Royalties – the temporary or permanent transfer of intellectual or industrial rights – are considered to be part of Category B (independent business activities) when made by the originator, or in Category G when transferred by a third party. When in Category B, no prior registration is required unlike other forms of business activities. However, as “intellectual workers”, they have the same Social Security obligations as other sole traders.
Royalties paid directly to the author
a) Paid in Portugal
Royalties paid in Portugal are subject to a 16.5% withholding tax.
b) Paid from Abroad
If royalties are paid from abroad, Double Tax Convention rules may apply. If so, tax withheld at source will be considered up to the percentage defined in the respective treaty and will be eligible for an international tax credit in Portugal. Any additional balance withheld should be refunded by the source country.
Assessment of royalties
For resident taxpayers who are the original authors, the first €10,000 of royalties are entitled to an exclusion of 50%. Under the Simplified Regime (when income falls below €200,000), the balance is then reported allowing for a further 25% exemption. Withholding for residents is at 16.5%. Alternatively, this income is added to other sources to determine the final tax rate. When reporting royalty income from abroad (Anexo J), it is not necessary to register the activity. Non-residents currently pay a flat rate withholding of 25% on Portuguese-sourced royalties.
Royalties paid to a third party
If royalties were originally bought from the author and now received by a third party, the full income is taxable with no exclusions. If withholding takes place, it will be at the rate of 16.5% for residents and 25% for non-residents as a final payment.
Sale of royalties
The sale of royalties is taxed in Category G (Capital Gains). The full gain is taxable at 16.5% to residents and 25% to non-residents.
Question: I know I must report royalties as business income. Do I need to register as a business activity?
euroFINESCO: No. While reported on Annex B as business income, no prior registration is required nor will this income trigger mandatory Social Security contributions in Portugal.
Question: Tax is deducted at source on my royalties from abroad. Am I entitled to an international tax credit?
euroFINESCO: Portugal should grant a tax credit up to the limit as defined in the appropriate Double Tax Treaty.
This is the final article of a seven-part series on the self employed in Portugal
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.