UPDATE 1-Portugal rolls out tax incentive to boost investment

Thu May 23, 2013 12:55pm EDT

* Minister sees recovery starting in second half

* Incentives have European Union's OK

* Corporate tax rate could be as low as 7.5 pct vs 24 pct (Adds impact on corporate tax rate, German support)

LISBON, May 23 (Reuters) - Portugal rolled out a new fiscal incentive for companies on Thursday, saying it will allow a 20 percent tax deduction on investments of up to 5 million euros to help drag the bailed-out economy out of a deep recession.

Finance Minister Vitor Gaspar said the fiscal credit measure was an "innovative and unprecedented" move that will serve as catalyst for economic growth and jobs creation, adding that the recovery should begin in the second half of the year.

"The moment for investment has come," Gaspar told a briefing. He said the incentives will not compromise Lisbon's budget deficit goals under its EU/IMF bailout and already have the green light from the European Commission.

Gaspar said the move will have an immediate impact on the economy and could lower the corporate tax rate to as low as 7.5 percent in some cases from the regular rate of 24 percent.

The measures are mainly aimed at small and medium-sized companies that make up the backbone of Portugal's economy. Their access to funding has been severely hampered by the country's debt crisis.

The government also confirmed it will set up a development institution to finance such companies, with technical and financial help from Germany's state development bank KfW .

Earlier this month the government kicked off corporate tax reforms with a new accounting scheme for value-added tax, long sought by firms to free up cash flow and give them financial flexibility. It has also pledged to gradually but significantly lower company tax rates in the years to come.

Portugal has applied tough austerity measures under the bailout and is grappling with its worst recession since the 1970s. The economy is still expected to shrink 2.3 percent this year before returning to meagre growth next year. (Reporting By Sergio Goncalves and Daniel Alvarenga; Writing by Andrei Khalip; Editing by Catherine Evans)