The Simplified Regime
The Simplified Regime in Category B (Self Employment) has had massive adherence by sole traders over the years. Currently, 99% of sole traders in Portugal pay their IRS through this scheme, while for companies, less than 10% have adhered.
The Simplified Regime offers sole traders a simple, cost-effective alternative to the traditional profit/loss method of accounting (contabilidade organizada). With assessment based on a fixed percentage of gross invoices, small independent businesses simplify record keeping, reduce taxes and increase productivity. Individual entrepreneurs whose annual turnover does not exceed €200,000 in 2014 (formerly €150,000 in 2013, and €100,000 at inception) qualify for the Simplified Regime.
Filing your Income Tax Return
After completing your first year of business, it will be time to settle your tax on income with Finanças. The fiscal year in Portugal corresponds to the calendar year. Business activities fall into Category B and are reported on “Anexo B” in the second internet filing period in May. For Residents, net local lodging invoicing is added to other sources of income, such as pensions, dividends, etc. Tax is calculated at marginal rates (14.5% – 48%).
Non-Residents are assessed at a flat rate of 25%. Although expenses do not normally enter into these calculations, you may need to keep expense records for reporting VAT.
Starting in your third year of operation, you will need to pay estimated taxes in three instalments. These Payments on Account are made in July, September and November with the final balance settled through the annual Income Tax declaration (IRS).
As the following chart illustrates, the Simplified Regime is not quite so simple any more. Formerly with just two categories, the scheme has recently expanded to five.
Under this method of assessment, taxpayers do not deduct professional and business expenses against their annual income. Instead, taxable income is calculated by applying the coefficients to gross turnover as shown on the table.
In 2014, the key innovation is in Service Activities with the new distinction for “Other Activities in Category B”. Art. 151º liberal professions (profissões liberais) – professions usually requiring advanced degree qualifications as opposed to vocational careers in non-academic skills and technical trades – continue with an exclusion limited to 25%. However, vocational services are allowed to exclude 90% of their invoiced income. This means that final taxable income is just 10% of turnover.
For example, property managers who coordinate various support services for property owners now qualify for this 90% exclusion on their fees.
A €30,000 annual income pays less than €225 in IRS, a final tax rate of less than 1%. Compared to previous practices, the same income when reported as service income in 2013 would have paid over €6,300 in tax, based on the prevailing 75% coefficient. That’s a 28-fold difference!
Those in Local Lodging tourist activities also enjoy a substantial reduction in 2014 – albeit a bit less spectacular – with taxable income dropping to 15% from 20% last year.
Resident owners engaged in Local Lodging were taxed on one fifth of their invoices in 2013. Based on an income of €20,000, they would have paid €365. Now, with the coefficient decreasing to 15%, taxation on the same income falls to €220, a 40% reduction or just over 1% of total turnover.
Non-residents are levied a flat tax of 25% (or 3.75% of turnover).
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.