Tax strategies in Portugal

Barbashyn Law Team Sergiy Barbashyn - attorney at law, managing partner. Iryna Syroid - attorney at law
31 May, 2023 5 min for reading
31 May, 2023 5 min for reading

Portugal is one of the countries that attracts IT professionals, digital nomads, and business owners. Living in the country, you can receive both passive incomes and conduct active activities through a company or as an entrepreneur.

We suggest you consider how you can start your business in Portugal and what tax strategies you can use.

NHR and tax exemption

NHR is a special status that can be obtained by tax residents of Portugal.

Status works in two main directions:

  1. a special tax rate of 20% on income from Portugal

Let’s imagine that you receive a salary in Portugal or have opened a business. Instead of income tax on a progressive scale from 14.5% to 48% – 20% is paid. Preferential rates can apply to high-skill professions, which include IT specialists, directors and TOP positions in companies, doctors, designers, etc., linguists, etc. Full list of professions at the link.

2. 0% on foreign income

Certain types of foreign passive income, such as dividends, royalties, rental income, are tax-free in Portugal. For example, if a resident of Portugal receives dividends or royalties from another country, additional taxes must not be paid in Portugal when declaring.

Of course, in order to apply these norms, a number of criteria must be met. Among such criteria, include the existence of conventions on the avoidance of double taxation between countries, the possibility of taxation of such income, etc.

A non-exhaustive list of NHR benefits is provided. This also includes preferential taxation of pensions or income from foreign wages.

How to get NHR

NHR status is granted for 10 years. The application for the status must be submitted during the year in which you became a tax resident in Portugal and by March 31 of the following year. For example, in May 2023, temporary protection was obtained, which means the automatic acquisition of tax residency in Portugal. You now have time throughout 2023 and until March 31, 2024 to apply for the NHR.

Company in Portugal

You can open a company in Portugal with a physical presence or remotely. The founder of the company can be a non-resident of Portugal, the minimum number of founders is one person.

To open a company, you need to complete a number of formalities – obtaining a local tax NIF number, searching for a company name, drafting founding documents, contributing authorized capital, etc.

Among the distinct advantages of opening a company in Portugal is the possibility to quickly open a bank account, which is a difficulty in many European countries.

Tax burden. Standard tax rates are average across European countries. The company pays the following taxes: income tax – 21%; VAT – 23%; social contribution – 23.75%. Additional municipal taxes and fees may apply. However, the dividend tax is 28%.

A social contribution of 11% and personal income tax is withheld from the employee (a fixed rate of 20% according to the NHR or a progressive rate from 14.5% to 48%). Holders of temporary protection in Portugal can get a job in a Portuguese company.

There are special tax zones and taxes in Portugal. For example, taxes on the island part of the country (Azores, Madeira) can be significantly lower than the mainland part of the country.

Private entrepreneur

The Portuguese individual entrepreneur is an analog of the Private entrepreneur in Ukraine. In general, the registration procedure is quite similar. You must obtain a NIF number, open a bank account, and have a Portuguese address.

It is important to choose the codes of types of activities correctly. For example, for IT, it can be computer programming activities, computer consulting, other activities related to information technologies, etc.

Since the entrepreneur’s registration takes place online, it is worth getting access codes to the personal tax office in advance.

Taxes. If the activity falls under high-skill and the NHR status is available, the tax burden can be 7.5% in the first year. This can be achieved if you are on a simplified taxation system, apply tax benefits, and provide proof of expenses.

In fact, personal income tax is from 14.5% to 48% or 20% with NHR status; social contribution 21.4%; VAT – 23%. The tax base is 75% of income, subject to proof of 15% of expenses. However, there are tax benefits in the first years of activity. For example, a reduced income tax base for the first calendar years (the first year – by 50%, the second – by 25%) and exemption from paying the social contribution for the first 12 months.

Limits. The simplified taxation system has limits. This is EUR 200,000 for the last two calendar years or EUR 250,000 for the last year of activity. Exceeding the limits results in the mandatory involvement of a certified accountant and an organizational form of reporting.

Migration issues (temporary protection, visas, residence permits)

Currently, you can stay in Portugal on the basis of temporary protection. In addition, the country offers a wide range of visa programs for relocation to Portugal. Such programs include:

  • D2 visa (employment or business)
  • D3 visa (for highly qualified specialists, including IT specialists)
  • D7 visa (passive income)
  • digital nomad visa and others.

It is possible to apply for a certain type of visa only outside Portugal in the country of residence, for example, for passive income.

However, Portugal provides the opportunity to legalize directly from the country. For example, after employment or starting a business.

Conclusions

Portugal offers many attractive opportunities for the relocation of businesses and entrepreneurs. This applies both to the taxation system and to forms of activity. Examples include the special status of the NHR, which allows you to avoid taxation of foreign income or preferential taxation of entrepreneurs.

The flexibility and variability of migration programs should be emphasized separately. A number of which can be applied for both from the country of residence and after arrival in the country. After obtaining a residence permit for the main applicant, you can go through the family reunification procedure.

Since the issue of choosing tax strategies or migration processes has many features, we recommend contacting specialists to choose the best option.

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