Guide to the Simplified IRS Regime in Portugal

1. Introduction

The simplified IRS regime in Portugal is a tax framework designed for self-employed individuals and small businesses with annual gross revenues up to €200,000. It is a simplified alternative to the organized accounting system, offering reduced administrative obligations and predetermined expense deductions.

2. Eligibility Criteria

To qualify for the simplified IRS regime, a taxpayer must:

Be a Portuguese tax resident.
Have annual gross income below €200,000.
Not be required to undergo an audit.
Not operate under a legal entity structure.

3. Tax Calculation Under the Simplified Regime

Under this regime, taxable income is calculated by applying a coefficient to the gross revenue, which varies according to the type of activity:

0.75 (75%) for professional services listed in the table annexed to Article 151 of the CIRS (e.g., lawyers, doctors, consultants).
0.35 (35%) for general service providers not included in the table.
0.15 (15%) for trade, manufacturing, and business activities related to sales.
0.95 (95%) for agricultural and forestry activities.

For example, if a consultant earns €50,000 per year, only 75% (€37,500) is subject to taxation, while 25% (€12,500) is automatically considered business expenses.

4. Mandatory Expense Justification

Professionals with a coefficient of 0.75 or 0.35 must justify business expenses amounting to at least 15% of gross revenue. If insufficient expenses are documented, the missing amount is added to taxable income.

Eligible expenses include:

Rent of office space.
Utilities such as electricity, water, and telecommunications.
Business-related travel and transport.
Professional insurance and membership fees.
Purchase of goods and services essential to the business.

5. VAT (IVA) Obligations

Self-employed individuals must determine their VAT status:

Exemption under Article 53 of the VAT Code: If annual revenue does not exceed €14,500 (in 2024) or €15,000 (in 2025).
Exemption under Article 9 of the VAT Code: For certain professions (e.g., medical, educational, and cultural services).
Standard VAT Regime: Requires issuing invoices with VAT and submitting periodic VAT returns (monthly or quarterly, depending on revenue volume).

6. IRS Withholding Tax (Retenção na Fonte)

Independent professionals may be required to withhold IRS on their invoices:

25% for professionals listed in Article 151 of the CIRS.
11.5% for other service providers.
Exempt if annual income is below €14,500.

Even if exempt, voluntarily withholding tax can prevent large tax bills at year-end.

7. Social Security (Segurança Social) Contributions

Self-employed individuals are subject to social security contributions at a rate of 21.4% of their “relevant income,” which is calculated as follows:

70% of service-based income.
20% of trade or manufacturing-based income.

Newly registered freelancers are exempt from contributions for the first 12 months.

8. IRS Declaration and Reporting

Annual IRS Return (Modelo 3): Must be submitted between April 1st and June 30th.
Required annexes:
- Annex B: For those in the simplified regime.
- Annex C: For those under organized accounting.
- Annex SS: Declares clients to Social Security for contribution assessment.

9. Changing from Simplified Regime to Organized Accounting

If annual gross income exceeds €200,000, or if the taxpayer voluntarily opts for it, switching to organized accounting requires hiring a certified accountant and maintaining detailed financial records.

10. Closing Activity

To cease activity, the self-employed must:

Submit a closure declaration through the Portuguese Tax Authority (Portal das Finanças).
Notify Social Security (automatic upon tax closure).
Settle outstanding tax and social security contributions.