Tax Authority Confirms 25% IRS Withholding on Payments to Non-Resident Freelancers
The Portuguese Tax and Customs Authority (AT) has issued a binding information notice clarifying the tax obligations for Portuguese companies that contract non-resident independent workers. According to the notice, published on July 30th, companies are required to withhold Personal Income Tax (IRS) at a standard rate of 25% on payments made for services rendered by freelancers who are not tax residents in Portugal. This rule applies regardless of where the services are physically performed.
In its response to a company's query, the AT specified that under the Portuguese IRS Code, income from independent work is considered to be sourced in Portugal if the paying entity has its residence, headquarters, or effective management in the country. This interpretation means that payments from a Portuguese company to a foreign-based freelancer are subject to taxation in Portugal. The authority stated that companies are therefore "obliged to withhold tax at the source when paying this income."
The clarification addresses a growing area of uncertainty as more Portuguese businesses engage with a global remote workforce. The general rule mandates the 25% withholding, establishing a clear compliance requirement for the paying entities. The AT did, however, outline the conditions for a potential exemption. Such an exemption from withholding is only applicable if the non-resident worker is a tax resident of a country that has a double taxation agreement (DTA) with Portugal. For the exemption to apply, the specific DTA must grant the exclusive right of taxation to the worker's country of residence.
These situations are described as exceptional cases, and the burden of proof lies with the worker to provide the Portuguese company with a valid certificate of tax residency from their home country's tax authority to benefit from the treaty provisions. In addition to the withholding obligation, the AT emphasized that companies must declare all payments made to non-resident entities using the Modelo 30 form. This declaration is mandatory even in cases where a DTA provides a full or partial exemption from the withholding tax. This requirement is consistent with the reporting obligations for other cross-border payments, such as commissions paid by local property owners to international booking platforms.
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