Working as a freelancer or starting a company in Portugal - what is your best bet?

The decision to work as a self-employed professional (freelancer) or start a company in Portugal is influenced by several factors that may not be clear from the outset.

When assessing which option is best for you, it is crucial to consider factors such as your business's growth potential, expected long-term stability, the flexibility of the structure you implement, funding opportunities, contractual liability, implementation costs, operating expenses and, of course, the tax implications.

At NEWCO, we assist our clients in implementing both solutions:

• We guide freelancers and companies through the intricacies of Portuguese legislation.
• We provide advice and a hands-on approach to planning, implementing and managing your business in Portugal on a day-to-day basis.

This article focuses on some basic tax principles applicable to freelancers and companies in Portugal.

Please note that we recommend a specific analysis for each case and that it should not be limited to a tax perspective.

How are freelancers taxed in Portugal?

If you are working as a freelancer in Portugal, you will be subject to personal income tax and several tax compliance obligations.

Which accounting regime should you choose?

The professional income of self-employed individuals is subject to taxation in Portugal. Taxable income (i.e. the portion of income on which tax is levied) may be determined under either the simplified regime or the organised accounting regime.

• Under the simplified regime, taxable income is determined by applying a coefficient to gross income. This coefficient represents a presumed level of business expenses incurred.
• Under the organised accounting regime, taxable income is determined based on accounting rules and principles. In this scenario, all costs related to the activity are deductible from the income earned.

A self-employed individual with an annual gross income below €200,000 may choose either the simplified regime or the organised accounting regime.

If you exceed this threshold in the previous two years, you must adopt organised accounting from the following year onwards.

As a rule, the organised accounting regime is more advantageous if your expenses exceed the amount assumed under the simplified regime.

What taxes do freelancers pay in Portugal?

The applicable rates depend on whether you are an “ordinary” tax resident or a tax resident benefiting from a specific programme, such as the Tax Incentive for Scientific Research and Innovation (IFICI / NHR 2.0) or the Return Programme.

For “ordinary” tax residents, income is taxed according to the progressive Personal Income Tax (PIT) rates.

Conversely, a taxpayer benefiting from IFICI may benefit from a flat 20% tax rate on employment and self-employment income derived in Portugal from qualifying activities, as well as an exemption on foreign-source income (except pensions).

After an initial 12-month exemption, you will begin paying Portuguese social security contributions.

Tax compliance obligations

Freelancers have simpler tax compliance obligations than companies. However, there are still important obligations requiring attention, including:

• Statement of commencement, amendment or cessation of activity
• Advance tax payments (pagamentos por conta)
• Issuance of electronic invoices in accordance with Portuguese tax legislation;
• VAT returns 
• Annual personal income tax return
• Social Security declarations

Setting up your activity correctly and filing each return accurately and on time are essential for the long-term success and stability of your project, reducing the risk of corrections and penalties.

How are companies taxed in Portugal?

There are two main types of companies in Portugal:

• Quota companies (Lda.); and
• Public limited companies (S.A.).

The most common type among investors is the quota company (Lda.) because it offers greater flexibility and a less complex administrative and supervisory structure than an S.A.

When setting up a company in Portugal, it is essential to assess two levels of taxation:

• Taxation at company level;
• Taxation at shareholder level.

Taxation at the level of the company

Portuguese companies are subject to Corporate Income Tax (CIT) levied on their taxable income.

As a rule, the taxable income of Portuguese companies is calculated as follows:

CIT to be paid = [Taxable income – Tax losses = Tax profit x CIT rate]

Once assessed, the taxable profit is subject to the applicable CIT rates.

The general CIT rate in mainland Portugal is 19% (for SMEs, the first €50,000 of taxable profit is taxed at 15%, with the remainder taxed at 19%).

In Madeira, the general CIT rate is 13.3%, with the first €50,000 taxed at 10.5% (the remainder at 13.3%).

Tax compliance obligations for Portuguese companies

Companies have several tax compliance obligations, including:

• Statement of commencement, amendment or cessation of activity;
• Annual CIT return;
• Annual accounting and tax information return;
• Issuing invoices using certified invoicing software;
• VAT returns.

Taxation at the level of the shareholder     

The most common way of extracting income from a Portuguese company is through dividends or employment income (i.e. salary).

Both entail different tax implications at the level of the recipient.

Dividends - shareholders

Dividends distributed by a Portuguese company to a Portuguese tax resident are subject to a 28% withholding tax. In this case, no tax advantage arising from special tax regimes such as IFICI applies.

However, the recipient may opt to include this income in their tax return and have it taxed at the applicable progressive rates, ranging from 12.5% to 48%, depending on income level. In that case, only 50% of the distributed dividends are considered.

Employment income

Regarding the applicable special tax regimes (i.e. IFICI or the Return Programme), employment income earned by a shareholder of a Portuguese company is taxed in the same way as that of a freelancer, as described above.

In addition to personal income tax, employment income is also subject to social security contributions.

Tax compliance obligations for shareholders and employees

As a shareholder or employee of a Portuguese company, you must submit an annual income tax return between April and June each year.