Taxes and payrolls: presenting the Portuguese labour market

Initially, each labour market has some peculiarities. However, it may be tricky for foreigners to understand fully the payment methods, the taxes and other benefits related. So in TalentUp we are starting a series of different blog articles, one for each country. And in fact, this article analyses the Portuguese labour market.

General data about the Portuguese labour market

One of the most peculiar facts of the Portuguese compensation methods is that most jobs, even if they are paid monthly, have 14 pays. Specifically, the two extra pay are given one in June (double summer pay) and one in December (double Christmas pay).

So, establishing the minimum salary to be 600€, takes into account 14 pays. Hence, if we divide the total amount for the 12 months of the year, the minimum monthly salary is 700€ (717.5€ in Madeira and 735€ in Azores).

Payroll taxes in Portugal

Undoubtedly, social security contributions are made by the employer and the employee. Thus, they are used for funding unemployment, pension, maternity/paternity leave, and sickness or injury.

Moreover, Wage Guarantee Fund is an employers’ mandatory contribution for all employment contractsto ensure the payment of debts employers can’t pay employees because of insolvency or difficult economic situation. In fact, it is not applied to the 13th and 14th salaries, neither bonus nor allowances.

In this regard, the age for retirement is 66 years and 5 months for both men and women.

Once contributions are paid, then employees need to pay an income tax that varies depending on their gross salaries. 

In fact, common benefits for employees include:

• Additional sickness benefits, medical plans, accident insurance and pension plans.
• Extra vacation days
• Flexible working hours
• Meal Voucher/lunch card
• Health club allowance
• Monthly and yearly school bonuses
• Cellphone allowance
• And finally, National/InternationalTravelAllowances

Contingencies from self-employees

Additionally, self-employed persons are entitled to protection in the contingencies of sickness, parenting, occupational diseases, invalidity, old age and death.

Also, they are entitled to protection in case of unemployment. 

Firstly, self employed pay taxes over their contribution base. Then, the contribution base is 70% of the income earned. So to say, taxes are paid only on 70% of the earnings. Hence, the tax rates are:

• On one hand, 21.4% for self-employed persons and their respective spouses.
• On the other hand, 25.2% for Individual Entrepreneurs and holders of a single-member limited liability company and the respective spouses.

Specifically, these taxes are paid each three months: on January, on April, on July and on October).

Example of net salary in Portugal

Lastly, and as a reference, we use the average salary of a software engineer. Therefore, in Portugal, on average, software engineers earn annually 30,000€.

Specifically, the employer contributes 7950€ to social security and the employee 3300€. In fact, in the case of self-employed, they contribute just 4494€ to social security (tax applies to only 70% of the earnings).

Thus, after paying the income tax, the employee has a net salary of 20,044.09€ coming from a gross salary of 30000€. In contrast, self employees, for the same gross salaries, earn 769.2€ less.

Unemployment regulation in Portugal

Eventually, employers are required to provide notice to employees with fixed-term contracts or if the employer has decided to terminate an employee a trial period that has lasted over 60 days. So, in order to have grounds for dismissal an employer must have just cause, redundancy, closure, or the employees’ failure to adapt.

So, the length of notice periods varies according to the employee’s level of seniority:

Employees who are terminated due to collective dismissal or redundancy are entitled to severance. Hence, the amount an employee will be paid depends on their seniority within the company. So, the compensation pay received for unemployment consists of:

• On one hand, 80% of the monthly social benefit rate for persons who have at least 180 days of contributions during 12 months of employment.
• On the other hand, 65% of their average earnings for the first 180 days for persons who have at least 360 days of contributions during 24 months of employment.

Different kinds of leaves in Portugal

To begin with, Portugal has 13 national mandatory holidays. There is no substitute holiday system in Portugal, however, it is common to have a bridged weekend, so employees do not have to use their vacation days to enjoy a long weekend.

Moreover, every calendar year employees are entitled to 22 days of paid vacation. Vacations should be taken within the natural year, but they may be taken up until April 30th.

New employees receive 2 days of paid vacation each month with a limit of 20 days but can only be used after 6 months of work. If the calendar year ends before 6 months the vacation days can be used until June 30th.

To begin with, employees can receive sick leave benefits through social security for up to 1,065 days. The worker receives:

• Firstly, 55% of their average daily earnings for the first 30 days
• Secondly, 60% from the 31st day till the 90th
• Thirdly, 70% from the 91st day to the 365th
• And finally, 75% from then on.

Thus, employers are required to take out private insurance to cover employees in case of a work injury.  During the first 12 months of disability, the worker receives 70% of their earnings and 75% thereafter. So this benefit is paid until recovery or permanent disability takes effect.

Overall, employees are entitled to two days of paid bereavement leave but must provide the employer with the required documents.

Paid parental leave

Firstly, maternity leave is a period of 120 or 150 days and can be taken by either parent except for the first 6 weeks of leave after the birth of the child which must be taken by the mother. And secondly, Fathers are required to take a compulsory leave of 15 days after the birth of the child with 5 days immediately after delivery and the other ten days within the first 30 days.

So after the required 6 weeks of maternity leave and 15 days of paternity leave the couple can decide who takes the next 78 or 108 days. Finally, if the couple takes a total of 150 days the leave is 80% paid, and if they choose 120 days, they will receive 100%.

Common benefits offered in Portuguese companies

How to employ a Portuguese worker

Neither tax nor employment law requires the setting up of any structure/investment vehicle before a company can hire employees in Portugal.

However, the entity must be registered with the National Register of Legal Persons, which will assign a Portuguese tax number. Moreover, registrations in the Tax and Customs Authority and the Social Security Office need to be done too in order to provide the monthly payroll report.

Hence, these companies will only be subject to Corporate Income Tax on the earnings obtained in the country and to social security and tax obligations for the employees residing in Portugal.

Specifically, some platforms (Papaya Global among them) offer the Employer of Record (EoR) service helping companies hire countries where they do not have any office.

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