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Taxation of royalties in Portugal

With the rise of digital nomadism, more people who come to Portugal have income from intellectual property, and particularly from royalties.

This includes Youtubers and other content creators. 

When classifying income, it is important to be careful in identifying the exact type of income. Income from content presents one of the most complex classification challenges when filing tax returns. However, a ruling from the Portuguese tax authorities offers helpful guidance. 

Income from IP - capital gain, royalties or business income?

The most important thing is to classify the income correctly.

The first question should always be what is the payment for?

If the taxpayer is paid for the creation of content for a client, then the classification is just like any other work. This normally means that the classification will be as self employment income (or category B income) and taxed, in most cases, in full rates. 

However, if the payment is for using the content, then the normal classification will be royalties, which is a special category. 

The distinction is normally based onwho retains ownership of the content. If the taxpayer is a copyrighter and the copy belongs to the client, then the income is simple income from work. However, if the taxpayer creates content and sells access to the content or other type of rights to use the content, then the income is normally royalties. 

In the event of YouTube, the ownership of the content transfers to Google, but Google charges clients to access the content and share a percentage with the creators. This is also normally royalty income and indeed, Google will withhold taxes on part of that income. 

Treatment of content creation in Portugal

Content creation or writing is normally simply an activity. If it falls into the list of high value activities, such as is the case in certain conditions with journalism, the taxpayer may benefit from the 20% reduced rate. Otherwise, full rates apply. The taxpayer should have an activity open with Finances and issue Recibos Verdes. 

Treatment of royalty income under NHR

Royalties are a different story. Income from royalties is normally based on the location of the entity that pays. Therefore, if users pay for accessing content from overseas, then the income is taxed overseas. This assumptions could be reversed if the content is produced in Portugal or is strongly linked to Portugal in some double taxation treaties, but normally, content watched overseas and paid for by overseas entities is considered "foreign-sourced income". 

The Portuguese classification differentiate between the original creator or a subsequent purchaser, but the tax outcome is the same in most cases. So, influencers who are tax residents in Portugal who enjoy royalty income from content they created will normally be sourcing income overseas. 

The NHR rules allows for a full exemption on foreign sourced income when such income could be taxed overseas. This covers royalty income that could be taxed overseas. 

Now, most double taxation treaties indeed grant the other country the right to tax royalties and therefore, full exemption is the normal result, even if the other countrydoes not in fact apply any tax(such as the case for the UK for example). The right of taxation is what matters. 

Income from assignment of rights

If the income is from sellingIP, one must review whether the selling is regular activity (in which case the classification is likely a business activity) or if it's a one off event, in which case the classification is likely capital gains. In both cases, taxation in Portugal applies. 

Great outcomes but extreme nuance

Royalties offer some of the best tax structuring opportunities to taxpayers in Portugal under the NHR (or the new TISRI scheme) but it is important to understand that the classification is extremely nuanced and royalty-based planning is for professionals. 

It is also important to remember that one must always consult the specific double taxation treaty and specific rules and not make general assumptions. 


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