Digital Nomads Relocating to Portugal: 3 Tax and Legal Pitfalls Foreign Employers Must Avoid
Mónica Santos Costa
Lisbon
Tiago de Magalhães
Lisbon
Portugal is in vogue. It is the favorite destination for great expat fortunes and digital nomads. But it it isn’t all fairy tales and rainbows for companies and individuals, either.
Attracted by a safe and affordable lifestyle, year-round sunshine, and a very attractive migratory and tax environment, more and more people are choosing Portugal as their country of residence while continuing to work for companies (or clients) in other parts of the world. This is the case of the so-called digital nomads, people who are location-independent and use technology to perform their jobs, working remotely rather than being physically present at a company’s office.
With digital nomads in mind, the Portuguese government has created visa categories that allow third-country nationals to live in Portugal and work “outwards”. At the same time, the tax regime for Non-Habitual Residents (NHRs) also contributes to attracting remote-working professionals to Portugal by, among other advantages, allowing them to pay a personal income tax at a rate of 20% on their professional income (as long as they exercise an activity of high added value), instead of the progressive PIT rates that go up to 48%.
Despite these undeniable advantages for those who move to Portugal – whether EU citizens or holders of a digital nomad visa – relocation also raises challenges and potential pitfalls of which both individuals and companies need to be aware.
The foreign employer may be responsible for expenses arising from teleworking
According to the Convention of Rome, on the law applicable to contractual obligations in connection to the employees’ move to Portugal, Portuguese authorities may, in many cases, consider
- that the Portuguese law is applicable to an employment relationship; or
- that at least the mandatory rules of the law are applicable whenever an employee from a company not based in Portugal decides to move, live, and work from here.
As an employee in Portugal using technology to perform his functions, the teleworking or home office regime foreseen in the Portuguese Labor Law (‘PLC’) will be applicable. Thus, as established by law:
[…] the employer shall fully compensate the employee for all additional expenses that, demonstrably, the latter bears as a direct consequence of the acquisition or use of equipment and computer or telecom systems necessary for the performance of the work, as pursuant to the preceding paragraph, including the increased costs of energy and Wi-Fi that are set up at the workplace in conditions of speed which meet the duties communication needs, as well as for the costs of maintaining said equipment and systems.
“Additional expenses” – which, according to the PLC, are not considered an employee’s income and thus not subject to tax – are considered those expenses corresponding to the acquisition of goods or services that the employee did not have before entering into the remote work agreement, as well as those determined by comparison with the employer’s homologous expenses in the same month of the last year prior to the implementation of such agreement.
This rule has raised several doubts in the past year (the legislation has only been in force since January 2022), such as: How do companies calculate the amount in cases where the employee does not have a prior cost by which to compare, or in cases where the employee shares a dwelling with others who also perform remote work regime?
To (try to) clarify, more recently, the Portuguese Parliament has deliberated and approved (not yet published) that the parties will be able to fix an amount to compensate the employee for these additional expenses. It is foreseen that in the absence of choice by the parties, this fixed amount will be considered equal to the increase in expenses compared with the last month of face-to-face work.
Coincidentally or not, the Portuguese tax authorities, a few days after the discussion in Parliament, highlighted that the allowances and bonuses paid with no link to the effective accrual of expenses would be subject to taxation.
Social security liability
Both employers and employees must be aware that having an employee residing and working from Portugal could trigger new compliance obligations and Portuguese social security liability.
Indeed, considering the so-called Lex Loci Laboris principle, whereby employed persons are normally subject to legislation of the country where the activity is carried out, which normally applies within the scope of EU regulations or bilateral agreements over social security matters, one cannot disregard the risk of an individual working remotely from Portugal becoming subject to social security in Portugal. Moreover, in some circumstances, the “residence” of the employee may be a relevant criterion for determining which social security legislation is to apply.
In this context, if Portuguese legislation applies (which should be assessed on a case-by-case basis), the employer of an employee working from Portugal may be obliged to pay social security contributions in Portugal and, in this sense, be subject to corresponding payroll obligations.
Thus, individuals and companies must be aware that employees would be subject to a social security rate of 11% of the gross salary, while the employer would be subject to social security contributions of 23,75% of the gross salary.
Permanent establishment exposure
From a corporate taxation point of view, this regime may potentially trigger a permanent establishment (“PE”) in Portugal for the company, even though the only link to Portugal is the employee working from there.
Non-resident companies need to be aware that the presence of one (or more) of their employees working remotely from Portugal can trigger the existence of a PE within the Portuguese territory, in which case profits attributed to such PE would be liable to corporate income tax under the general terms applicable to a company headquartered in Portugal.
Given the definition of PE (under domestic and double tax treaty provisions), the analysis of the PE exposure should be made from several perspectives. Indeed, a PE can result from the existence of a “fixed place of business” in Portugal or by having a “dependent agent” there using his or her authority to enter into contracts in the name of the foreign company (or by playing the ‘principal role’ in the formation of contracts that are the formally concluded by the company), assuming that, in both cases, activities performed in Portugal are not deemed as having a preparatory or auxiliary nature.
Also, according to the Portuguese domestic legislation (which would only apply if there is no double tax treaty in place), a PE can also arise where services (including consulting services) are rendered by a non-resident company, via employees or via other personnel hired by such entity to perform such activities in Portugal, provided that those activities are carried out for a period (or periods) that, in total, exceed 183 days in a given 12 month-period (i.e., the “Service PE” rule).
In this regard, even if an employee is not engaged in a contractual activity in Portugal, and the foreign company does not have physical premises (e.g., an office, a factory, etc.) within the Portuguese territory, attention should also be paid to the employee’s home office, in the context of the assessment of a PE risk. Indeed, if the latter is working from his home office, in Portugal, on a regular and continuous basis, in a way that could be regarded as being at the disposal of the company, this could potentially trigger a physical PE.
In summary, as businesses are putting in place flexible arrangements to allow employees to work from home or in locations outside the jurisdictions where their employers typically operated or were located, this can trigger an un-envisaged PE or local tax presence, of which they should be cognizant.