If you start working as a freelancer or independent professional in Portugal, you will usually be placed under the Simplified Tax Regime.
It is designed to reduce accounting obligations, but there are still some important points to understand, particularly around tax coefficients, expenses, VAT and Social Security.
How is taxable income calculated?
Under the Simplified Regime, taxable income is not normally calculated by deducting all your actual business expenses from your revenue.
Instead, the Portuguese Tax Authority applies a coefficient according to the type of income or activity.
Some of the most common coefficients are:
| Type of income | Coefficient |
|---|---|
| Professional activities listed under Article 151 of the Portuguese IRS Code | 75% |
| Other services | 35% |
| Sale of goods | 15% |
For example, if a consultant invoices €50,000 and the 75% coefficient applies, the initial taxable income is €37,500.
This does not mean that the tax rate is 75%. The €37,500 is added to the taxpayer’s other income and is then subject to the applicable Portuguese income tax rates.
The correct coefficient depends on the exact nature of the activity. This is why choosing the right activity code when opening the activity is important.
What about business expenses?
This is one of the areas that causes the most confusion.
Under the Simplified Regime, expenses do not normally reduce taxable income one euro for one euro.
However, for income subject to the 75% and 35% coefficients, part of the assumed expense allowance depends on the taxpayer having enough qualifying expenses.
The calculation takes into account a statutory amount and certain eligible expenses, including qualifying Social Security contributions.
Other expenses may include:
- Software and subscriptions;
- Professional insurance;
- Accounting and legal fees;
- Office expenses;
- Telephone and internet;
- Rent and utilities connected with the activity;
- Properly documented business travel.
Where an expense is only partly connected with the activity, only part of it may be considered.
If the required expense amount is not reached, the shortfall may increase taxable income. For this reason, freelancers should keep their invoices and classify business expenses correctly.
First-year and second-year reductions
A genuinely new activity may benefit from a reduction in the applicable coefficient:
- 50% in the first year;
- 25% in the second year.
These reductions are subject to conditions.
They generally do not apply where the taxpayer also receives employment or pension income during the relevant period. They may also be unavailable where an activity was closed and restarted within the previous five years.
This is particularly important for people who move to Portugal and change from employment to self-employment during the year.
Simplified Regime or Organised Accounting?
The Simplified Regime often works well for freelancers and consultants with relatively low business costs.
Organised Accounting may be more suitable where the business has significant expenses, employees, subcontractors, rented premises or substantial equipment costs.
Under Organised Accounting, taxable profit is based on business income less expenses that are properly documented and deductible under Portuguese tax rules.
It also involves more administration and requires a Certified Accountant.
The best option depends on the full situation, not only on turnover.
Common mistakes
Some of the issues we most often see are:
- Choosing the wrong activity code;
- Applying the wrong coefficient;
- Confusing the Simplified Regime with the VAT exemption;
- Failing to classify business expenses;
- Ignoring VAT rules when invoicing foreign clients;
- Looking at income tax without considering Social Security.
VAT, IRS and Social Security are separate systems. Being under the Simplified Regime does not automatically mean that the taxpayer is exempt from VAT or Social Security.
Every case is unique
Two freelancers with the same income can have very different tax results.
One may qualify for the first-year reduction, while another may not. One may have significant business expenses, while the other has almost none. Residence dates, other sources of income and whether the freelancer has foreign clients can also affect the final tax outcome.
For this reason, it is always better to analyse the full situation with a qualified tax professional before opening the activity or changing tax regime.
How PortugalTaxes can help
PortugalTaxes assists freelancers and internationally mobile professionals with:
- Opening or amending their activity;
- Selecting the appropriate activity codes;
- Comparing the Simplified Regime with Organised Accounting;
- Estimating income tax and Social Security;
- Reviewing VAT and invoicing obligations;
- Assessing foreign clients, foreign income and international business structures.
A proper review at the beginning can help avoid incorrect registrations, missed benefits and unexpected tax liabilities later.
Contact us at PortugalTaxes.pt to book a consultation and clarify your position regarding Self-Employment in Portugal.
This article provides general information only. Each case is unique, and the correct tax treatment depends on the taxpayer’s activity, income, expenses, residence status and personal circumstances.
Disclaimer:
This website is for informational purposes only and does not constitute legal, tax, or financial advice. Individual circumstances vary, and we recommend consulting a qualified professional before making any tax-related decisions. PortugalTaxes.pt is not affiliated with the IRS, Portuguese Tax Authority, or Portal das Finanças. PortugalTaxes.pt is not affiliated with the IRS or Portuguese Tax Authority.
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