British operators anticipate up to a 600% increase in reservations for the Algarve and Madeira. During the upcoming summer tourist season, Turismo de Portugal expects to resume 700 weekly air routes with the United Kingdom that existed before the spread of Covid19. In the Algarve, Easyjet announced another 175 thousand seats for the coming months. British Airways is proposing new routes to Newcastle, Manchester and Edinburgh in addition to online agencies that are growing bookings in triple digits since the UK announcement.
Whether for profit or pleasure, the truth is that there are many people who choose to be sole traders as a way to make a living. More than one out of five Portuguese workers are self-employed, a percentage that places Portugal within the highest level of entrepreneurs in the EU. For a person to operate as a sole trader, there are some preliminary requirements that must be met with Tax Authority and Social Security Administration before starting up a business operation.
Opening a business activity
If you want to do business as a sole trader, the first step is to communicate your intentions to the Tax Authorities (“A.T.”), even before you launch your business. This is done by registering the Opening of Business Activity Declaration (“Declaração de Início de Actividade”). This step can be done in person at a Finanças office or in a Citizens’ Centre (“Loja de Cidadão”). In these cases, a civil servant guides you through the process to complete the necessary forms and enroll you directly into the system.
Taxpayers should also choose between being assessed in the Simplified Regime or under Standard Accounting procedures. Portuguese tax residents can also open their business activity on the Internet through the Finanças website. To submit a declaration, you must first have a Portuguese Tax Identification Number (“NIF”)as well as your Finanças password (“senha”). Proceed as follows:
Home ➾ Services ➾ Submit ➾ Activity Declarations ➾ Opening of Business Activity
An important note: Once you have completed these steps, you can start your business or professional activity after receiving confirmation by post in the form of a “dependability code” that will be sent to your registered address.
Another important point: If you intend to perform a one-off “Isolated Act” rather than exercise an on-going business activity, you are excused from the requirement of submitting an Opening of Business Activity Declaration.
Registration for Social Security happens automatically and does not require you to complete any additional forms. If this is your initial registration, you are eligible for a first year exemption from Social Security contributions. Likewise, until your taxable sole trader income surpasses €2,515.32, you will also be exempt. In situations where you accumulate an independent business activity with salaried work or are in receipt a Social Security Old Age pension, you are also excused from Social Security contributions. Standard contributions for Sole traders are at the rate of 29.6%.
Closing your business activity
It is not at all uncommon for sole traders to cease their business activity yet fail to notify the Tax Authority of the fact. It should not come as a surprise that as far as Finanças is concerned, the activity remains open until reported closed. To wind up your self employment, you should go to an “AT” office, a Citizens’ Centre or to the Finanças website. To close your activity online, proceed to the “AT” website and go though the following steps:
Home ➾ Services ➾ Submit ➾ Activity Declarations ➾ Closing a Business Activity
On your next IRS tax return, you must refer to the cessation of activity in Annex B. As happens with the opening of a sole trader activity, the cessation will be reported automatically to Social Security by Finanças and no further declaration is necessary on your part. Failure to close your business with result in ongoing assessment based on previous activity.
Those who are contemplating taking on Portuguese citizenship often wish to retain their nationality of origin. Fortunately, Portugal recognises and permits dual nationality. There can be a variety of reasons for taking on Portuguese citizenship:
- Lifelong access to state healthcare;
- For British nationals, certainty regarding their status in the EU after “Brexit”;
- The ability to move freely around Europe and enjoy the benefits of being an EU citizen;
- Being able to vote in national elections.
Any foreign citizen aged 18 or over may apply for naturalisation once having formally resided for six or more years in the country. As EU nationals, this requires having held temporary residency in Portugal for a period of 5 years, then taking permanent residency through the local SEF office (Serviço de Estrangeiros e Fronteiras).
Central to the naturalisation process is a notarised and translated copy of the Birth Certificate issued in the country of origin.
A criminal record certificate, translated and apostilled, is also required from Portugal, from the country of origin and from any other country of residence. In Portugal, the certificate is issued at the local Tribunal. For UK nationals, application can be made online:
Then choose the ‘Police Certificates’ tab.
Citizenship application is handled by the IRN (Instituto dos Registos e do Notariado) through the local Conservatória. Depending on the nature of one’s situation, there are appropriate forms available in Portuguese only on the IRN website:
Applicants must pass a Portuguese language proficiencytest, known as CIPLE – A2, except for those who have been married to a Portuguese national for more than 3 years.
Application for the test should be made online at least one month in advance. To help prepare, there is a book of model tests available from the following link:
CIPLE measures the basic ability to interact in a limited number of predictable daily communication situations. The exam consists of three parts:
- Reading comprehension and written interactions
- Oral comprehension
- Oral production and interactions
Citizenship by marriage
If married to a Portuguese national, citizenship may be obtained after 3 years of residency. In this case, the language test is usually waived.
If you are in a cohabiting relationship with a Portuguese citizen but not married (commonly referred to as “união de facto”), it is still possible to obtain Portuguese citizenship once the union has been officially recognised. While there is no formal process for registration for cohabiting couples, the status must still be proven. The couple should request a declaration from the local parish council, stating that they have lived together for at least two years. Two local witnesses are necessary. Translated copies of the birth certificate will also be necessary. In this case, no minimum required period of residency exists prior to applying for citizenship. However, authorities may require a Portuguese language proficiencytest as well as documented links which demonstrate integration into Portuguese society.
All foreign language documents should be translated into Portuguese and certified. Once all of the paperwork has been assembled and checked, application should be hand delivered or sent by post via registered mail to:
Conservatória dos Registos Centrais
Rua Rodrigo da Fonseca, 200 1099-003 Lisboa
or visit the local “Conservatórias do Registo Civil”. The process usually takes around 3-6 months.
When assessing Company profits, taxation occurs in a two-stage process: first, the Company pays Corporate Income Tax on its profits, then Shareholders pay Individual Income Tax on these distributed profits (now called dividends). This assessment procedure is called “economic” double taxation. Almost all countries in the EU have adopted one of several methods to eliminate “economic” double taxation-some via the Company, some via the Individual. Regardless of the method, the end result should be the same: dividends reported by the Individual should be after the elimination of any “economic” double taxation.Continue reading
The imposition of IMI and IMT for companies directly or indirectly based in so-called tax havens, approved in the State Budget, does not distinguish between the jurisdictions with which Portugal has double taxation (ADT) and information exchange (ATI) agreements from those in which complete opacity prevails in capital movements. Sovereign funds and other investors from Oman, the United Arab Emirates or Qatar as well as investors based in Hong Kong – all included in the list of tax havens but with ADT with Portugal – will be some of the hardest hit. The same happens with the Cayman Islands, Jersey, Guernsey, Isle of Mann or Panama, where the funds are established, which aggregate a large part of institutional investors worldwide.
Even in the year of the pandemic, many British nationals continue to seek out Portugal as a popular destination. The UK government has multiplied notices to UK citizens who reside in Portugal to have their documentation in order by 31 December. Currently, there are more than 50,000 British nationals residing in Portugal, ranking Portugal in sixth place behind Spain, Ireland, France, Germany and Italy. Official data in 2019 from the Portuguese Immigration and Borders Service (SEF) indicated there were 34,358 UK citizens officially residents in Portugal. SEF officials explain that from January to October 2020, a further 6,469 new Residency Permits were issued to UK nationals for a total of 40,827 current residents. Since 2016, the year of the Brexit referendum, 19,384 Britons registered in Portugal. Up until last October, the increase reached 111%.
The British embassy in Lisbon recognises that there are, in fact, many more Britons living in Portugal than the official figures would indicate. By the end of the year, many more are expected to register officially with SEF. What is certain is that now all will have to deal with the new bureaucracy necessary to remain in the country in January 2021 and beyond. At this point, the embassy also does not have definitive record of the number of British nationals who have already completed all the necessary steps.
At the top of the concerns of the British in Portugal are upcoming changes. One of the reasons for the aggressive advertising campaign to ask British citizens to take care of all necessary documentation is also due to Portuguese bureaucracy. There may be delays in scheduling services as well as problems in accessing services due to the pandemic. The embassy clarifies that Portugal does not oblige UK nationals to apply for a new residency status according to the current agreement. However, as there are many who are still unregistered, it is important that everyone needs to become compliant to protect their rights after the transition period at the end of December. In October, the embassy, in partnership with SEF, launched a joint campaign asking the British living in Portugal to register where they reside by the end of the year.
You can drive in Portugal with a UK driving licence until it expires. You must register your address in Portugal with IMT services within 60 days of settling in Portugal. The IMT online (Instituto da Mobilidade e dos Transportes – IMT) allows for the exchange of a UK licence for a Portuguese one. Even if you are unable to affect the exchange immediately, British citizens have 90 days after 1 January, so no road test should be necessary.
Another concern is access to the Portuguese National Health System. Coverage may be dependent on your residency status. If British nationals are registered as residents in Portugal, they should have full access to the Portuguese National Health Service (Serviço Nacional de Saúde, SNS).
British embassies are no longer involved if a passport expires. Renewal is now carried out online. The embassy warns that British citizens living in Portugal that they must have a valid passport after 1 January 2021.
The British Government has posted a dedicated website called “Living in Portugal” (gov.uk/livinginportugal or sef.pt/en). The embassy indicates that the Portuguese Government is responsible for implementing the Exit Agreement. British citizens are accountable for ensuring that they have their documentation in order before the end of the transition period.
The proposed 2021 state budget, fashioned with strong socialist leanings, has been delivered to the National Assembly for debate and approval before the end of 2020. After three months of negotiations between political parties on the Left, the document focuses on strengthening support for the unemployed, single-parent families, the self-employed and informal domestic workers. In other words, the upcoming budget will focus on the groups hardest hit by the Covit-19 pandemic.
Among several measures meeting the left wing coalition demands, the Government has decided to writeoff old debts to Social Security and recover furloughed railway workers. In addition, the government promises to hire 3,000 non-teaching assistants for schools. Here is an initial preview of some of the key points in the State Budget for 2021.
Social support: facing the pandemic
New extraordinary social support measures are expected to confront the drop in household income. It will be a benefit that will cover employees and domestic workers for one year and sole traders for six months.
Social Security: Farewell to 20-year-old debts
The oldest and smallest debts to Social Security may be forgiven starting next year. If passed, the Government is authorized to forgive amounts when there is a debt for contributions and benefits that are 20 years old or more or that are less than €50 and more than 10 years old.
Unemployment: Benefit to €505
The reference value of installments is €501.16 and the minimum amount is €50. The lower limit for unemployment benefits will increase from the current €438.81 to €505. It is also foreseen that public daycare centres will be free of charge for students in the 2nd income bracket.
Health: Repeated hiring
The Government announced the plan to recruit 4,200 professionals for the National Health Service (SNS). By the end of the first quarter of 2021, the needs for medical professionals will be assessed to determine who may benefit from a risk subsidy of €219.40 payable every other month. Also there will be an investment of €90 million for the sector to improve facilities and equipment in health centres and family health units.
School support staffing
The Government pledges to hire 3,000 professionals, promising a revision of the criteria for calculating non-teaching staffing in schools.
Security forces: €10 million allocated to housing for police
The Government intends to guarantee basic living conditions for police and other security forces who are displaced by their job placement. The plan is to launch an investments of €10 million in housing for police in 2021.
Tourism: Credits for those who spend in hotels
According to the proposal, visitors will accumulate credits during one quarter, amounting to the total VAT incurred in consumption in the sectors of hospitality, culture and restaurants. Subsequently, holiday makers can use this value during the following quarter in consumption in those same sectors.
The Banco de Portugal wants companies and shops to accept at least one form of electronic payment in addition to cash. With cash increasingly in decline, the covid-19 pandemic has only accelerated the digitalization of transactions, thereby increasing online consumption and the use of contactless payments.
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.
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.
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.