Effective tax rate when self-employed in Portugal

[disconnected]

I have read a lot on this forum but have never seen this mentioned anywhere, so I thought I would share it as I think a lot of people would be interested in it. Purely sharing knowledge here.

I have recently moved to Portugal and there is a thing called the simplified regime for self-employment. Depending on your profession, if you register as 'outros prestadores de servicos', which would be applicable to many online small businesses, your tax is calculated on 35% of your income, the rest is assumed as expenses. You only have to justify 15% expenses. Effectively this ends up as 5-14% income tax. Besides that there is social security. Together it amounts to roughly 20% total tax rate. Of course, it's not zero, but it's not bad for doing things above board in an EU country. The revenue limit for the simplified regime is 200K. Above that you need organized accounting, and it suddenly won't be so interesting anymore.

First year there is no social security to be paid. You get 50% discount on income tax in the first year and 25% in the second year. See the table below.

 

[JosephLL]

Mind my ignorance, but what is IRS?

 

[JohnnyDoe]

What about taxes on investments? Since one would probably be able to save some money after having paid 19-20% taxes

 

[disconnected]

"imposto rendimento singular" or "O Imposto sobre o Rendimento das Pessoas Singulares (IRS)". Personal income tax in Portuguese.

What about taxes on investments? Since one would probably be able to save some money after having paid 19-20% taxes

If you move here from abroad you can get NHR as most are familiar with, so that makes passive foreign income tax free for 10 years. Other than that it depends on the type of investments I suppose?

Crypto is also tax-free for now...

 

[void]

Looking at the table it still seems pretty high. For example Czech republic offers self employed regime which has effective rate at about 10-11% of total income up to about 40k EUR (80k EUR from 2023) including income tax, social security and health insurance.

 

[fshore]

I have read a lot on this forum but have never seen this mentioned anywhere, so I thought I would share it as I think a lot of people would be interested in it. Purely sharing knowledge here.

I have recently moved to Portugal and there is a thing called the simplified regime for self-employment. Depending on your profession, if you register as 'outros prestadores de servicos', which would be applicable to many online small businesses, your tax is calculated on 35% of your income, the rest is assumed as expenses. You only have to justify 15% expenses. Effectively this ends up as 5-14% income tax. Besides that there is social security. Together it amounts to roughly 20% total tax rate. Of course, it's not zero, but it's not bad for doing things above board in an EU country. The revenue limit for the simplified regime is 200K. Above that you need organized accounting, and it suddenly won't be so interesting anymore.

First year there is no social security to be paid. You get 50% discount on income tax in the first year and 25% in the second year. See the table below.

What about if you're registered for VAT, don't you have to have proper accounting for VAT receipts? Will that affect this regime?
What is the thresholds for registering for VAT in Portugal (and is it the same for selling services and goods)?

 

[disconnected]

Looking at the table it still seems pretty high. For example Czech republic offers self employed regime which has effective rate at about 10-11% of total income up to about 40k EUR (80k EUR from 2023) including income tax, social security and health insurance.

What if your cross that threshold? 40K is not very much... And it's also about where do you actually want to live, I know I would rather live in the Algarve then in Czech.

What about if you're registered for VAT, don't you have to have proper accounting for VAT receipts? Will that affect this regime?
What is the thresholds for registering for VAT in Portugal (and is it the same for selling services and goods)?

In my case I only do business with entities in the USA so I'm VAT exempt. If you have clients in Portugal or EU then there is VAT. The threshold is something like 10 or 12K.

 

[fshore]

In my case I only do business with entities in the USA so I'm VAT exempt. If you have clients in Portugal or EU then there is VAT. The threshold is something like 10 or 12K.

Good. Are you sure you don't have to register and make zero rated invoices? In many other countries you'd have to do that even when everything is zero rated.

 

[void]

What if your cross that threshold? 40K is not very much... And it's also about where do you actually want to live, I know I would rather live in the Algarve then in Czech.

above 40k (up to 80k) you have to register as VAT payer (nowadays the limit will be increased to 80k next year) which is a bit of an additional hassle
above 80k it's not that efficient anymore, you can't declare lump sum costs, you have to care about accounting etc.

you can live anywhere after setting up and once a year submit 3 forms digital way (tax office, social security and health insurance company) - no one cares where you are

yes, it's just another cheap and efficient small-ball solution for self employed individuals up to certain level of income

 

[RealDude]

Depending on your profession, if you register as 'outros prestadores de servicos', which would be applicable to many online small businesses, your tax is calculated on 35% of your income, the rest is assumed as expenses.

Can i apply with the following professions?
1. (Remote) IT consulting and development as Freelancer
2. (Worldwide) Software as a Service (SaaS) provider paid by customers on annual/monthly subscriptions

 

[disconnected]

Good. Are you sure you don't have to register and make zero rated invoices? In many other countries you'd have to do that even when everything is zero rated.

Yes that's correct, you have to do that.

Can i apply with the following professions?
1. (Remote) IT consulting and development as Freelancer
2. (Worldwide) Software as a Service (SaaS) provider paid by customers on annual/monthly subscriptions

I think so. If you do some research, there is a list of professions and services with specific codes and tax coefficients. Or contact an accountant in PT. I can give you a few accountants which seem pretty good.

 

[name]

OP is working for the Portugal government. Take anything he says with a s**t ton of salt.

What about taxes on investments? Since one would probably be able to save some money after having paid 19-20% taxes

It's 28%

 

[disconnected]

OP is working for the Portugal government. Take anything he says with a s**t ton of salt.


It's 28%

Dude, relax. I'm just some guy who moved here last year and did a s**t ton of research about the tax system. I learned about this tax scheme and thought it may be interesting for some freelancers who don't make more than 200K a year.

Thinking Portugal would send someone online to promote their country is massively overestimating their abilities... lol. Believe me I hold plenty of grudges against the system here, but one needs to make compromises sometimes. Tbh I'm still somewhat on the fence if I want to stay here permanently.

Btw, capital gains tax is 28% on 50% of the gains. Thus, 14% effectively. Another example of how the Portuguese like to overcomplicate everything!

 

[donald1234]

holy s**t, even in luxembourg i got an average of about 45%...

 

[thirdShow10]

What if your cross that threshold? 40K is not very much... And it's also about where do you actually want to live, I know I would rather live in the Algarve then in Czech.


In my case I only do business with entities in the USA so I'm VAT exempt. If you have clients in Portugal or EU then there is VAT. The threshold is something like 10 or 12K.

Dont they tho? I want to move my a*s to Czech Republic next year (I live in country right next to it, doing remote business), and this is not first time I hear about people having registration in Czechia, while never being there, and nobody cares (they ofc dont talk about it IRL too much).

 

[drdivago]

Someone knows what professions are considered "outros prestadores de services", it is a bit vague. Working as a software developer for a non-portuguese company is considered in the list as a software developer that is 75% (not 35%) of the income or not?

Looking at the table it still seems pretty high. For example Czech republic offers self employed regime which has effective rate at about 10-11% of total income up to about 40k EUR (80k EUR from 2023) including income tax, social security and health insurance.

You didn't mention that is valid only if you work only with clients in the Czech Republic. The 80K limits It is a proposal that I know is not approved, and if you do use not this simplified tax regime the total tax rate is close to 14-23% depending on your income.

 

[disconnected]

Someone knows what professions are considered "outros prestadores de services", it is a bit vague. Working as a software developer for a non-portuguese company is considered in the list as a software developer that is 75% (not 35%) of the income or not?

If your profession does not have a specific mention on the list of professions with codes, you can most likely fit into the 'outras' category. That's the way I understood it.

Also, check if your profession is eligible for the 20% flat tax under NHR. Let's say you are a journalist for example. In this case your tax coefficient is 75%, and you will be taxed 20% on that. I think software developer also qualifies. That's 15% income tax effectively.

 

[drdivago]

If your profession does not have a specific mention on the list of professions with codes, you can most likely fit into the 'outras' category. That's the way I understood it.

Also, check if your profession is eligible for the 20% flat tax under NHR. Let's say you are a journalist for example. In this case your tax coefficient is 75%, and you will be taxed 20% on that. I think software developer also qualifies. That's 15% income tax effectively.

Hmm problem is social security, if we imagine an income of 100000, it is 20% of 70% = 14000 for income tax + 21,4 of 70% = 14,980, total tax is around 29% after 2 year. So you have total tax 14% first year, then 21.5% second year and 25.25% third year, and 29% from the third year.

 

[disconnected]

Hmm problem is social security, if we imagine an income of 100000, it is 20% of 70% = 14000 for income tax + 21,4 of 70% = 14,980, total tax is around 29% after 2 year. So you have total tax 14% first year, then 21.5% second year and 25.25% third year, and 29% from the third year.

I agree. Social security is ridiculously high in Portugal. There is the option to adjust the rate you pay by 25% up or down. This will affect how much pension you will get in the future (if you paid for at least 15 years). At least that's the way I understand it.

(income tax is 20% of 75%, not 70%. for social security it is 70%. So it's even a bit more than in your calculation.)

 

[robocorp]

Thanks for the table @disconnected. Do you know if the 50% discount on year 1 applies on top of the NHR max rate? For ex: 100,000 income on year 1, with an eligible profession, would it be 20% of 75% = 15000 of income tax, or 7500? Since there are no SS on year 1, it's a pretty good short term option