Regime Simplificado vs. Regime Organizado for Freelancers

Portugal is a representative democracy of the European Union, and a particularly attractive country for freelancers, expats, small business owners, and ambitious entrepreneurs. But, as a sovereign power, Portugal also expects anyone working in the country to pay taxes.

Luckily, there's more than one way of doing it. For example, choosing between a Simplified Regime and an Organized or General Regime can help workers save a significant portion of their income once the fiscal year is over. But what are the differences between these two regimes? And which one suits your activities the most?

This article isn't just for freelancers, but also for people operating their own small businesses in Portugal. In sum, it matters to anyone looking to start fiscal activity in the country, but who's still a little bit confused about how the Simplified and Organized tax regimes work.

So, are you ready to clear things up?

What is the Simplified Regime (Regime Simplificado)?

The Simplified Regime is a much simpler alternative to the General Regime, as the personal income tax is calculated automatically. Such is possible because the Portuguese Tax Authorities assume that the income subject had no losses in his annual gross income. In other words, expenses are never higher than the taxable income.

Due to its lack of complexity, the Simplified Regime is not only easier to navigate but also cheaper, as tax residents are not required to hire the services of a professional accountant. Their self-employment income is taxed at a flat rate because it's assumed that their monthly income and expenses are always the same.

In Simplified tax regimes, the deduction of expenses doesn't change from month to month, even if you happen to have more expenses in one month than the other. In addition, the tax regime isn't available for tax residents who earn more than €200,000 annually.

What is the Organized Regime (Regime Organizado)?

The Organized Regime or Regime Organizado is a tax regime that's mandatory for Portuguese tax residents with an annual gross income higher than €200,000. For freelancers and self-proprietors with a self-employment income lower than €200,000, the Organized Regime isn't mandatory but remains an option.

In the Organized Regime, personal income tax is not stable because the difference between professional income and expenses is calculated every month by a certified accountant. Due to its complexity, tax residents falling under the Organized Regime are legally required to hire professional accounting services.

Organized tax regimes don't assume that the difference between professional income and expenses is the same month after month, meaning that the percentage of monthly expenses is accurately divulged to the Portuguese Tax Authorities.

Simplified Regime vs. Organized Regime

The main difference between the Simplified and Organized Regime is the way income and expenses are calculated. In the Simplified Regime, the income-expenses ratio is assumed to be the same every month. In the Organized Regime, such a ratio must be communicated to the relevant authorities every time with the help of a certified accountant.

Let's look at a practical example:

• João is a freelancer who earns €5,000 per month (€60,000 annually).

• In the Simplified Regime, João is taxed at a flat rate of 70% income and 30% expenses and can do his taxes on his own.

• In the Organized Regime, the difference between income and expenses changes from month to month to reflect the real difference between João's income and expenses, and João needs to pay for the services of a certified accountant.

• Should João continue to fall under the Simplified Regime, or opt for a new tax regime?

The answer depends on how many professional expenses João has every month, and on whether it's profitable for him or not to pay for an accountant when changing to the Organized Regime.

Pros and Cons of the Simplified Regime

Pros:

• Personal income tax is calculated at a flat monthly rate, meaning that tax residents will always know beforehand how much they will pay.

• Taxpayers can easily do their taxes without paying for a certified accountant.

Cons:

• In case monthly expenses are higher than the expenses predicted in the flat rate, taxpayers may end up being unfairly taxed.

• In the Simplified Regime, it's simply assumed that workers don't suffer monthly losses—they always make money, even when they don't.

Pros and Cons of the Organized Regime

Pros:

• Since the difference between income and expenses is communicated to the authorities every single time, taxable income is more accurately reflected.

• Such income isn't stable, but it can be much lower in months in which (for example) the expenses have been higher than the income, which benefits taxpayers.

Cons:

• Due to the complexity of Organized Regimes, taxpayers are required to hire the services of a professional accountant.

• In case workers have an amazingly profitable month, their personal income tax will be correspondingly higher, which wouldn't be the case with the Simplified Regime.

• It's mandatory for taxpayers earning more than €200,000 in a fiscal year.

How to Open Activity in Portugal

Now that you know the difference between the Simplified and Organized regimes, it's time to open activity in Portugal. This is a crucial step to pay taxes in the country, as it qualifies you as a tax resident in the face of the Portuguese Tax Authorities.

To start activity under the Simplified Regime, you will only need an ID document (Cartão de Cidadão) and a Portuguese tax number. For the Organized Regime, you will also need to have a certified accountant, which is known as a Técnico Oficial de Contas in Portugal.

You can do so online and in person:

• Online: Visit the Portal das Finanças website, select "Cidadãos - Serviço - Atividade" and submit the "Declaração de Início de Atividade."

• In Person: Visit the nearest physical location and follow the instructions provided.

Simplified or Organized? The Bottom Line

The Simplified Regime has a narrower scope than the Organized or General Regime, but it does pay off if you're making less than €200,000 annually and running a business in which the difference between income and expenses tends to be stable month after month.

On the other hand, companies making tons of money and looking to save on taxes through their deductible expenses should consider the Organized Regime even if such implies paying for the services of a professional accountant.

Frequently Asked Questions (FAQ)

To whom is the Portuguese Simplified Regime applicable?

The Simplified Regime applies to all freelancers and self-proprietors earning less than €200,000 per fiscal year.

What are the requirements of the Organized/General Regime?

In Portugal, you're obliged to pay for the services of a professional accountant to fall under the Organized Regime.

Do I need to have a permanent establishment in Portugal to be taxed?

In Portugal, as in many other countries, the existence of a permanent establishment can trigger taxation on certain types of income but is not a requirement for tax payment.

How are capital gains taxed in the Portuguese territory?

In Portugal, capital gains don't fall under the Simplified and Organized regimes and are usually taxed at a flat rate of 28%. In addition to capital gains, this flat rate may also apply to rental income, investment income, interest, and dividends.

Where can I learn about other types of tax regimes?