What IRS is and who pays it
IRS (Imposto sobre o Rendimento das Pessoas Singulares) is the equivalent of Spanish personal income tax. It is paid by individuals: employees, freelancers, and partners who receive dividends or salaries from their company.
Your company pays IRC (corporate tax) on its profits. IRS is different: it taxes what you, as an individual, receive from the company or from your activity. They are two distinct taxes applied in layers.
IRS brackets and rates
IRS is progressive: the higher the income, the higher the rate. Brackets range from 13% for low incomes to 48% for the highest. A fixed deduction per bracket is applied to the result, so the effective rate is lower than the marginal rate.
If you are a tax resident in Portugal, you are taxed on your worldwide income. If you are not, only on income obtained in Portuguese territory.
Dividends: 28% as a general rule
Dividends you distribute from your LDA are taxed at 28% as a final rate. That is, you withhold that 28% and do not need to include them in the IRS base.
You can choose to include them in IRS if your effective rate is lower, which may be worthwhile for low incomes. It is advisable to run the numbers before distributing profits.
Freelancers: recibos verdes
In Portugal, freelancers invoice through recibos verdes (green receipts), the self-employed regime. You issue invoices without incorporating a company and declare income in IRS as professional income.
In addition to IRS, freelancers pay Social Security on part of their turnover. The rate is lower than that of an employee, but it must be added to the real cost of working for yourself.
Freelancer or company: which suits you
The choice depends on volume and margin. A freelancer pays progressive IRS from the first euro, while a company pays IRC at 21% and you only pay IRS when you receive a salary or dividends.
For high turnover with profits you plan to reinvest, the LDA usually works out better because it defers personal taxation. To start and validate an activity, being self-employed is simpler and cheaper to maintain.
How it avoids double taxation with Spain
If you are a tax resident in Spain and earn income in Portugal, the double taxation treaty between the two countries determines where each income is taxed and prevents you from paying twice on the same income.
In practice, you declare in Spain and deduct the tax paid in Portugal, or the income is exempt in one of the two countries depending on its nature. An adviser with experience on both sides prevents costly mistakes.
