Box B income encompasses income generated from commercial, industrial, agricultural, forestry, or livestock activities, intellectual and service provision activities[1]. Individuals deriving Box B income must specify and disclose the activity(ies) that they carry out before the Portuguese tax authorities, a choice which may impact the taxable base for personal income tax purposes and is subject to potential challenges.
Under the simplified regime, Box B taxable income is calculated by applying a legal coefficient to the annual gross amount invoiced. Coefficients range from 0.1 to 1, depending on the nature of the income (e.g., sale of goods, local lodging services, provision of services specified in a government-approved list, provision of services not otherwise specified, etc.).
The variance in coefficients is justified by the presumption that certain professional/business activities inherently incur higher costs[2].
The law establishes an assumption of expenses/costs taking into account different circumstances. Such a difference in the calculation of Box B taxable income would be justified by the principle of equality[3].
However, it is questionable whether the different tax treatment between certain service provider individuals whose professional activities are listed in a table approved by a government ordonnance[4] (“Group 1”) and those whose activities do not match the ones listed in such table (“Group 2”) observes the principle of equality.
The law essentially provides that Group 1’s taxable income is subject to 0.75 coefficient whereas Group 2 benefits from a 0.35 coefficient. By this reasoning, consultants and sportsmen are including in Group 2, whereas advisers[5] and professional referees pertain to Group 2.
The Supreme Administrative Court[6] established that “the coefficient of 0.75 can only be applied to professional activities specifically listed in the table referred to in Article 151 of the IRS, and 0.35 for those not listed therein“. The Court ruled that professional referees are not specifically listed in the table and cannot be deemed sportsmen for the purposes of the application of the coefficient.
The established ruling did not mitigate the tax disputes arising from the application of Box B coefficients to provision of services activities. Choosing the appropriate activity is often an interpretative task: the Portuguese tax authorities tend to have a broader approach, whereas taxpayers will likely adopt a more restrictive approach (shielded by the courts’ positions).
The arbitration courts have since then ruled on activities such as “martial arts instructors“[7], “advisors to public bodies“[8], “student tutoring activities“[9], “sports commentator“[10], the hot topics being the prohibition of analogy in matters subject to the principle of law and the limits to a broad interpretation of the activities as listed in the table. In general, these activities were deemed provision of services not otherwise specified, therefore subject to the 0.35 coefficient.
While we align with most court views, we question whether the result of the application of the law is aligned with its purpose. Is the activity carried out by a sports commentator/critic, in principle, more costly than a consultant’s activity? Considering the evolution of Box B taxable income rules, does it still make sense to have special lighter coefficient applicable provision of services not listed in the table?
As self-employment activities evolve, and considering the positions of the Portuguese Tax Authorities, we anticipate continued litigation regarding the application of Box B coefficients to service provision activities.
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DISCLAIMER: this article does not constitute legal advice. It reflects a personal opinion that does not bind any authority, court nor my present of former(s) employer(s).
Diana Figueiredo
December 2023
[1] As per article 3 of the Personal Income Tax Code.
[2] As per article 31, paragraph 1 of the Personal Income Tax Code.
[3] Tax experts such as Manuel Faustino are very critic in respect of the taxation rules of Box B income. See: https://www.isg.pt/wp-content/uploads/2021/03/28_2_mfaustino_oe2007_f27.pdf ; https://www.jornaldenegocios.pt/economia/detalhe/trabalho-independente-nem-sempre-tem-traducao-em-facturas;
[4] Ordonnance no. 1011/2001, dated of 21st August in its current redaction: https://diariodarepublica.pt/dr/detalhe/portaria/1011-2001-516217
[5] Case no. 644/2021-T, dated 28th March 2023: https://caad.org.pt/tributario/decisoes/decisao.php?id=6219
[6] Case no. 092/19.9BALSB, dated 9th December 2020: http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/37a1c71866b4fb998025863f003ebc8f
[7]https://caad.org.pt/tributario/decisoes/decisao.php?u=1&listPageSize=100&listOrder=Sorter_processo&listDir=ASC&listPage=1&id=6620; https://caad.org.pt/tributario/decisoes/decisao.php?id=5631; https://caad.org.pt/tributario/decisoes/decisao.php?listPageSize=100&listOrder=Sorter_data&listDir=DESC&id=5854.
[8] https://caad.org.pt/tributario/decisoes/decisao.php?u=1&listpage=269&id=6925
[9] https://caad.org.pt/tributario/decisoes/decisao.php?u=1&listPage=7&id=6180
[10] https://caad.org.pt/tributario/decisoes/decisao.php?u=1&listPage=2&id=7335