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Sole traders in IRS – Category B || Part 1

This is the first in a seven-part series on the self-employed in Portugal

Whether by choice, for profit or pleasure or the need to find other forms of supplementary income, the truth is that there are many people who choose to be sole traders as a way to make a living. Currently, more than 21% of Portuguese workers are self-employed, a percentage that places Portugal with the highest level of self-employment in the EU.

Sole trader business activities
All independent business activities fall under Category B including:
▪ Services;
▪ Literary rights (royalties);
▪ Commercial and industrial activities (including sales, construction, manufacturing, property development, property management, handicrafts, travel and touristic activities including Local Lodging.);
▪ Agriculture and hunting;
▪ Research and development;
▪ Income also includes proceeds from capital gains, severance agreements, and subsidies associated with a business activity.

The simplified regime
Rather than the traditional method of assessing tax according to net profit (income less expenses), the Simplified Regime defines taxable income as a fixed percentage of invoiced income. When gross turnover is less than €200,000, the taxable income is as follows:
▪ Sales of merchandise and products X 15%
▪ Tourist activities X 15%
▪ Billings for services and others X 75%
▪ Vocational activities X 35%
▪ Royalties X 95%
▪ Non business related subsidies X 30%
▪ Business related subsidies and other income in category B X 10%
▪ Income taxed under fiscal transparency X 100%

On a one time basis, one may surpass the €200,000 threshold by as much as 25%. However, if repeated or by more than 25%, one falls into Standard Accounting (Contabilidade Organizada) in the following tax year. A Change in Business Activity Form (Alteração de Actividade) to this effect must be filed. Those in sales and in tourist activities continue to enjoy a reduction in taxable income of 85% in 2015. Non-residents are levied a flat 25% (3.75% of turnover).

Standard accounting
Those with gross business income exceeding €200,000 pass into Standard Accounting. Tax is calculated on the net profit: the difference between income and allowable expenses. A registered accountant (Técnico Oficial de Contas, or TOC) is required to meet fiscal compliance obligations.

By Dennis Swing Greene
|| [email protected]

Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.