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

The decision to work as a freelancer or start a company in Portugal is influenced by several factors that might not be clear from the outset.

You must consider growth potential, long-term stability, flexibility, funding opportunities, protection against liabilities, implementation costs, operating expenses and…tax implications.

At NEWCO, we assist clients in implementing both solutions:

• We guide freelancers and companies on the intricacies of Portuguese legislation.
• We offer advice and a hands-on approach to the planning, implementation, and day-to-day running of your business in Portugal.

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

Please note that a specific analysis is recommended for each case. This analysis should not be limited to a tax perspective.

Taxation of freelancers in Portugal

If you are working as a freelancer in Portugal, you’ll be subject to personal income tax and have other reporting requirements.

Income subject to taxation

The business income of freelancers subject to taxation in Portugal can be determined via the simplified regime or the organised accounts regime.

• the taxable income is obtained by applying a coefficient to the gross income earned that represents an assumption of the amount of the expenses borne.
• Under the organised accounts regime, the assessment of the taxable income is made by reference to accounting rules and principles. In this scenario, all costs related to the activity are deductible from the income obtained under the same terms as companies.

Typically, the organised accounts regime is more favourable if the level of expenses/costs borne exceeds the one presumed under the simplified regime.

If you're a freelancer with an annual gross income below € 200 000, you can choose between the simplified regime or the organised accounts regime.

On the other hand, if you have exceeded this threshold in the previous two years, you must keep organised accounts from the following year.

Personal income tax rates

The applicable rates depend on whether you are a "normal" tax resident or a tax resident benefiting from a specific programme, such as a non-habitual resident (NHR) with income deemed to come from a high value-added activity listed by the Portuguese government or a beneficiary of the "Return Programme".

For "normal" tax residents, the income obtained is taxed according to the progressive rates of personal income tax. On the other hand, a non-habitual resident with income from a high value-added activity listed by the government can benefit from a flat rate of 20 per cent. For their part, beneficiaries of the "Return Programme" can access a 50% tax exclusion, with limits for those who become fiscally resident from 1 January 2024.

It should be noted that after an initial exemption of 12 months, you will start paying social security contributions in Portugal.

Tax compliance obligations

While the tax compliance burden for freelancers is theoretically more straightforward than that of companies, there are still relevant obligations that require attention and proper assistance, such as:

• Statement of beginning, change or cease of activity
• Advance tax payments (“pagamentos por conta”)
• Issuance of electronic Invoices in accordance with the Portuguese tax legislation;
• Value Added Tax returns
• Annual personal income tax returns
• Social Security returns

Setting up your activity correctly and ensuring the timely and accurate filing of each return is fundamental for your project's long-term success and stability, mitigating risks of corrections and penalties.

Taxation of Portuguese companies

According to the Portuguese Companies Code, there are two main types of companies:

• Quota companies (“Lda.”); and
• Share companies (“S.A.”)

The most common type of company for freelancers is the Lda company. This is because they offer more flexibility and a less complex administrative and supervisory structure when compared to SA companies.

In the case of company incorporation in Portugal, it is essential to assess two types of taxation:

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

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]

Portuguese resident companies that are not exempt from (CIT) nor are subject to a special tax regime and are engaged primarily in commercial, industrial, or agricultural activities may opt for a simplified tax regime (following a similar rationale to the simplified regime for freelancers), provided certain cumulative conditions are met.

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

The general CIT rate in Mainland Portugal is 21% (in the case of small and medium-sized companies, the first € 50.000 of taxable income is taxed at 17%, and the remaining is taxed at 21%).

In Madeira, the general CIT rate is 14.7%, and the first € 50.000 of taxable income is taxed at 11.9% (the remaining is taxed at 14.7%).

The Madeira International Business Centre tax regime offers a 5% CIT rate for companies with international activities

Tax compliance obligations

• Statement of beginning, change or cease of activity;
• Annual corporate income tax declaration;
• Annual declaration of accounting and tax information;
• Issuance of invoices for the services rendered using certified invoicing software;
• Submission of VAT declarations.

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

Dividends distributed by a Portuguese company to a Portuguese tax resident are taxed at a 28% withholding tax. No advantage arising from the NHR status is applicable in this case.

However, the recipient can choose to include such earnings in his taxable return and subject it to the progressive tax rates that apply to “regular” residents, which range from 14,5% up to 48%, depending on the income level. Only 50% of the distributed dividends will be considered in this case.

Employment income

With regard to the applicable special tax rates and regimes (i.e. NHR or Programa Regressar), employment income earned by a shareholder of a Portuguese company is taxed in the same way as that of a freelancer under the terms described above.

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

Tax compliance obligations

As a shareholder or employee of a Portuguese company, you may have to submit your annual tax return between April and June each year.