Digital nomads and expats in Madeira have been on the rise, the Island’s unique lifestyle and system of tax incentives being the two main driving forces behind the success program launched by the Madeira Regional Government.
Currently, the Island offers a combination of residency, personal and corporate tax incentives to digital nomads and expats in Madeira willing to relocate effectively.
Personal Income Tax Incentives
Whether employed or self-employed, digital nomads and expats in Madeira can benefit from the NHR program.
When taxing individuals who take up residency in Madeira on their worldwide income earned outside of the country, a unique system known as the NHR scheme is in effect. Anyone planning on making Portugal their permanent home can take advantage of this program. Those who meet the requirements of the Non-Habitual Resident (NHR) regime are treated as residents of Portugal for tax purposes. However, they are subject to a lower tax rate or a complete exemption depending on the income earned. In addition, special conditions apply to self-employed/freelancer individuals.
When granted, NHR status is effective for a term of 10 straight years that cannot be renewed unless the taxpayer is a non-resident for tax purposes for at least five years before reapplying to the scheme.
New rules for freelancers in Portugal and Madeira
Freelancers (or digital nomads) wishing to relocate for an extended period of more than 183 days may be liable to Portuguese personal income tax on their worldwide income. Exploring the Non-Habitual Tax Resident (NHR) route may be an option that one should consider if one intends to be freelancing in Madeira.
Under the NHR scheme, foreign-sourced income is exempt from personal income tax in Portugal, provided some requirements are met under the scheme’s rules. In addition, Portuguese-sourced income may be subject to a flat tax of 20% if the activity carried out by the digital nomad is deemed as a high-added-value activity (software engineers fall under this category).
Under Portuguese tax law, freelancing 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 might be progressive (up to 48%) or flat at 20% (under NHR scheme conditions).
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 will be 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 part not exceeding 10% of the gross income received).
- Staff expenses, wages, or salaries were 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 communicated 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-Community 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, exceeding 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 in the 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 (5.765,16 euros, value in 2020), i.e. maximum contributions per month are 21.4%x(12 IAS) = EUR 1.233,74.
As a freelancer or self-employed person, it is essential to note that 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 to which they refer.
VAT in Portugal is payable by all businesses with a turnover in excess of €13,500 on taxable services. VAT is payable to the Portuguese Tax Authority seven days after the reporting deadline periods, either quarterly or monthly.
Last but not least, please note that invoices related to your freelancing activity must be issued through a Portuguese Ministry of Finance approved invoicing software.
Corporate Income Tax Incentives
Companies in Portugal may be subject to different corporation tax rates depending on where in Portugal they are based and registered. The Autonomous Region of Madeira has always been the most tax-friendly region in Portugal for business and investment, making it a perfect location to keep pursuing their business.
In addition, those providing international services can also benefit from incorporating their business within the Madeira International Business Centre (MIBC), which currently offers a 5% corporate tax rate on the taxable income derived from business conducted with non-Portuguese entities, provided economic substance requirements are met.
Those relocating to Madeira island that do not hold an EU/EEA, Swiss or Andorran nationality may benefit from the different types of visa set in place by the Portuguese Government, such as the digital nomad visa or the passive income visa.
This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind. Should you have any questions, please do not hesitate to contact us.