What is the “Simplified Regime”?
The Simplified Regime offers freelancers a simple, cost-effective alternative to the traditional profit/loss method of tax accounting. With assessment based on a fixed percentage of gross invoicing, small independent businesses can simplify record keeping, reduce taxes and increase productivity. Entrepreneurs qualify when their annual turnover does not exceed €200,000.
Example: John recently moved to Portugal and operates a freelance business, billing clients in his home country. Last year, his invoicing totalled €75,000. As a freelancer in the Simplified Regime, he is taxed on just 35% of his total income. 65% is automatically allotted to cover operating expenses. No further accounting is required. His annual tax is €5,625: just 7.5% of his gross income, far less than the 20% flat rate charges under NHR.
Other Benefits
In the first year of business in Portugal, freelancers are entitled to a 50% income tax reduction. In John’s case, his tax goes down to €2,812 on his gross income of €75,000. A reduction also extends in year two at the rate of 25% before normalising in the 3rd year and beyond.
Social Security
Embracing National Healthcare, old-age retirement pensions, disability insurance, maternity and paternity leave and unemployment benefits, Social Security contributions are both expensive and mandatory. For the self-employed individuals in the Simplified Regime, the basic contribution rate is 29.6% of taxable earnings.
Example: John pays Social Security contributions calculated on 70% of his gross income, or €52,500. That works out to less than €750 per month. The net amount is 12% of total income as opposed to that considered on the higher rate of 34.75% applicable to most Non-Habitual Residents.
Since contributions are based on the previous year’s earnings, sole traders are exempt in their initial year of business.
VAT
When annual gross earnings exceed €10,000, sole traders become subject to VAT reporting in the following year. In the case of invoicing outside of Portugal, most billings are VAT exempt. Since an entrepreneur both pays VAT on necessary business expenses and potentially collects VAT from customers, an opportunity arises for ongoing tax refunds.
Conclusion
While Non-Habitual Residency can be appealing for some people in certain circumstances, the Simplified Regime usually turns out to be the more beneficial method for most freelancers. When correctly registered as self-employed, Sole Traders can meet their new tax obligations in Portugal in what most will find to be a very acceptable manner.
Overall, there are many attributes that attract people to move to Portugal:
• Best climate worldwide (Algarve has over 300 days of sunshine per annum);
• Receptivity to foreigners: 2nd best immigrant integration in the EU;
• 3rd most peaceful country worldwide (2017 Global Peace Index);
• Security: low crime rate and only a minor threat of terrorism;
• Attractive quality of life - ranking 8th worldwide;
• Quality healthcare - ranking 12th worldwide (2017 World Health Organisation).
• No inheritance tax;
• No wealth tax.
The list goes on, also to include low taxation for entrepreneurs wishing to launch a globalised start-up enterprise in the gig economy from Portugal.
Dennis Swing Greene is chairman and International Tax Consultant for euroFINESCOs.a. www.eurofinesco.com
Dear Portugal News
you write this in your example:
"Last year, his invoicing totalled €75,000. As a freelancer in the Simplified Regime, he is taxed on just 35% of his total income. 65% is automatically allotted to cover operating expenses. No further accounting is required. His annual tax is €5,625: just 7.5% of his gross income, far less than the 20% flat rate charges under NHR."
However, I understand the simplified scheme to be the Opposite, If I earn 75k per year, I can assume 35% is for the expenses and they will tax me on the rest of it , i.e. Tax me on 65% of 75k, which is 48,750 EUROS , which is a High Tax Bracket.
Am I missing something?
please advise
john
By Robert Hope from Lisbon on 07 May 2018, 17:10
Well indeed John, I am also confused, but I believe you are right...
Thus 'Robert Hope', please comment and Correct if necessary :)
BR, Ruben
By Ruben from Algarve on 06 Jun 2019, 14:19
Hi,
According to the article, you have it backwards. 65% is allotted to covering the operational costs of running the business. So you are only taxed on 35% of your gross receipts. May seem hard to believe, and I would surely confirm it with a local tax advisor. Also keep in mind that as of 2019 there is a 21.4% contribution to social taxes.
The source document for this article is here.
( https://www.eurofinesco.com/en/our-publications/sole_trader/1-simplified-regime/36-e2-sole-traders-a5-tablet-colour-cover-13th/file )
By Orlando Jaime from Other on 15 Feb 2020, 01:28
If you're self-employed, social contributions are up around 30% now. I believe you get a one-year pass on income tax the first year after registering your activity. I am still unclear on how social contributions are ascertained in year one.
By Jack from Porto on 29 Sep 2020, 18:22
Well its wrong, nowadays the gov will tax 75% of your money and 15% need to be deducted(you need to have expenses to get this money back) and only 10% is tax-exempt, all info here is 100% wrong, no way the gov is going to tax you only 35%, Portugal is lead by a socialist party and they like to tax workers to death... do you really believe you can get lower taxes here?
By Victor from Lisbon on 13 Aug 2021, 14:43
The article is correct provided the proffesion is not covered by activity list of article 151 of the IRS Code as explained here
https://www.pwc.pt/pt/pwcinforfisco/guia-fiscal/2023/irs.html
So if you fall in "other category" your coeficient is 0.35. Hope this helps.
By tox from Lisbon on 05 Aug 2023, 20:03