# Self Employed Tax Calculation



## Muenchkin

Hi everyone!

I appreciate the helpful information I've found on these forums, but if possible, I'd like to ask for some simplified information.

First, I'm a 46-year old American working in Germany for an intellectual property firm as a Trademark Analyst (not an attorney). I've been here for over 6 years. My job could be done remotely, so I'm considering a move to Lisbon. This will require some convincing at my firm, so it doesn't sound frivolous and won't be too complicated for them.

I could possibly remain an employee, but I don't know how easy it would be for my firm to deal with the cross-border tax calculations. If that's not too complicated or more expensive for them, it may be the easier option.

For this post, however, I'm asking about self-employment.

Aside from some bureaucracy, nothing I've read implies that it would be difficult for me to obtain residency in Portugal, and if I can prove a reasonable income, I don't expect to have any work visa issues, either (don't think I need one to be self-employed anyway).

So, finally, my goal with this post is to have find a simplified answer to taxation in my situation. Let's start with the premise that I could have an exclusive contract with my current firm and use two income scenarios - EU 28.000/year and EU 34.000/year.

I'm assuming that my "employer" would not have any withholding tax responsibilities in this case and that their paperwork for me would be simply receiving and paying invoices (the equivalent to a monthly salary).

Could someone give me a basic calculation of taxation based on each of these amounts? For example (and I have no idea if this is even close to the way it would be calculated):

EU 34.000 - income from contract
- standard deduction (if there is one, what is it for this scenario?)
- social security payments (I assume this covers public health care) (what is the percentage in this scenario?)
* (progressive) tax rate OR special self-employment tax rate (what is it for this scenario)?
= Income tax
+ social security payments
= Total tax burden

EU 34.000 - income from contract
- Total tax burden
= Net income

Keep in mind, it would be helpful to actually have (nearly) exact percentages here. I can find the progressive tax rate tables online if they are applicable.

Also quite important is how VAT would reduce my income. If I have an exclusive contract for services to be provided to Germany, I am assuming I would have to deduct the VAT from my own income, or is there some other way of handling this? (I understand their may be a first-year grace period for VAT, but I have to take into account far into the future, so this is somewhat irrelevant for me.)

I'm also interested in knowing what other deductions might be possible, keeping in mind my work expenses would be minimal - probably a new computer/notebook at some point, an Internet connection (which would also be for personal use) and a small office area within my own apartment. Occasionally, I might have to fly back to Munich and stay for a couple of days, but I'm hoping that would be rare, as I doubt the tax advantages would offset the overall cost in any meaningful way.

Please know that I DO intend to talk to an attorney and/or tax professional, but before I start handing over more money, I want to try to defray the costs by being prepared, limiting their work to only what might be relevant to my situation, so I want to know if the BASIC numbers work out to something I would consider livable before I throw more money away.

Of course, as I said, I'm also open to remaining an employee (cross-border) if anyone has any insight on this being easy for my employer and financially more beneficial to me.

I know this was long, but it seems like this simplified information would be more helpful to a lot of people on this board than separate threads about self-employment, income tax, social security, VAT, etc.

Thanks!
David


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## Muenchkin

In response to my own post, it seems that the "tax holiday" for non-habitual residents may mean the possibility of living in Portugal while maintaining the status quo, i.e., being taxed (income, social security and healthcare) by my employer in Germany as though nothing has changed but my physical location. I've now read a better clarification of this in several places, but could anyone else attest to this? 

If this is the case, does anyone know what is meant by "ten years"? Does the law expire in 10 years or does the "tax holiday" apply to non-habitual residents for the first ten years in Portugal no matter when they arrive, even if it has already been 4,5 years since it was enacted (which could also mean it is not feasible to be taxed in such a way after the next 5,5 years)?


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## canoeman

Concession only applies for 10 years you then revert to "standard" tax system, will it be extended ?? would doubt it.
Not certain that your situation would be covered by this scheme, it is after all designed to bring specific types of people to Portugal although a few loopholes that are being used, you need advice from a major accountancy firm not a "local" one.

Think the 1st things you need to check out are
Residency Visa would you get one if employment is non Portuguese, not impossible but might be more difficult.
How German Tax & Social Securities would view situation and whether they would still deduct/charge you and /or would they credit Portugal with Social Security, the UK would but *not* if any work was done via internet.

Self employment in Portugal is quite expensive for S/S 1st year free, but that year is used as basis for future S/S payments, but it is declared on IRS.

Taxation by far the easiest scheme is the Simplified Scheme where your allowed a straight % against turnover, tourism related is 20% on turnover up to 150,000€ other areas slightly lower.
So if your turnover was 34,000€ you be taxed on 6,800€ (tourism related) less whatever personal allowances or other qualifying deductions you'd be entitled too.
If you opt for any other regime it generally require employing an accountant/bookkeeper as unlike a lot of countreies you cannot DIY 

VAT (IVA) thresholds are low in Portugal +9,975€ you must register, not sure whether your services would reguire registering but think so, and quite how the German connection would work?

*Overall you need some serious expert advice*, personally I'd check the German end first before tackling the Portuguese end


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## Muenchkin

canoeman said:


> Concession only applies for 10 years you then revert to "standard" tax system, will it be extended ?? would doubt it.
> Not certain that your situation would be covered by this scheme, it is after all designed to bring specific types of people to Portugal although a few loopholes that are being used, you need advice from a major accountancy firm not a "local" one.


Thanks for the reply, Canoeman.

I figured that VAT would be the biggest issue for taxation if I'm self-employed, considering that I could not raise my fees in this situation to account for it.

Regarding my eligibility for the "tax holiday", I've read several more specific articles that seem to say that same things. 

1) The German (or any other) government would only look at it as a job provided by a German company to an employee, as though the employee were in Germany. The income tax portion of withholding becomes "free money" to them, as the employee requires few or no services in Germany on a regular basis.

2) Portugal wants highly-skilled employees to help stimulate the future economy (who are less likely to take jobs from Portuguese citizens) *AND self-employed workers with foreign-source income because their income stimulates the current economy and, again, does not affect the unemployment rate among Portuguese citizens*.

3) The most recent clarifications of this law indicate that *the Portuguese government expects LESS of a burden on both the employee and self-employed to provide evidence of eligibility. *

The following is a quote from a web site "tax-news", but other organizations have also recently explained the law, eligibility and expectations in basically the same way:

"Portugal Partly Clarifies Expatriate Tax Concessions

by Ulrika Lomas, Tax-News, Brussels

14 August 2012

The Portuguese Revenue (IRS) issued on August 3rd a circular partly clarifying the situation of taxpayers applying for the special expatriate tax regime.

Back in 2009, Portugal implemented a special tax regime for expatriates living in Portugal, in the hope of attracting capital inflows. Individual taxpayers deemed to be “non-habitual residents” (residentes não habituais) could apply for the special regime if they were either High Net Worth Individuals (HNWIs) or “high value-added” employees *or self-employed individuals *[emphasis added], provided they had not been resident in Portugal for the five years preceding the application. The special expatriate regime involves a 10-year tax concession with a* flat tax rate of 20% on income sourced in Portugal and an exemption on foreign income while maintaining eligibility to tax treaty benefits*[emphasis added].

To qualify, however, the IRS initially required applicants to show documentation from a foreign tax authority confirming that they had been resident abroad, and that foreign-source income was “effectively taxed” in the source country, both during the years preceding residence in Portugal and during the years of residence in Portugal.

Tax advisers argued that these requirements were excessive, especially because they were not contained in the law.

With the newly published circular, the IRS clarified that it was* no longer necessary to prove previous residence in a foreign country*[emphasis added], thereby making the scheme available for 'perpetual travellers'. The IRS now requires only a declaration from the applicant, unless it has good reasons to believe this declaration is not correct. In that case, the IRS may request further evidence from the applicant.

While the case of HNWIs has not been clarified yet, *“high value-added” employees or self-employed taxpayers are now no longer required to prove effective taxation in their former country of residence prior to becoming resident in Portugal*[emphasis added]. Furthermore, they will be liable to a final 20% withholding tax while being resident in Portugal, and will no longer pay the regular rate of income tax, forced to claim refunds from the IRS afterwards, as has applied until now.

Nevertheless, the tax treatment of foreign income under the special expatriate regime remains unclear, and the IRS still requires it either to be effectively taxed abroad, or, in the case of pensions, to be paid from an overseas entity. It makes sense, however, for Portugal's tax policy to play on the uncertainty as it is pursuing the double objective of attracting foreign capital inflows while maintaining the country's credibility toward its treaty partners."

I will be in Lisbon next month. I hope to talk to someone there at the time.

David


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## canoeman

If you where taxed on a profit of 6,800€ under simplified scheme you might well find this cheaper after any other deductions your allowed than battling your way through the Non Habitual Residence scheme that would entail you employing an accountancy firm to represent you, just because scheme has been clarified in certain areas don't think for 1 minute that all Finanacas offices are aware or than any but the bigger accountants are either, vast majority will look at you blankly


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## Muenchkin

Hi Canoeman,

It seems to me that there is less accounting to be done under the "tax holiday" law than under self-employment, as a German employer takes care of the taxes (in Germany, it is not mandatory to submit a tax return for standard employment, though you can if you have additional deductions). In fact, while I've always appreciated caveats as a necessary heads-up, when I planned to stay in Germany, I was told the taxation would be confusing and possibly prohibitive, and the ability to find a job and retain residency was highly unlikely. 

After working for my American firm on a business trip in Germany for two years, I wanted to stay, so when the business trip ended, I applied for 6 jobs, got one call a week later, interviewed the next week, was hired the next week and started working as soon as I received my contract and my work visa was approved. At that point I feared the bureaucracy of work-related issues, health insurance, social security, etc. When I asked the Human Resources Department at my (small) firm what I had to do, they gave me one form, which I completed, and I was done. Nothing else. No problems. This with no German to speak of (no pun intended).

I have found Portuguese versions of the law online and, on the web sites of major accounting firms (e.g., KPMG) clarifications of it from its confused inception to more recent simplification.

I know that in most places government employees are government employees. Even in highly bureaucratic systems that want the letter of the law, employees often don't know it. But the proven tactic always used in the US (and frequently in Germany, from what I've heard) when dealing with bureaucrats is, if you get an answer you don't like from one person, move on to the next until you get the answer you want. It's a pain, but it usually works.

What I see as an advantage in this case is that Portugal, while being cautious before refining the clarifications, is actively promoting this program for financial stability. And it makes sense. No Portuguese citizens lose a job if there is a lack of highly-skilled labor or if the self-employed have income entirely form a foreign source that would not normally be available to a Portuguese citizen in the first place. To me, the best indicator of how effective they feel this plan may be is the additional provision that income earned in Portugal is also given preferential tax treatment.

But I do thank you for your comments. Sometimes caveats can turn into reality checks, and I'd like to be prepared for anything.

David


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## canoeman

Think the point you might be missing is that although these laws, amendments etc are all accessible on the web, unless you use one of the major accountancy firms like PWC, KPMG then you will find the scheme problematical to initially register for, do a search on here its come up a few times, plus you also have to deal with the Residency Visa which is a separate issue and not really part and parcel of the Non Habitual Scheme, the clue being in the name as although a qualifying Resident can register, its primary purpose was to attract Non Habitual Residents which means although they might own property here they don't necessarily spend sufficient time in Portugal to be a true Resident but are treated as Tax Residents for this scheme


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## Muenchkin

I will definitely seek professional assistance. Fortunately, my current employer is a division of a law firm, and for larger issues, my former employer is one of the top international firms, and I still have some friends in our Frankfurt office who may be able to help me find the right counsel, though I doubt that they themselves are particularly knowledgeable about the specifics in Portugal in this case.

My reading, however, was that it was to attract NEW people to Portugal, meaning those that don't already live there. My clue to this was in several articles that discuss bringing in new people with foreign-source income. I also took it from this translation of the code by an English-language newspaper in Portugal:

Decree-Law 249/2009, dated September 23, approved the Investment Tax Code, outlining several measures with the purpose of attracting foreign investment to Portugal. One of the measures was the creation of a favourable tax regime for non-residents’ income taxation.

*1. Attribution of non-habitual resident status*

*The non-habitual resident status can be attributed to:*

*(i) all non-residents wishing to establish permanent residence in Portugal *

(ii) non-residents who, being independent or dependent workers, or members of statutory legal entities, just want to establish a temporary residence in Portugal as a result of expatriation or labour secondment.

Requirements

• *to obtain that status you must acquire Portuguese residence, according to the criteria stated in article 16th of the IRS Code. This scheme is applied to those who gain residence in Portugal from the year 2009 onwards.*

• *the non-resident must not have been taxed in Portugal, as a resident, on any of the five years prior to the application of the scheme.*

Once attributed with the status of non-habitual resident, the taxpayer enjoys favourable taxation relating to income tax (IRS) for a period of 10 years, not necessarily consecutive, with the only requirement being that the criteria of residence is filed in line with article 16th of the IRS Code.

*2. Income covered *

The system includes two separate sets of rules: the income of non-habitual residents obtained in Portugal and the income obtained abroad (example: pensions).

These must be recognised in two categories: 

a) liabilities income, including interest, dividends, capital gains and other income on capital, income on property and pensions;

b) *income which corresponds to the income of dependent *and independent *labour* and royalties.

2.1. Liabilities income of foreign source

This type of income is progressively exempt from IRS, since it can be taxed at source in the state where the income is achieved and in accordance with the Convention for the Elimination of Double Taxation that has been agreed between Portugal and that State.

*The system only requires that such liabilities income may be taxed in the payment source state in accordance with the rules of a convention to eliminate double taxation, but does not require the effective taxation.*

2.2. Income of foreign source

Category A: income obtained abroad by non-habitual residents will be exempt of IRS (with progression) if it is actually taxed in the other contracting state in accordance with the convention for the elimination of double taxation signed between Portugal and that State.


I'm not too concerned about the residency issues. If there are any problems with granting it to me (which seems, for Americans, to only rely on the same basics it does in Germany - no criminal record, enough money to support yourself, 2 dreadful photos (the worst part!)), I can apply for permanent EU residency through Germany as soon as I can pass the language test. There are limitations, but generally that will allow me to move to most EU countries and take up residency fairly easily.


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## canoeman

But you have to read it in the light of the Finanacas definition of a Tax Resident

"Page 50-51 Who is liable for IRS, and definition of Tax Residence
Liable to IRS is any individual person who is a resident of the Portuguese territory, and any non resident individual who derives income therein.
In the case of a resident in the Portuguese territory, IRS is levied on the overall income, including income from outside that territory.
There shall be considered as resident in the Portuguese territory any person who, in the year to which the income relates:
• Stays there more than 183 days, with or without interruption;
• Having stayed there for less than 183 days, has at his own disposal on 31st
December of that year a dwelling place in such conditions that it may be inferred that there is the intention to keep and occupy it as an habitual abode; "


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## Muenchkin

I'm not sure how tax residency figures into my original questions in a significant way. The issues, in my understanding, are the "tax holiday" and my obtaining my right to live there. As far as the tax situation is concerned, whether there is a requirement to file or not within a certain amount of time and whether or not I've exceed 183 and/or have a permanent abode in Portugal, the plan indicates that my actual tax burden is payable to Germany and it is the German government's responsibility to collect it. As for my right to live there, most of what I read implies that a permanent abode, no criminal record and sufficient funds are the main requirements to establish residency. Should it be more complicated than that, I simply take the German test and get my permanent EU residency, which will allow me to move to Portugal anyway.

I do appreciate your concerns, but I think we will continue to go around in circles here. Through my office I have regular contact to with two intellectual property law firms in Lisbon, so it may be better to seek their advice/connections on whom I should contact.

Best,
David


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