This article, “Digital Nomad Taxes Portugal”, delves into the home office matter. First and foremost, defining the term “digital nomads” is essential. It is generally accepted that a digital nomad takes advantage of the technological means available to carry out their work activities, whether as an employee of a given enterprise or as an independent (freelancer).
Even though this way of life and work has become increasingly popular over the past few years, many enterprises are concerned about having workers in this situation. They may be deemed to have a permanent establishment in another state through their worker’s activity and, therefore, incur tax obligations.
Now, a digital nomad, in the above-stated situation, could potentially create a situation of permanent establishment for the enterprise he conducts activities for in one of two ways:
Either by this worker’s home office being deemed a fixed place of business that is considered to be at “the disposal of the enterprise” or through the particular activities carried out by the remote worker.
When a digital nomad’s home office is considered to be “at the disposal of the enterprise”, therefore creating a situation of permanent establishment:
For the above to be verified, the following criteria must be met:
- The employer must ensure expenses comply with management and control where the worker carries out his professional activity (rent, internet, telephone, paper costs, etc.).
- Worker’s tasks are performed from their home office with regularity over a certain period;
- The contract stipulates that the enterprise must be the one who provides the home office;
- The tasks that the worker performs must be strictly commercial;
- It must not be the enterprise’s preference that the worker perform his professional activities from his home office;
- The absence of access limitations for the enterprise to the worker’s home.
In cases where a remote worker carries out the majority of his work activities in one state and not from the office made available to him in another state, the home office will not be “at the disposal” of the company, given that the company does not require that the home office be used for its commercial activities and in case the enterprise provides no other physical space for the worker to carry out his activity.
Where, independently of whether the home office is considered to be “at the disposal of the enterprise”, the nature of the digital nomad’s activities on behalf of the company creates a situation of permanent establishment:
A company could also be deemed to have a permanent establishment in another state through the nature of the activities performed by a worker in that state.
For that to happen, all of the following conditions must be met:
- A person must be acting in another state on behalf of an enterprise and
- In doing so, that person habitually concludes contracts or habitually a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise and
- These contracts are either in the company’s name or for the transfer of ownership of, or the granting of the right to use, property owned by that enterprise or that that enterprise has the right to use or for the provision of services by that enterprise.
As such, even though an enterprise may not have a fixed place of business in a specific state, persons whose activities may create a permanent establishment for the enterprise are those who, whether or not they are employees of the enterprise, act on its behalf and are not doing so in the course of carrying on a business as an independent agent.
In conclusion, enterprises and their digital nomad workers must be very wary of situations in which the permanent establishment of an enterprise could be established in different states. The circumstances of each case need to be carefully studied and reviewed to safeguard enterprises from incurring situations where they are considered to be making revenue in a different state, therefore incurring extra tax obligations.
Digital nomad – Portugal Taxes
Most digital nomads in Portugal will be engaged in freelancing, which entails the income from a commercial, industrial, or agricultural activity and income from a sole trader (including scientific, artistic, or technical services) or from intellectual rights (when earned by the original owner) may be taxed either under a simplified regime or based on the taxpayer’s organized accounts.
The simplified regime will apply only to freelancing taxpayers who, not having opted for organized accounts, have a turnover or a gross business and professional income lower than EUR 200,000 (for 2020) in the previous year. Under this simplified regime, the above income is taxed on 75% of income arising from business and professional services listed in the table referred to in Article 151 of the PIT Code. As an incentive for taxpayers joining the simplified regime, the coefficient of 75% is reduced by 50% and 25% in the tax period of the beginning of activity and in the following one. The applicable personal income tax rate is progressive (up to 48%).
The income ‘deduction’ arising from applying the coefficient of 75% is partially conditioned by verifying expenses and charges effectively incurred and related to the activity.
Therefore, to the taxable income determined by applying the coefficients added the positive difference between 15% of the gross income and the sum of the following amounts (EUR 27.360):
- EUR 4,104 or, when higher, the total amount of mandatory social security contributions (in the part not exceeding 10% of the gross income received).
- Staff expenses, wages, or salaries are communicated to the Portuguese tax authorities.
- Property rentals allocated to the professional activity communicated through the issue of an electronic receipt or a specific statement, whose invoices and other documents are transmitted to the Portuguese tax authorities (if only partially assigned to the professional activity, it is considered only 25% of the total amount).
- 1.5% of the tax registration value of the properties assigned to the business or professional activity or 4% of the tax registration value of properties assigned to the hotel or letting activities (if only partially assigned to the professional activity, it is considered only 25% of the total amount).
- Other expenses with the acquisition of goods and services related to the activity, duly communicated to Portuguese tax authorities, namely expenses with current consumption materials, electricity, water, transports and communications, rents, litigation, insurance, leasing rents, mandatory fees paid to professional associations and other organizations representing professional activities to which the taxpayer belongs, travels and stays of the taxpayer and one’s employees (if only partially assigned to the activity, it is considered only 25% of the total amount).
- Imports and intra-EU acquisitions of goods and services related to the activity.
In addition to the amount of the above deduction, the amount of mandatory social security contributions paid to exceed 10% of gross income and related to such professional activities may also be deducted from the self-employment income if not deducted for other purposes.
The contributions rate applicable to self-employees corresponds to 21.4%. The monthly contribution basis for self-employees corresponds to 1/3 of the relevant remuneration determined in each reporting period and produces effects in that month and the following two months. To determine the relevant remuneration of the self-employed, the income received three months before the reporting month is considered. The relevant remuneration corresponds to 70% of the amount of services rendered. The contribution base considered for each month has a maximum limit of 12 times the value of the IAS (5,7654.16 euros, value in 2020), i.e. maximum contributions per month are 21.4%x(12 IAS) = EUR 13073.78.
As a freelancer or self-employed person, you will be exempt from making Social Security payments for the first 12 months from the start of your activity. Social Security contributions must be paid between the 10th and the 20th of the month following the month they refer.
VAT is payable by all businesses with a turnover over €13,500 on taxable services, and a digital nomad in Portugal may not be immediately exempt from it. VAT is payable to the Portuguese Tax Authority, quarterly or monthly, seven days after the reporting deadline.
Lastly, please note that invoices for your freelancing activity must be issued through Portuguese Ministry of Finance-approved invoicing software.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered legal or tax advice. Please consult a qualified professional for specific guidance tailored to your circumstances.
Rosana Rodrigues is a co-founder and partner of TFRA Law Firm. Her work mainly involves advising foreign investors in Portugal, particularly in areas of Corporate and Tax law. She has also worked extensively in Shipping law… Read more
