Portugal
in numbers
Portugal scores high in the legal category due to well-defined legislation that supports and clearly outlines self-employment. However, the registration process is bureaucratic and costly for self-employed individuals in the early stages of their careers.
Contract classification is highly regulated, with strict criteria for self-employed individuals. Portuguese authorities actively monitor and audit for potential misclassification, employing a wide range of indicators to assess compliance, limiting flexibility for self-employment.
Self-employed individuals in Portugal face mid-range tax rates. However, the administrative process can be quite complicated, requiring a lot of paperwork and tax-specific knowledge to meet legal requirements and stay compliant.
Portugal’s tax exposure score reflects a 14% difference in tax liability between employees and self-employed individuals, combined with the risk of high fines and penalties for misreporting or non-compliance. This creates moderate exposure for self-employed individuals and companies on the Future of Work Index scale.
Portugal excels in the business category, thanks to its lack of rigid contract requirements and straightforward processes for payments and opening local bank accounts. This makes it easy for self-employed individuals to do business.
Portugal offers a digital nomad visa valid for up to five years, but the process can be lengthy with relatively high income requirements, limiting access to some individuals seeking to work remotely.
Key takeaways
Portugal’s contractor-friendly legislation and clear guidelines for proper classification makes it easy for foreign companies to hire self-employed professionals. The law favors self-employment, offering flexibility for contractors to set their own rates, choose projects, and work remotely.
Frequently asked questions
This can be done by engaging them as self-employed contractors, as Portuguese legislation supports remote and platform work for self-employed individuals. Alternatively, if you prefer to hire employees directly (without intermediaries or an Employer of Record), this is also possible, but you must run local payroll and comply with local employment regulations.
The EOR model is well-established and regulated under local law. However, if not properly implemented - such as failing to follow required rules or maintain proper documentation - it may result in an unintended employment relationship between the employee and the company, potentially leading to fines or penalties. There is no maximum period for how long the EOR model can be used per employee.
If you hire a team member in Portugal as an independent contractor and do not have a local entity, your company generally has no obligation to withhold taxes. The contractor is responsible for declaring and paying their own income taxes and social security contributions.
Company paid health insurance is not yet widely adopted in Portugal, however this approach is becoming more popular in competitive industries to attract skilled professionals. This doesn’t pose a significant misclassification risk if the benefit is optional and not a mandatory part of their compensation.
Determining the correct contractual relationship
If Portuguese authorities review the contract, they may classify the relationship as a B2B arrangement if the self-employed contractor:
- Has control over how, when, and where the work is performed, without direct supervision
- Sets their own rates, covers business expenses, and invests in their own tools or equipment
- Determines project methods and timelines without receiving company-led training or detailed instructions
- Performs tasks that are not essential to the company’s primary business activities
- Engages in project-based or fixed-term contracts instead of long-term, indefinite agreements
If the relationship does not meet most of the criteria above, it will most likely be classified as an employment relationship. Refer to the following sections for details on potential risks associated with reclassification.
Financial risk associated with a potential contract misclassification
If a contractor in Portugal is reclassified as an employee, a compliance review from the authorities may trigger obligations to cover backdated employment taxes. In addition, if the individual did not previously receive the same benefits as employees, the company may be asked to compensate them retrospectively.
Additional taxes
In Portugal, the tax and contribution difference between hiring an employee and a self-employed contractor is approximately 14%*, primarily due to the employer's responsibility for social security contributions. These additional costs are charged directly to the company in the event of misclassification. The company may also owe back-payment of benefits if it has failed to provide them.
The statute of limitations for misclassification claims is 1 year.
*To keep things comparable, we use a salary for $4,000/month to determine the potential exposure. The calculation takes into account equivalent taxes paid to the authorities by the self-employed person during the same period of time.
What could trigger a compliance review?
In Portugal, a compliance review could be triggered by regular audits conducted by authorities, as misclassification is a common focus during these audits. Additionally, complaints from dissatisfied or unhappy contractors can also prompt a review.
How will any additional amounts be charged?
If Portuguese authorities reclassify a self-employed contractor as an employee, any additional taxes, retroactive social security contributions, and related penalties will be charged to the foreign entity. Fines and penalties resulting from misclassification will also be imposed on the foreign entity. Portuguese authorities have established procedures that allow them to effectively enforce these charges on foreign companies.
Will a local contractor trigger a permanent establishment?
Yes, hiring a local contractor in Portugal can trigger a Permanent Establishment (PE) if the contractor provides services to a foreign entity over a long period (typically more than 6–12 months). Although the PE risk is generally lower with self-employed contractors than with employees working locally, authorities may still assess whether a PE is created during tax audits, especially when reviewing worker classification.
Is paid health insurance one of the indicators used by local authorities to determine if a worker is misclassified?
Although offering paid health insurance to contractors is not a common practice in Portugal, it does not represent a significant indicator of worker misclassification and is rarely analyzed by tax authorities. The risk of misclassification is lower if the health insurance is optional and not a mandatory part of their compensation.
About the Future of work index
This information is provided by SafetyWing in collaboration with a Big 4 company to assist companies in understanding potential compliance risks. While we strive to provide accurate and up-to-date information, it should not be used as the sole basis for ensuring compliance. Individual circumstances and changing laws may alter the applicability of this information. Please seek appropriate professional support.
