For freelancers eyeing Portugal as their work base, understanding the tax landscape can make a significant difference in the actual income you pocket. With enticing tax advantages offered by the Non-Habitual Resident (NHR) status and other schemes, Portugal can be a highly attractive destination. This article delves deep into how the tax scenario pans out for freelancers in Portugal, especially during their first year of activity.
The Portuguese Personal Income Tax (IRS) Scenario
The Personal Income tax (IRS) in Portugal operates on a progressive scale, with rates ranging between 14.5% and 48%. Should your taxable income exceed 80,000 euros annually, you may find yourself facing a top tax rate of 53%, once the solidarity tax is applied.
However, the Portuguese tax landscape isn’t merely about ascending percentages. It’s rife with opportunities for tax reduction, especially for those who qualify for the NHR status.
Benefits of the NHR Status
Becoming an NHR can significantly tilt the tax balance in your favor. If you render in Portugal a freelancer or self-employed service identified as a high value-added activity by Portuguese legislation, you’re eligible for a reduced IRS flat tax rate of 20%. This is a substantial reduction, especially when compared to the higher tiers of the standard tax rate.
Discounts in Your Initial Freelancer Year
A unique aspect of Portuguese legislation is the introductory tax discount designed to cushion the tax burden during a freelancer’s first year of activity. As per Article 31 of the Portuguese Personal Income Tax Code, freelancers can benefit from a 50% discount on their taxable income base during their first year of activity. The relief continues into the second year as well, but at a reduced 25% discount.
Given these reductions, it’s not surprising that many explore.tax clients initially feared high taxation in Portugal, only to discover Portugal’s welcoming tax approach. For those who meet the necessary conditions, Portugal can indeed transform into a tax haven during the initial years of their freelance journey.
As you can read in our next blog article, freelancing in Portugal can also generate zero VAT and Social Security payments in the first year.
A Practical Simulation: The IT Freelancer example
Let’s unpack the tax math using a hypothetical scenario of an IT freelancer, specializing in web3 development, with an annual income of €150,000. The calculated tax, considering all reductions and the NHR status, would amount to just €11,250, a mere 7.5% of the total income. This rate is remarkably competitive, especially considering the quality of life and amenities that Portugal offers.
This calculation stems from applying a 75% coefficient to the annual income, meaning only €112,500 of the income is considered taxable under the 20% NHR tax rate. The 50% reduction for first-year freelancers further accentuates these tax benefits.
Our explore.tax team’s ebook offers an in-depth breakdown of this tax calculation. Understanding this tax simulation logic can empower you to tailor it to your specific case. For personalized guidance, we always recommend scheduling an online video consultation with our experts.
It’s essential to be aware that the legislation may add 15% of your gross income to your taxable base. In the above example, an additional €22,500 could be levied. However, with astute tax planning and legal deductions, you can potentially offset this charge.
Tailoring Your Tax Simulation
To arrive at an accurate tax estimate, identifying your activity code is crucial. You must know If your code is derived from the Personal Income Tax Code list of professional activity (CIRS) or from the CAE (Classification of Portuguese Economic Activities by Branches of Activity). The CAE code aligns with sectors such as crypto mining, token validation, etc.
However, if your annual earnings exceed €200,000, the simplified accounting method won’t apply to you. In such instances, especially if your income stretches beyond €250,000 in a year, we advise considering a tailored tax plan. This might involve establishing a corporate structure either in Portugal or abroad for maximized tax advantages, incorporating the NHR benefits.
Portugal’s freelance tax landscape offers numerous opportunities for tax savings. The combination of the NHR status, first-year freelancer reductions, and strategic tax planning can make Portugal an ideal hub for freelancers. To navigate this terrain effectively, seeking expert guidance can be invaluable. With the right knowledge and assistance, freelancers can optimize their earnings, ensuring they make the most of what Portugal has to offer.