Are you self-employed in Portugal? Find out how the tax system works with our expert guide to taxes for freelancers and self-employed workers in Portugal.
The Portuguese tax system can be confusing to navigate for foreign workers, especially if you’re setting up a self-employed business or conduct freelance work.
This guide to self-employed tax in Portugal includes advice on the following:
- Self-employed tax system in Portugal
- Self-employed income tax in Portugal
- Registering for self-employed tax in Portugal
- Self-employed tax deductions and credits in Portugal
- Corporate tax in Portugal
- How to file self-employed tax in Portugal
- VAT in Portugal for self-employed people
- Social security for self-employed workers in Portugal
- Self-employed tax fines in Portugal
- Associations for entrepreneurs in Portugal
- How to find an accountant or financial adviser in Portugal
The self-employed tax system in Portugal
According to World Bank data from 2019, 16.9% of people in Portugal are self-employed workers or freelancers, which is higher than the EU average (15.2%).
Whether you’ll need to pay income tax or corporate tax on your profits in Portugal depends on the type of business you run. There are also several different accounting methods that expats may wish to consider.
Self-employed income tax in Portugal
Tax for self-employed sole traders and freelancers in Portugal
Sole traders, freelancers, and people who run unincorporated businesses in Portugal have their income treated as personal earnings and pay Portuguese income tax rather than corporate tax.
Sole traders can set up a single-member limited company (Sociedade Unipessoal por Quotas) or an individual limited liability establishment (Estabelicimento Individual de Responsabilidade Limitada). However, in the second scenario, any business assets separate from personal earnings are subject to corporate tax.
Income tax rates in Portugal are progressive. As a result, you pay more tax the more you earn. Workers have a tax-free allowance of €4,104. Non-residents are taxed at a flat rate of 25% on their taxable remuneration.
Portugal’s income tax rates for 2020 (to be filed in 2021) are the following:
|Annual taxable income||Portugal income tax rate|
|up to €7,112||14.5%|
Tax on partnerships in Portugal
Partnerships, where two or more people share all business profits and have liability for business debts, are taxed in the same way as sole traders.
Consequently, each partner will pay tax on their share of the profits through the income tax system.
Tax on limited companies in Portugal
Limited companies in Portugal must pay corporate tax on their profits.
If two or more people set up a business and incorporate it as a limited company, profits generated by the company that is not declared on personal income tax returns are subject to corporate tax.
The main limited company structures in Portugal are Private Limited Companies (Sociedade por Quotas), Public Limited Companies (Sociedade Anomina), and Limited Liability Partnerships (Sociedade em Comandita).
Registering for self-employed tax in Portugal
If you’re planning on setting up a business in Portugal, it’s important to check you meet the legal requirements as well as register with any necessary trade bodies.
Unlike in some countries, self-employed workers can’t simply start a business without gaining accredited status in their industry.
To set up shop in some industries, you’ll need professional qualifications. In some cases, this means that you may need to take a Portuguese language exam.
Self-employed tax deductions and credits in Portugal
When it comes to calculating your taxable income, you can deduct any business expenses that you’ve incurred as part of running your enterprise. For example, this can include the likes of rent costs for your office, material costs, product costs, and utility bills.
There are some limits, however. For example, expenses for travel and entertaining clients can only be deducted if they’re less than 10% of overall income. If you work from home, you can claim expenses up to a limit of 25%.
Accounting methods in Portugal
Self-employed workers in Portugal can declare their income tax liability by filing their full accounts on an annual basis (also known as the direct method). Alternatively, they can do so by using Portugal’s simplified tax regime.
In addition to this, some expats in Portugal can benefit from the special Non-Habitual Residency (NHR) tax regime.
Before deciding which method to use, you should take professional advice from an accountant, as the right choice will vary from business to business.
Direct accounting involves filing annual accounts as well as paying income tax at the standard rates on your profits.
If you use this method, you’ll need to employ an accountant who calculates your gross annual profit after your allowable business expenses have been deducted, however.
The simplified regime involves paying income tax at the standard rates on 75% of your overall income and providing expense receipts to offset the remaining 25%.
Because all sole traders can make use of a tax-free deduction of €4,104, those with lower incomes may find the simplified regime a beneficial option.
New businesses start off using the simplified regime, but it’s possible to switch to another method at a later date. You can request to change systems until the end of March each year, but you’ll need to stick to the new system for three years after making the change.
Businesses with an annual turnover of more than €200,000 aren’t eligible for the simplified regime. They must instead file their annual accounts using the direct method.
Non-Habitual Residency (NHR) regime
Some expats living and working in Portugal can apply for the special NHR tax regime.
Under the NHR regime, expats pay income tax on all Portuguese earnings at a flat rate of 20%. Most significantly, the NHR scheme allows workers to benefit from a tax exemption on income received from abroad.
Expats can only gain NHR status if they’re deemed to be conducting activities that arise from high-value activities of a scientific, artistic, or technical nature.
Corporate tax in Portugal
Corporate tax rarely applies to self-employed workers and freelancers in Portugal.
However, businesses pay corporate tax in Portugal at a flat rate of 21% of their taxable profits. The rate has gradually come down in the last decade, leaving it slightly below the EU average of 21.9%.
Businesses in Portugal may also need to pay surcharges on top of their corporate tax bill, depending on where they’re located and their overall profits.
Small- and medium-sized businesses pay a reduced Portuguese corporate tax rate of 17% on their first €25,000 of taxable profit.
How to file self-employed tax in Portugal
The Portuguese tax year runs from 1 January to 31 December. Workers must complete their tax returns for 2020 between 1 April and 30 June 2021. Self-employed people can pay their tax in three installments, in July, September, and December.
Corporate tax returns must be submitted online. Again, tax payments are made in three installments, and payments are usually based on the previous year’s assessment.
VAT in Portugal for self-employed people
VAT in Portugal (Imposto Sobre o Valor Agregado, or IVA for short) is payable by all businesses with a turnover of more than €10,000 on taxable goods and services.
There are three rates of IVA in Portugal:
- General rate: 23% on taxable goods and services
- Intermediate rate: 13% on food and drink
- Reduced rate: 6% on essential necessities including certain foods (e.g., meat, fruit, vegetables, cereals), books, newspapers, medicines, transport and hotel accommodation
Madeira (22%/12%/5%) and the Azores (18%/9%/4%) apply slightly different rates, however.
If your business is liable for VAT in Portugal, you will also need to apply for a VAT number, or NIF (Numero de Identificacao Fiscal).
IVA is payable to the Portuguese Tax Authority seven days after the reporting deadline periods, either quarterly or monthly.
Social security for self-employed workers in Portugal
If you are self-employed, you are responsible for making your own social security contributions. While employed workers’ contributions are topped up by payments from their employers, those who are self-employed have to pay the full contribution themselves.
The vast majority of self-employed workers in Portugal earning over must pay contributions through the Portuguese Social Security (Segurança Social). How much you’ll need to pay varies, but the general rate of contributions for self-employed workers in Portugal is 21.4%. Payments need to be made monthly between the first and 20th of the month.
In return for social security contributions as a self-employed worker, you are entitled to unemployment benefits, an allowance for sickness, parenting benefits, family allowance, invalidity benefit, as well as Portuguese pensions and survivor’s pensions.
After 12 months, however, you’ll start paying based on the previous year’s taxable income.
Self-employed tax fines in Portugal
The financial penalties for filing late or incomplete Portuguese income tax returns range from €200 to €2,500. Late payments can be penalized from 10% of the outstanding tax to double its value up to a maximum of €55,000 (plus interest).
If you file your corporate tax return late, interest is charged at a daily rate of 4% on the tax due. Penalties are capped at €165,000 (if the delay is deliberate) or €45,000 (if it’s due to negligence).
If you pay your taxes late, your company could face fines of between 30% and 100% of the tax due, capped at €45,000.
Associations for entrepreneurs in Portugal
- EO Portugal – Portuguese branch of the global peer-to-peer organization for business owners.
- Portuguese Association of Women Entrepreneurs – an organization founded in 1985 to promote female entrepreneurs.
- Startup Portugal – organization offering advice and information for people starting businesses in Portugal.
How to find an accountant or financial advisor in Portugal
You can get advice on tax and social security issues from an English-speaking chartered accountant through the international directory through the Institute of Chartered Accountants in England and Wales (ICEAW).