FAQ’s: Freelancers and the Simplified Regime

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Sole Trader Start-up

Many foreign residents plan to open a small business when they move to Portugal. Regardless of your interest or motivation, it is essential to understand the basic requirements in Portugal before launching and conducting your new business activity. The following FAQ’s will help you get off to a good start while better serving your clients throughout the EU and beyond.

What is the difference between Standard Accounting and the Simplified Regime?

“Standard Accounting”  refers to the traditional system of accounting that calculates taxable profits from the net difference between income and expenses. This method requires professional accounting services (“TOC”).  Under the “Simplified Regime”, taxable income is calculated as a percentage of invoiced income (from the total of “electronic green receipts”) and is usually self-administered.

Do most self-employed go automatically into the Simplified Regime?

Yes, but not all. The Simplified Regime is designed for smaller businesses.  To qualify, your gross invoiced income must not exceed €200 000. 

What happens if my income exceeds this limit?

On a one-time basis, you may surpass this threshold by 25%. If repeated, the “AT” will switch you automatically to Standard Accounting (“Contabilidade organizada”). Subsequently, a Chartered Accountant must do regular reporting.

Initially, I opted for Standard Accounting but now realise that the Simplified Regime should be more advantageous. Can I switch?

Yes, taxpayers may switch in the following fiscal year if they so wish.

I only had €1,500 of income from a sideline business.  How should I report?

When freelance income constitutes less than one half of an individual’s declarable income, it may be treated as an “Isolated Act” and follow standard accounting rules.  No “TOC” is required.

How do I calculate my taxable income?

The calculation for determining taxable income is as follows:

 Category B      Expanded Simplified Regime                      Base

Sales of goods and services; Activities related to tourism      15%

Liberal Profession business activities (profissões liberais)     75%

Other income from services                                                    35%

Royalties, know-how, other income in connection with

activity; Rental income not declared in Category F               95%

Non-business-related subsidies                                                30%

Business related subsidies; Other income not listed              10%

This income is added to other sources (aggregation) to determine your final rate of taxation.

Is it true that there is a minimum tax?

No. While one used to exist, the minimum tax was abolished in 2010.

When do I have to charge “IVA” to my clients?

“IVA” (Valued Added Tax) requirements are the same under both methods. Once income exceeds €12,500, regular IVA collection and reporting is mandatory, either on a quarterly or monthly basis, depending on turnover.

Do I have to make contributions to Social Security?

Beginning in the first year of business activity, you are entitled to a 50% discount. In year two, the adjustment reduces to 25% and disappears altogether in the 3rd year and beyond, based on monthly payments to Social Security at the rate of 21% of your taxable income.

If your business activity is Local Lodging (“Alojamento Local”), you are exempt from Social Security contributions on this income.

If you already contribute to Social Security in another country or receive Social Security benefits, you can request exemption from paying again in Portugal. Alternatively, you may be eligible for reduced contributions.

Início de Actividade” (Business Registration)

Formal registration of your business activity with Finanças is the first step to detail all required information about yourself and your planned endeavour.

Recibos Verdes Electrónicos” (Electronic Green Receipts)

Freelancers may no longer buy books of Green Receipts and must file invoices electronically via Internet. Be careful to use the correct procedures within the duly designated time periods as there are fines if deadlines are not met.

Social Security

Freelancers must register with Social Security (National Insurance) and make monthly payments in the beginning of the second year of business activity. Services as well as Sales and Production currently contribute 21%. If you receive Social Security benefits or are already contributing to Social Security in another country, you may be eligible for exemption from contributions in Portugal.

National Health Coverage

As a freelancer, you will be eligible to apply for your “Cartão de Utente” (National Health Card). You, your spouse, and dependent children will be covered. With this registration, you will gain access to local Health Centres and Regional Hospitals. The card also entitles you to reductions on medication and prescriptions at local pharmacies.

IVA” (VAT)

Unless your income or activity exempts you from collecting “IVA” (freelance income under €12,500 pa), quarterly submissions need to be filed. Unfortunately, only Portuguese-language applications are available. If you invoice primarily outside of Portugal to other countries in the EU and beyond, this reporting could entitle you to a refund for “IVA” paid on business expenses Portugal.

VISA D2 for a Sole Trader or Investor

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The request for a Residence Visa to exercise an independent professional activity or to become an immigrant investor (visa D2) is normally issued to the applicant in his country of residence through the Portuguese Embassy or Consulate. Once application has been made, the deadline for the decision is usually 60 days, starting from the day of submission of the application with all substantiating documentation. This period may vary depending on the country of origin. Continue reading

Tax authorities simplify IRS payments IRS in instalments

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With the Tax and Customs Authority (“AT”) asking taxpayers to remain at home by using digital channels, the process for IRS payments in instalments has been simplified. If you have an outstanding debt of up to €5,000 and do not owe other taxes, it is possible to divide the amount to be paid in a maximum of 12 instalments. However, when the amount owed is above €5,000 or more than 12 instalments are required, the tax authorities still ask for a guarantee.

Lisbon Airport with 50% of air traffic in August, compared to 2019

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During this month of August, at least half of the number of flights registered at Lisbon Airport has resumed according to the data from ANA – Airports. Air traffic has begun to show signs of recovery after the 93.8% drop in the second quarter as compared to the same period in 2019. Due to the pandemic and consequent movement restrictions, the number of passengers fell by 97%. Airports expect to only recover their usual volume of passengers by 2024.

Hybrid “AL” lets – Q & A

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Question:  I have only been able to let my local lodging unit during the high season. There is now a potential tenant who wishes to rent the apartment from October to May. Can I do this by concluding a contract for the period and then move forward with weekly or biweekly lets in the summer season?

Yes, such a hybrid solution is possible. You will need a rental contract, defining the duration of the agreement as well as delimit any other conditions. In essence, this arrangement is compatible with your proposed summer “AL” activity. However, you will not be able to deduct expenses as you would with a conventional long-term lease.

US Expats: Travelling with your pet

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by Suzana Horta Greene

Are you planning to fly with your pet to Portugal? TAP and some other airlines welcome dogs to travel in the cabin or the hold, as long as the owner provides valid documentation and the pet carrier is deemed safe.

Ticket:  Regardless of the status of your dog, you must book your ticket with the airline directly (over the phone). You cannot purchase the animal’s ticket separately. If you are travelling with a Service Dog, you will have to provide a completed form from your personal physician that will be emailed to the airline prior to departure subject to approval. (Due to respiratory issues, flat-faced dogs are not permitted to fly).

Veterinary/USDA: You must book an appointment with your vet. They will facilitate the paperwork to be sent overnight to the USDA for approval. You will have to get a money order for USDA payment and include an overnight FedEx return envelope.

Carrier: You must have an airline-approved carrier, regardless of the status of your dog.

Customs: You will have to book an appointment with the custom’s vet in advance of arrival at Lisbon Airport. There will be a €40 fee.

We do not recommend procuring Emotional Support Animal (ESA) or Service Dog (SA) status if you intend to travel only once.  The airline may prove difficult. You will have to pay for the certification and physician’s sign-off which is similar to the cost of the pet’s plane ticket.

Service Dog status: As there is no accredited entity that supervises Service Dog certification, this status will not be recognized in the EU. Furthermore, there is no legislation that covers ESA so the airline might still charge for the ticket. That said, you can always travel with your dog in the cabin (if the dog falls under the airline weight limit).

Note: To be able to have the dog travel outside of the carrier, it must have the appropriate training (be able to remain calm for the duration of the travel – no barking, no peeing, etc).

Covid-19 restrictions

Currently, US nationals are not able to travel to Portugal simply on a US passport. If you are able to procure an exemption, you will not be allowed to travel with a pet in the hold (in-cabin only, in accordance with weight restrictions). Once the present travel ban is lifted, so will these limitations. If your pet is over the weight limit, it can be transported in the hold.

Advice on pet well-being

  • Be sure to exercise your dog in advance of travel. Fortunately, the US-PT flights are overnight, so the dog should already be primed to sleep for the duration of the flight. If you travel from JFK, Terminal 5 has an outdoor dog run which is right by the Lisbon departure gate. It is well worth it to book this route as it is a long flight and your dog will be stressed from the check-in/security process. The flight itself is 6-8 hours depending on wind. If you add the travel to the airport, check-in and luggage claim, security at departure and arrival with the custom’s vet, the whole procedure adds up to ±12 hours.
  • Do not feed your dog dinner (breakfast only). Use dinner as a slow-feed opportunity to calm your dog at take-off with any relaxation protocols you might already have in place. Toys and treats are very important for the duration of the flight. Bring a water bowl and allow for small amounts of water during the flight, as pets too get dehydrated. Be sure to manage intake since there will be no opportunity for pee breaks. Bring a pee-pad for emergencies to be used in the plane’s WC. It is highly unlikely that the animal will relieve itself in such an awkward setting, but if it is trained to go on command or it is clearly having trouble, this may be very helpful.
  • If you opt to medicate your dog, be sure to do a trial run well in advance of your departure so that you can mitigate any adverse reaction with the assistance of your vet.

Suzana Horta Greene is a dual US/PT national and flies frequently with her dog.

 

US Expats: Tax basics when living abroad

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Tax planning is an essential part of preparing to move abroad. You will continue to have reporting obligations and possible tax liabilities in the States based on your US nationality, in addition to the new requirements founded on fiscal residency in Portugal. As always, the IRS applies harsh penalties for non-compliance. The following is an overview of some of the basics for expats on federal and state taxes as well as estimated payments, penalties and interest. Fortunately, there is a bilateral tax treaty designed to protect you from double taxation. The accord can be used to mitigate or even eliminate assessment in the States while taking advantage of Portugal’s most favorable tax breaks,

Filing a Federal US Tax Return

All US citizens are required to complete an annual return when they live overseas. Other reporting requirements apply to US nationals as well, including FBAR (Foreign Bank and Financial Accounts) and FATCA (the Foreign Account Tax Compliance Act), that are triggered by meeting thresholds in foreign bank accounts and asset holdings.

Filing a State Tax Return

State income tax can also be a problem. Whether you need to file a state tax return depends on the last state where you lived. Some states have more complex residency rules than others, which means that these states may continue to consider you as a resident if in the state you own a property, possess a driver’s license, have bank accounts or an investment portfolio, are a registered voter, keep a mailing address, or have dependents who live in that state.

If you meet these criteria, you may need to submit a state tax return and pay state taxes even if you were absent during the fiscal year. Four of the more sticky states are California, New Mexico, South Carolina and Virginia. On the other hand, seven states charge no state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming.

Most of the other states only require a state tax return when you were actually present in that state during the tax year. If you were, income tax is only due on earnings within the state. Because of the variability in different state requirements, you should confirm your own individual circumstances.

Closing or moving bank accounts, selling a property or changing your driver’s license to another state be steps that can help to sever the ties in your former state of residence.

Estimated Tax Payments

The IRS requires taxpayers to make quarterly estimated tax payments if the following conditions apply:

  • You anticipate at least $1,000 in federal tax in the current tax year after federal withholding tax and refundable credits; and
  • Federal withholding tax and refundable credits do not reach 90% of your current tax liability or are less than the total tax you owed in the previous year.

If you must make estimated payments, the reporting schedule is as follows:

Payment Period                         Due Date

January 1 – March 31                April 15, 2019

April 1 – May 31                       June 17, 2019

June 1 – August 31                    September 16, 2019

September 1 – December 31      January 15, 2020

You will not have to make the 4th quarter payment if you file by January 31 and pay the outstanding balance with your tax return.

Penalties

Two types of sanctions can be charged against expats who fail to pay their estimated taxes: “failure-to-pay” and “failure-to-file”. Submitting your federal tax return after the extended deadline can lead to a punitive “failure-to-file” penalty: 5% each month on the unpaid balance.

This charge is ten times the “failure-to-pay” fine. However, penalties are not allowed to exceed 25% of your total tax bill. If you are unable to pay all your taxes when due, reporting by the deadline is always preferable.

The “failure-to-pay” penalty is less severe: 0.5% monthly of the unpaid balance. “Failure-to-pay” fines begin to accrue on the day after the assessment is due. If you owe both penalties in one month, the maximum cumulative penalty in any given month is capped at 5%.

On the positive side, taxpayers living abroad get an automatic two-month filing extension.  Nevertheless, keep in mind that a filing extension is not an extension on paying outstanding taxes.

 

Portuguese Residential Tourism deemed best in Europe

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Portuguese resorts are considered to be the best in Europe among 26 residential tourism developments in 9 countries. According to 54 criteria in 10 categories, Portuguese holiday retreats ranked nº 1. There are many forms of tourism: recreation and leisure, healthcare, curative spa, cultural, educational, social.

EU Blacklist: addressing external fiscal challenges

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The list of non-cooperative jurisdictions for tax purposes is a tool to tackle:

  • Tax fraud or evasion;
  • Illegal non-payment or underpayment of obligations;
  • Use of legal means to minimise tax liabilities and money laundering;
  • Concealment of origins of illegally obtained money.

The EU blacklists countries that encourage abusive tax practices that erode member states’ corporate tax revenues. Member states can act together to press for reform. The aim is not to “name and shame” countries but rather to encourage positive change in fiscal legislation and practices through cooperation. Once a jurisdiction is compliant, it can be removed from the European Union’s blacklist.