Setting up as a freelancer in Portugal is something that you should know about as a digital nomad.
A lot of digital nomads fall in love with Portugal. Some like the city of Lisbon, others spend their time in the Algarve. Some other even go on a trip into the Atlantic Ocean to the Azores or Madeira.
Spending a lot of time in one country can mean you become a tax resident in that place. You will become a tax resident of Portugal if you spend at least 183 days in the country. Nevertheless, even if you would spend a lesser amount of days, you could still be a Portuguese tax resident. This is the case when you have your habitual residence in Portugal. In other words, if you always return to Portugal as your home, Portugal can also consider you tax resident even if you don’t spend more than six months in the country.
In previous articles, I already assessed if digital nomads pay taxes in Portugal and we took a deeper dive into the non-habitual residence regime. You can read those articles by clicking on the aforementioned links.
In the this article, I want to take a closer look at the option of establishing yourself in Portugal as a freelancer. The reason is that this setup is not as well known as for example the non-habitual residence regime. Yet, if you opt for the simplified tax regime, there are some benefits involved. You can apply the simplified regime if you don’t have a revenue/income of more than €200.000 per year.
Income taxes as a freelancer in Portugal
In principle, you need to register all your income and expenses in a detailed bookkeeping in order to calculate your profit. Furthermore, there might be limitations to what kind of expenses qualify to deduct and which don’t. As this can be complicated, you will need a lot of help of an accountant for all of this. However, for this reason the simplified regime was created for small businesses.
Under the simplified regime, you take into account 25% of your income as expenses. Actually, the expense rate depends on your profession. However, in practice, this is the rate that is applicable in most case. Consequently, you are taxed on 75% of your income. In order to apply the full 25% as deductible expenses, you will have to show proof of some expenses though. The calculation behind it is rather complicated but you should remember to keep proof of your actual expenses.
Once you calculated your tax base, the income tax rates are applied. In Portugal, tax rates are progressive. This means, the higher your income, the higher your tax rate.
Additional tax cut for the first two year
It is good to know that for newly established freelancers the first year you will get a tax cut of 50% of the taxes that are due. The second year, you still get a tax cut of 25%. As from the third year, you are taxed without getting any additional tax cut.
Lower income tax rates on Azores and Madeira
In addition to this, you should now that income tax rates in Madeira and Azores differ from those on mainland Portugal. The tax rates in Madeira and Azores are slightly lower than on mainland Portugal with the Azores having the most beneficial regime.
Social contributions as a freelancer in Portugal
Apart from income taxes, you will also need to pay social contributions in Portugal. For self-employed individuals, the rate amounts to 21,4%. However, you should know about the corrections to the aforementioned principle.
First, you don’t calculate social contributions on your full income. If you provide services, you take 70% of your income as taxable basis for the social contributions. This brings your actual rate of social contributions to 15%. You can opt to even lower (or increase) these payments with a maximum amount of 25% but in that case you will also receive less (or more) benefits.
Second, the maximum monthly contribution base is equal to twelve times the Social Support Index. For 2024 this equals around €5.800. Therefore, you will pay amaximum monthly contribution of around €1.250.
Conclusion: freelancer in Portugal
Setting yourself up in Portugal as a freelancer isn’t the most tax efficient solution. However, if you like the country and spend a lot of time there, you might have no other option. In this case, it is good to know that there are some tax breaks available which can limit your tax burden, especially during the first two years after starting out.