on the following topics: general background information on the respondent company, motives which led the firm to invest in Portugal, regulatory and policy challenges for investment and day-to-day operations in Portugal, the investor’s expansion outlook, the company’s trade profile, use of incentive schemes, economic outlook in the context of COVID‑19 and Russia’s war against Ukraine, and the firm’s digital transformation and green transition efforts.61

Following the online questionnaire, semi-structured interviews were held with 25 companies and ten chambers of commerce and industry federations between 19 September and 10 October 2022. Some of these meetings occurred bilaterally and some in focus groups invited by business associations. Most interviews were conducted in person in Lisbon, others via teleconference. In the interviews, investors were asked targeted questions based on their response to the online questionnaire, where applicable, to obtain additional information and clarifications. Business associations were asked more general questions on the topics covered in the questionnaire. Additionally, written clarification was received from two investors following their response to the online questionnaire.

Notes

← 1. EY (2022[18]) measured Portugal’s attractiveness in the eyes of 200 investors from various parts of the world from February to April 2022. 15% of the respondents were present in Portugal. EIB (2022[10]) collected information on investment plans, the impact of the COVID‑19 pandemic and climate change, drivers and barriers of investment, among other topics, from 481 firms in Portugal from March to July 2021. Statistics Portugal (INE, 2022[1]) assessed “framework regulation costs” incurred by companies in the following areas: starting a business, licensing, network industries, financing, judicial system, tax system, administrative burden, barriers to internationalisation and human resources. Framework regulation costs refer to the negative effects on companies’ activity caused by rules, procedures, actions and omissions not attributable to the firm or investor. Answers were collected from 4 672 non-financial firms headquartered in Portugal from February to April 2022. World Bank (2019[3]) surveyed perceptions of business owners and top managers in 1 062 firms from November 2018 to January 2020 regarding e.g. regulation, taxes, finance, infrastructure, trade and workforce.

← 2. As in the previous chapters, aspects of Portugal’s investment climate are benchmarked against a group of peer economies, namely the Czech Republic, Estonia, Lithuania, Poland, the Slovak Republic and Spain.

← 3. Investors’ concern with the regulatory environment has also appeared in other more comprehensive business surveys. After uncertainty about the future, business regulation was the second most cited long‑term barrier to investment by firms in Portugal in EIB (2022[10]), in which business regulation was perceived as an investment barrier by 80% of surveyed Portuguese firms, compared to 65% of EU firms.

← 4. Small and medium-sized enterprises reported more important obstacles than large and micro firms in taxation and licensing, whereas large firms were the most affected by the judicial system (INE, 2022[1]).

← 5. A sector-specific concern raised in interviews was that, in the future, Portugal might introduce additional requirements in electronic communications regulation or exclude firms from certain parts of the network based on the investor’s country of origin.

← 6. According to the general rule of the Code of Administrative Procedure (Article 128 of Decree-Law No. 4/2015), administrative procedures of private initiative must be decided within a period of 60 days, unless another period arises from the law. This period may be extended by the person responsible for directing the procedure, in duly justified exceptional circumstances, up to a maximum limit of 90 days.

← 7. Article 130 of Decree-Law No. 4/2015.

← 8. Article 16 of Decree-Law No. 169/2012 creating the Responsible Industry System.

← 9. See, for instance, Article 19 of Decree-Law No. 151-B/2013 establishing the Environmental Impact Assessment regime; Article 23 of Decree-Law No. 127/2013 establishing the industrial emissions regime; and Article 17 of Decree-Law No. 226-A/2007 regarding authorisation for the use of water resources.

← 10. Article 111 of Decree-Law No. 555/99 provides for the possibility of tacit approval only in certain processes in urbanisation and construction, such as applications for occupancy permits (autorização de utilisação), excluding municipal licensing processes from the scope of the “silence is consent” rule.

← 11. Additionally, in some cases, a license is considered to have been granted tacitly only if there are no grounds for rejection. This is the case under Article 23 of Decree-Law No. 127/2013 (industrial emissions) and Article 17 of Decree-Law No. 226-A/2007 (use of water resources).

← 12. Requirements to obtain additional authorisations for installations or expansions already covered by an industrial site’s environmental impact assessment were mentioned as an example of excessive bureaucracy in environmental licensing.

← 13. In fact, while some degree of simplification of environmental licensing procedures may be welcome by investors, it is important to ensure that the envisaged reform does not compromise environmental protection standards and, more broadly, the capacity of institutions to protect public interests by making informed decisions in licensing and permit matters. An assessment of the extent to which the proposal would indeed reduce bureaucracy without negative consequences to environmental protection is, however, not possible within the scope of this report.

← 14. For instance, an investor in real estate considered that technicians in public administration act as gatekeepers in the approval of real estate projects, imposing requirements that do not always have a sound legal basis. In turn, obtaining the involvement of high-level public authorities and navigating permit processes was, at times, easier in smaller municipalities.

← 15. The investor reported that the application process took around six months in Portugal, compared to as few as two or three weeks in best-performing European countries.

← 16. This observation is aligned with the findings of INE (2022[1]), concluding that information and communication and other services (excluding construction and hospitality) were the segments least affected by licensing, whereas firms in industry, agriculture, and energy, water and sanitation reported a particularly high negative impact of licensing.

← 17. Two investors explicitly mentioned an excessive need for legal services in Portugal in relation to other countries they have invested in, even though they could not attest that this had translated into significantly higher costs.

← 18. Overall, businesses reported that the private sector was not usually consulted in law-making, at least not within an appropriate timeframe, and even if consultations were held, their concerns were not necessarily taken into account.

← 19. Government of Portugal press release, 7 December 2022.

← 20. Such as the Cabinet from the Secretary of State for Digitalisation and Administrative Modernisation, other cabinets and the Competence Centre for Planning, Policy and Foresight in Public Administration.

← 21. Information obtained in consultations with Portuguese stakeholders in December 2022.

← 22. In business surveys conducted by Statistics Portugal in 2014, 2017 and 2021, the tax system has consistently come out as the area representing the highest “framework regulation costs” for businesses, with tax burden being the most cited obstacle in the area of taxation in 2021 (INE, 2022[1]). Similar results are reported by EY (2022[18]) and the World Bank (2019[3]). Businesses consulted for this report also perceive Portugal’s statutory corporate income tax rate (CIT; set at 31.5%, national and sub-national CIT combined) to be comparatively high. The second highest statutory CIT rate in the benchmark group (Spain) is about 6.5 percentage points lower (OECD, 2021[22]). Statutory CIT rates incorporate a strong signalling effect, but they do not reflect existing allowances and special tax incentives which some firms can benefit from. When some tax base provisions are taken into account (e.g. capital allowances), Portugal’s effective corporate tax rate is significantly reduced and lower than in some peer economies (see the OECD’s (2021[22]) data on forward-looking effective average tax rates). A more comprehensive assessment of the tax burden for business would be necessary to determine possible shortcomings of the current structure, reforms and implications. This is, however, not possible in the context of this report.

← 23. Article 68 of Decree-Law No. 398/98.

← 24. Article 68(8) of Decree-Law No. 398/98.

← 25. Pre‑filling is available for expense information in corporate income tax returns, and both sales and purchase transactions in value added tax (VAT) returns (OECD et al., 2022[20]). One-hundred percent of corporate income tax returns and VAT returns are filed via electronic systems (OECD, 2022[19]). Further investment in the digitalisation of public administration, including tax administration, are planned under Portugal’s Recovery and Resilience Plan (Portugal Government, 2021[5]).

← 26. Tax administration data from the World Bank Enterprise surveys, which are administered across countries to a representative sample of firms in the non-agricultural, formal, private economy, are for the latest year available: 2019 for all countries, except Spain (2021).

← 27. Media entities and websites disseminating financial services advertisements in Portugal must verify the veracity of the information in such ads and insert in them the financial services provider’s registration number with the regulatory authority. Article 3 of Law No. 78/2021.

← 28. In Portugal, an administrative entity has the power to request the removal of or prevention of access to content that has been unlawfully made available online, whereas in the investor’s experience, such interventions are subject to judicial control in other EU countries. Law No. 82/2021.

← 29. Law No. 16/2022 transposing Directive (EU) 2018/1972.

← 30. In Statistics Portugal’s business surveys, the area of human resources has consistently represented more bureaucracy for firms, with increasing negative effects for companies from 2014 to 2021, with the 2021 result reflecting difficulties in accessing qualified technicians (INE, 2022[1]).

← 31. The recognition of non-EU foreign professional qualifications, although ranked as an obstacle by close to half of the respondents to the questionnaire, was not confirmed as a major concern during the interviews. The consultation showed that recognition of qualifications might be an issue for foreign candidates in the public sector and in some specific activities in the private sector, e.g. health care and professional services.

← 32. Figures from 2019 indicate that processing times are considerably longer in Portugal than in best-performing European countries and longer than in some peer countries, such as the Czech Republic (British Irish Chamber of Commerce and Fragomen, 2019[23]).

← 33. Information obtained in consultations with Portuguese stakeholders in December 2022. The possibility to extend the validity of the visa as long as the residence permit application is pending is foreseen in Article 72 of the Foreigners Act (Law No. 23/2007).

← 34. Law No. 18/2022 (25 August 2022) amending Article 58 of Law No. 23/2007.

← 35. Law No. 18/2022 (25 August 2022) introducing a new Article 57‑A to Law No. 23/2007.

← 36. Decree-Law No. 187/2007, Article 19. The minimum period of 15 years applies to all workers, including Portuguese ones; however, time worked in other countries may count towards the 15‑year limit based on bilateral or multilateral agreements to which Portugal is a party, with the EU being a notable example.

← 37. One investor reported being hesitant of recruiting from non-EEA countries, considering it somewhat risky to go through the burdensome process of recruiting from abroad for then possibly seeing the non-EEA employee follow the route of Portuguese talents moving abroad for more competitive job offers.

← 38. See OECD (2022[9]) for a literature review on the economic impacts of EPL.

← 39. Some firms reported that contesting the tax authority’s decisions is, in practice, made ineffective by the long duration of proceedings in administrative and fiscal courts. Two investors considered that the tax authority tends to litigate, relying more on auditing than creating guidelines or procedures for tax subjects regarding the correct application of (new) rules.

← 40. In INE (2022[1]), over half of the firms considered the duration of proceedings as a high or very high obstacle. Large firms reported a slightly more important negative impact of the judicial system than small and medium sized enterprises, while micro firms were affected to a lesser extent. Fiscal disputes were perceived as presenting more obstacles than commercial or labour related disputes.

← 41. At 2.9 non-judge staff per judge in 2020, the ratio between non-judge staff and professional judges in Portugal is slightly below the EU median (3.3) and below the level observed in any of the peer countries (CEPEJ, 2022[21]). There has been no significant change in Portugal in these figures since 2012.

← 42. The underlying reasons supporting the interviewed firm’s opinion could not be further explored during the consultation.

← 43. There may be more widespread barriers on SME participation in public tenders in Portugal, with relatively small proportions of bids from SMEs (44% of all bids) and of SME contractors (42%) compared to most other EU countries. European Commission, Single Market Scoreboard, consulted on 10 November 2022.

← 44. World Bank (2022[16]) ranks Sines as the sixth best performing container port in Europe and North Africa, and second-best performing small port globally, in terms of total port hours per ship call.

← 45. Directive 96/53/EC does not currently allow Member States to authorise cross-border use of gigaliners, even if both Member States have authorised their use at the domestic level, as in Portugal and Spain.

← 46. For instance, the R&D tax credit (SIFIDE II), funding under the Agendas para a Inovação Empresarial programme, support for low-carbon industry projects under the Industry Decarbonisation programme, technology transfer between companies and universities via Programa Interface, Digital Innovation Hubs, Start-up Visa programme and local support from cities. Additional feedback, not limited to the above‑mentioned initiatives, was collected in interviews.

← 47. Recently, the offering of direct support mechanisms has been strengthened by the implementation of new measures. The Agendas para a Inovação Empresarial programme (Ordinance No. 43-A/2022) promotes innovative projects that can support Portugal’s economic recovery from the COVID‑19 pandemic. Eligible investment include collaborative R&D projects carried out by companies and research entities. The programme, however, received mixed reviews from consulted investors: one respondent said it was “very effective” for supporting R&D activities, another reported that the application process was “very bureaucratic” and time‑consuming. Under the Industry Decarbonisation programme (Ordinance No. 325-A/2021), firms in extractive industries and manufacturing industries can apply for direct support for low-carbon industry projects, including research and innovation processes.

← 48. Central Government’s incentives were seen as “very attractive” by 5% of surveyed firms, whereas regional and municipal authorities’ support and incentives were considered slightly more attractive (11% of firms) in EY (2022[18]).

← 49. According to respondents, Portugal 2020 and Portugal 2030 programmes’ rules prevent applicants from going ahead with their investment projects while waiting for a positive decision because any investment made before receiving a decision cannot be contemplated in the support scheme.

← 50. Two-in-five respondents indicated that they had not used any incentives or funding opportunities; perhaps partly due to challenges regarding e.g. eligibility, bureaucracy or long waiting times, as 55% of respondents reported difficulties accessing local funding, grants or subsidies as an obstacle to their operations in Portugal. Some investors also considered that support for large firms had overall become scarcer over the years.

← 51. Portugal’s investment promotion agency AICEP provides various support services, information and contacts to foreign investors seeking to establish or expand a business in Portugal. Support can include, for instance, organisation of site visits, provision of site proposals and establishing contacts with local entities. AICEP Portugal Global, AICEP support, consulted on 14 November 2022.

← 52. For instance, a firm in the automotive industry had used grants for employee training. An investor in the ICT sector had participated in a requalification programme, committing to hiring talent who undergo a six‑month training in a university, to mitigate skill shortage in the sector.

← 53. It is to be noted, however, that the aeronautics sector is a relatively newly developed one in Portugal and competence‑building work is ongoing.

← 54. In EIB (2022[10]), 72% of firms in Portugal considered that climate change and related changes in weather events already affected their business, albeit most reported the impact of climate change as minor.

← 55. As of 23 August 2022. This finding is aligned with the results of EY (2022[18]), in which 62% of surveyed investors had plans to establish or expand operations in Portugal over the next year, up from 37% in 2021.

← 56. In EY (2022[18]), 52% of surveyed investors identified the digital economy as the leading sector to drive Portugal’s growth in the coming years, up from 45% in 2021. Forty-two percent of firms surveyed in EIB (2022[10]) had already taken action to become more digital as a response to the pandemic, and 58% expected COVID‑19 to have a long-term impact on their business, in terms of increased use of digital technologies.

← 57. The Recovery and Resilience Plan foresees EUR 650 million worth of investment in companies’ digital transition, through training programmes in digital skills (see Box 4.5), a national network of test beds, coaching and support for the digitalisation of SMEs, among others (Portugal Government, 2021[5]).

← 58. EIB (2022[10]) found that 36% of firms in Portugal had already invested to deal with climate change and 50% were planning do so in the next three years. Thirty-seven percent of Portuguese firms perceived the transition to stricter climate standards and regulation as an opportunity, compared to 28% of EU firms. The survey, however, does not provide an explanation for such difference with the EU average.

← 59. Ordinance No. 325-A/2021.

← 60. In 2022, the regulatory framework for the electricity sector was renewed by the adoption of Decree-Law No. 15/2022, in effect from 15 January 2022, establishing the organisation and functioning of the National Electric System. The law consolidates the legal framework in the sector, aligns the National Electric System with Portugal’s energy and climate objectives and transposes EU energy directives into national law. The previously established requirement to obtain a grid capacity reserve title before the investor can apply for a production license has been retained in the new law. Under the new regime, the reserve titles are transferable until the issuance of a production license.

← 61. The content of the online questionnaire can be consulted in detail at: https://www.oecd.org/daf/inv/OECD-EU-Portugal-Questionnaire-Impact-Regulation-Foreign-Direct-Investment.pdf.

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