Introduction to remote work in Portugal
In an era where remote work has shifted from a luxury to a norm, Portugal stands out as an enticing destination for digital nomads and remote professionals from across the globe. This guide explores the intricate legal frameworks, financial implications, and practical considerations for anyone considering Portugal as their workspace.
The Legal Landscape of Remote Work in Portugal
Portugal offers a welcoming environment for remote workers, but understanding the legal landscape is crucial for seamless integration and compliance.
Specifically, there is a surprising mismatch between the immigration rules and the tax rules when it comes to remote work. The immigration rules not only encourage but even offer a special VISA for remote workers, whilst the tax rules could make such remote work non-compliant with the legal framework.
Indeed, the remote work revolution, boosted by the pandemic, met a legal framework that is not set up to deal with remote workers. International and national tax laws are still set up to deal with employees who work in-person. Employment laws are set to “protect” employees from misclassification, something that is almost a necessity when working remotely.
Generally speaking, remote work can occur in one of the following ways:
- Direct employment by a foreign entity.
- Employment via an Employer-of-Record (EOR).
- Contract work / freelancing.
- Payment through one’s own company set up in Portugal.
- Payment through one’s own company set up outside of Portugal
- Any mixture of the above options.
Direct Employment by a Foreign Entity
The fundamental difficulty with working for a foreign company whilst being in Portugal is that the underlying principle of tax laws is that employment income is generated in the place where the work is done (where the employee is located). As a result, employment taxes and social security are due where the work is done.
For a foreign company to withhold employment taxes and social security, it must register for tax in the country of the employee. If the employee is senior enough, this could lead to the country of the employee expecting not only employment taxes but also a part of the corporate taxes of the company.
If the foreign company is registered in Portugal, the legalities are straightforward.
However, if not registered, which is the norm, the arrangement works only if the employment is temporary, or if the work is in fact done through extensive commute to the location of the employer.
In cases where none of these conditions are met, the employer must undertake local registration to handle employment taxes, and the employee faces complexities in claiming tax benefits under the Non-Habitual Resident (NHR) status, if the employee indeed has such a status.
Employment via an Employer of Record (EOR)
EOR companies have been created to offer a compliant solution to companies seeking to employ people overseas. Rather than registering the entity in Portugal, the employee is hired “via” an EOR. The EOR handles all local legal and tax obligations, for a fee, making it a preferred choice for corporations.
In this setup, the tax burden is born by both the employer, via the EOR, and the employer.
This setup involves specific taxation and social security contributions, including income tax rates from 14-48% (or 20% if the employee qualified for NHR) and social security contributions split between the employee (11%) and the employer (23.75%).
The overall tax rate of this option is therefore very high.
Self-Employment and Freelancing
Self-employment offers considerable flexibility under Portuguese law.
Individuals earning up to 200,000 Euros a year can opt for a simplified tax regime where only a portion of income is taxable, providing significant tax savings, especially for those with lower operating expenses.
Under the simplified regime, the employee is subject to either the standard tax rates of 14-48% + solidarity rate over 80,000 or to the NHR 20% flat tax rate.
However, a main benefit of the simplified regime is that only part of the income is subject to tax (normally 75%). This isinsteadof deducting expenses so the turnover is taxed rather than the profit.
In addition, this regime allows new freelancers a 50% reduction in taxable income in the first year and a 25% reduction in the second. Note that the reduction does not apply if the taxpayer receives pension income.
Finally, the simplified regime offer an exemption from social security payments over the first year, a 70% reduction on social security payments in subsequent years and a monthly cap of approximately 1,300 Euros on social security payments.
Income sourced overseas (work done overseas) is not subject to tax if other country has the right to tax it (normally when done from a fixed base).
Note that 15% of the expenses need to be proven under the simplified regime.
Incorporating a Company in Portugal
Entrepreneurs can choose to incorporate a company in Portugal.
When having a company in Portugal, the owners can choose one of two routes to extract income.
They can pay themselves a salary, subject to the same tax and social security rates previously discussed in the context of an EOR, but always having the option to opt for the 20% tax rate if they have the NHR, being directors of their own company.
Or their company can pay corporation tax at 17-21% in the mainland, 14-17% in Madeira and Azores or 5% on income from foreign clients in a Madeira business center company, followed by 28% dividend rate when extracting the money from the company.
Importantly, a company gives the taxpayer flexibility in managing cash flow and extracting income and potentially significant tax reduction if dividends are not needed to cover living expenses.
It is important to remember that an owner of a company must make minimal social security contributions even if they do not receive a salary. A minimum salary at least is therefore normally recommended.
Incorporating a Company Abroad
Since dividends from overseas companies that are not in black listed jurisdictions are not subject to tax in Portugal if they can be taxed in their home country under the NHR, it is only natural that incorporating overseas is a common strategy for many taxpayers in Portugal and particularly NHR holders.
It is important to pay attention however to corporate tax residency rules. Merely holding a company in another country would not be enough since Portugal can claim that he company is tax resident in Portugal if it is managed from Portugal. Alternatively, even if a company is managed overseas, Portugal could claim that some of the income is generated in Portugal, leading to the creation of a permanent establishment in Portugal.
Mitigation of the above issues could lead to highly beneficial outcomes for the taxpayer.
US LLCs and S-Corps in Portugal
American (and non-American) remote workers often use US LLCs when trading in Portugal. In the absence of proper guidance from the authorities, tax advisors rely on a single ruling in relation to LLCs and interpret every word. LLCs could still represent powerful planning opportunities for taxpayers in Portugal.
S-Corps are a type of an American corporation that is only open to U.S. citizens and green card holders. An S-Corp turns what would otherwise be self-employment income into (1) a salary and (2) pass-through profit from a business.
There is no clear guidance how an S-Corp is treated in Portugal, but we believe that the salary is subject to the same rules as any other employment income and therefore if generated whilst working from Portugal, it is subject to entity registration or should be paid via an EOR.
Social Security Considerations
Understanding Portugal’s social security framework is essential for remote workers. Social security contributions vary depending on the employment status and the structure of any business entity involved. Totalization agreements between Portugal and other countries can also affect how social security is calculated and where payments are due.
Navigating VAT in Portugal
The Value Added Tax (VAT) system in Portugal is crucial for remote workers providing goods or services.
VAT may or may not apply based on the nature of the service, the location of the client and whether the client is a business. The general rule is that VAT does not apply to business to business (B2B) transactions but applies when selling to individuals, but some services are exempt from VAT when selling to individuals outside the EU.
Conclusion
Portugal’s legal and tax environment is conducive to remote work, but it requires careful navigation. From choosing the right employment model to understanding intricate tax laws and social security details, remote workers must be well-informed to make the most of their Portuguese experience. With proper planning and legal advice, Portugal can offer a rewarding and efficient remote working environment, blending professional opportunities with its renowned lifestyle and cultural richness.
