Contractor's guide to contracting in Portugal
From the Eastern frontier of Europe, let’s continue our contracting overseas journey by heading to the Western extremity of the Iberian Peninsula to Portugal, writes Kevin Austin, managing director of Access Financial.
It is the oldest nation-state in Europe, the world's first modern maritime power and birthplace to some of the world's first explorers during the 15th and 16th centuries. Portugal was also a leading colonial power for a span of 600 years and an important hub of European trade with other parts of the world.
Following the recent recession, which was unprecedented for the Portuguese economy, economic activity is projected to expand in the next two years. Employment growth is expected to be accompanied by positive changes in the labour market and increases in the retirement age.
What are the benefits of working in Portugal?
1. Economic strength: Portugal's economy is growing at a healthy rate of 2.2%, supported by a surge in foreign direct investment leading to strong employment generation that will buttress wages and keep labour market dynamics improving.
2. Simplified tax regime for non-resident contractors: While taxes in Portugal are relatively high by European standards, non-resident contractors can take advantage of a simplified flat rate tax of just 20% for self-employed income (see below for more details)
3. Low cost of living: With an annual inflation rate of just one percent, Lisbon is also a significantly cheaper place to live than many other capitals. The cost of living in Lisbon is half of what it would be in London, a fifth lower than Berlin and 60 per cent cheaper than New York, San Francisco and Zurich.
4. Very high standards of spoken/written English: The Portuguese speak and write English to a very high standard. Portugal is ranked 18 out of 80 countries for English proficiency, ahead of many other European countries, including Spain (ranked 28), France (ranked 32) and Italy (ranked 33)
Self-employment in Portugal
To work as a self-employed contractor in Portugal, you must have a local bank account and apply for the Fiscal Number "Número de Contribuinte" at the local tax office. If you expect your annual turnover to exceed EUR 10,000, then you must register for VAT. If you are an EU/EFTA national staying in Portugal for more than three months, a certificate of registration should also be obtained from the closest Serviço de Estrangeiros e Fronteiras (immigration authority) to where you reside within four months of your arrival in Portugal.
Non-EU/EFTA nationals require a temporary stay visa for working in Portugal for less than six months. For longer periods, you must have a residence visa, but as soon as the contractor enters Portugal, you must apply for a residence permit, provided you meet the requirements.
You must also apply at a local social security office by filling in a prescribed form. You will be responsible for making your own income tax payments and social security contributions.
What are the levels of taxation in Portugal?
The Portuguese tax year is the calendar year and all residents must file an annual tax return. A self-employed person must file before the end of April for paper returns, or the end of May for online returns. The tax rates for individuals in 2018-19 are as follows:
|Taxable income (EUR)||Marginal rate on excess over lower limit (%)|
|Up to 7,091||14.50|
|7,091 - 10,700||23|
|10,700 - 20,261||28.50|
|20,261 - 25,000||35|
|25,000 - 36,856||37|
|36,856 - 80,640||45|
An additional solidarity rate applies for taxable income between EUR 80,000 to EUR 250,000 at 2.5% and for income exceeding EUR 250,000 at 5%.
Income from self-employment is category "B" income, and is taxed either under a "simplified regime" or based on the taxpayer's actual accounts "direct method". If the taxpayer qualifies for the simplified regime then 75% of the income arising from business and professional services is taxed at progressive rates. Up to 25% expense deduction must be supported with receipts; any amount spent over EUR 4,104 should be properly documented by expense receipts. The retention percentage is typically between 61% to 70%, if expenses are supported with receipts.
Individuals who have become tax resident in Portugal for a year and have not been taxed as resident for any previous five-year period may apply for the special tax regime for non-habitual tax residents (NHR). NHRs are taxed at a flat rate of 20% in respect of self-employment income (Category B). NHRs have the right to be taxed as such during a period of 10 consecutive years. An application for the NHR tax regime must be submitted electronically at the Portuguese government’s Portal das Finanças. The retention percentage for contractors operating via the NHR regime is between 70-75%.
Can I pay my taxes back at home because my stay is less than 183 days?
Non-residents who reside in Portugal for less than 183 days per year are not required to pay tax on their worldwide income in Portugal. They are liable to pay income tax only on their Portuguese-sourced income, subject to the terms of the double taxation treaties.
In some cases, a person who spends less than 183 days per year in Portugal may also be treated as resident in Portugal, when he/she maintains a home in Portugal on 31st December of the assessment year with the intention to be habitually resident in Portugal, or if he/she is a part of a family whose head of household is resident in Portugal or his/her centre of vital economic interest lies in Portugal.
What are the social security requirements?
A self-employed person has the option to pay social security contributions based on his average income level. The choice must be made by February or June of each year, and the new contribution amount will apply from the following month.
A self-employed person in Portugal is exempt from paying social security contributions for the first 12 months of their business activity. After 12 months, they will start paying on the previous year’s taxable income.
Social security contributions by self-employed persons and directors of limited liability companies engaged in commercial or professional activity will be paid at the rate of 34.75%, the minimum income base for contributions is EUR 428.90 per month and maximum base is EUR 5,146.80.
Is the process for claiming expenses different in Portugal?
All business expenses can be deducted in calculating the profits of a trade or business. For professionals, certain items such as entertainment and travelling expenses are deductible only to the extent that they do not exceed 10 percent of gross income.
If you use your home for business purposes, then you can claim expenses up to 25% of the total expenses.
What about tax credits in Portugal?
There are various tax credits available depending upon the individual circumstances and income level.
Can I use my own limited company?
Using your own company is possible in Portugal, though most contractors opt for self-employment. In recent years, the Portuguese administration has simplified the process of setting up a company in Portugal as it is looking to attract foreign investors. The tax credits for international double taxation and several social security agreements offer interesting opportunities in a tax-friendly environment. However, it is easier and highly profitable for foreign contractors to work as self-employed rather than through a limited company.
What about employment in Portugal?
Employment contracts in Portugal work similarly to many European countries. Fixed-term, part-time and intermittent work contracts are the most common methods of employment. A non-EU national may find it difficult to secure a work permit, as companies are typically meant to offer positions first to Portuguese citizens or EU/EFTA nationals.
An employee resident or non-resident in Portugal is liable to social security contributions at the rate of 11% and employer's contribution is 23.75%. In total, the social security contribution by both amounts to 34.75%. The tax rates for employment income are progressive up to 48% and non-residents are not entitled to any deduction against their employment compensation. Portuguese tax residents can claim the specified tax credits against their employment income tax liability. However, the retention from employment is always less than the retention from self-employment.
Portugal has emerged from the Eurozone economic crisis in far better shape than either Italy or Greece. In recent years many of the leading economic indicators have been trending towards the positive. The job market is in better shape than at any time since the early nineties, which is creating opportunities for foreign contractors with the right skills.
Portugal's economic renaissance, combined with its proximity to the UK and its relatively lower cost of living, makes it an attractive destination for UK talent. Its favourable tax regime for foreign contractors means that, despite lower pay than some other European countries, take-home pay is relatively high in percentage terms. The climate, lifestyle and well-known friendliness of the Portuguese towards the British all add to the attraction.
 EF Proficiency Index, 2017