Deductible & non-deductible business expenses

Do you think all your business expenses are deductible on income taxes and VAT?

Well you must pay attention on Portuguese tax rules.

First if you are an entrepreneur (Trabalhador Independente ) you need to understand the two regimes available for income tax (IRS) and how they impact the approach on business expenses.

• Simplify Regime

The taxable income is determined by applying specific coefficients on the turnover, depending on the nature of the activity. For example, restoration/coffee shop and sales of goods, a coefficient of 15% is applied on the turnover to determine the taxable income. As for the revenues from the activity of exploiting local accommodation establishments in the form of housing or apartment, the coefficient to apply is 35%. In the case of service providers such as lawyers, programmers or accountants (famous list art.151º CIRS) the coefficient is 75%. In the last two examples, coefficients of 75% and 35%, it is necessary on the finance portal (e-invoice) to have expenses in this volume to benefit from the deduction of costs. On the other hand, they have a reduction in the coefficient in the first year of 50% and in the second of 25%.

This regime can only be applied in businesses with a turnover under 200,000€.

• Organized Accounting

As the name suggests, taxable income is calculated based on the profits determined in accounting, allowing the deduction of all expenses necessary to obtain the income. For example, in this regime, payments to social security by the entrepreneur are considered a cost and are deductible, while in the simplified regime they are not.

Expenses deductible (Art. 23º CIRC)

The types of expenses that we can deduct for income tax and VAT purposes are the same, both for the entrepreneur and for the companies. However, there are exceptions that we address in the following point, where VAT can only be deducted by 50% or not deductible at all. Important clarification, an entrepreneur with a simplified income tax regime can deduct expenses for VAT purposes. Thus, the expenses that can be deducted are:

• Acquisition of raw materials used on production operation;

• Expenses with salaries, team training, uniforms;

• Specialized services such as marketing, accounting, lawyers.

• Car expenses for professional purposes and their respective costs (fuel, travel, among others);

• Meals made within the scope of work;

• Travel for meetings or market prospecting;

• Expenses with computer equipment and office furniture;

• Maintenance of the workspace as well as costs of electricity, water and communications;

• Financing related to business assets or treasury.

Thus, expenses that cannot be deducted for tax purposes are: (Art. 23-A CIRC)

• Expenses not properly document - All expenses must have your NIF if you are an entrepreneur or your company to be possible deduct them on taxes. - art. 23-A n1 al. c) and special attention for art. 23 nº 4 al. b)

• Fines, if you commit violations;

• Expenses without document of support

• Expenses with luxury property (boat or car f.ex.) not related directly with activity.

VAT Specifics (art 21º CIVA)

In VAT some expenses have special treatment, even if they are fully deductible for income tax proposes.

Diesel - Just 50% of VAT is deductible (when the business of company is not transportation of goods)

In this expenses the VAT isn’t deductible:

• Fuels for rent-a-car vehicles - nº2 al. c)

• Acquisition, manufacture, import, transformation, repair of passenger cars - nº1 al. a)

• Transportation and business travel expenses, tolls, of the entrepreneur and employees. - nº1 al. d) -> Representation expenses see next point

Autonomous taxation

Some specific expenses suffer an taxation separately.

If your business have negative result the tax applicable are the Increased Rate.

Autonomous Taxation Art.88º IRC

No.	Expense or Charge	Normal Rate	Increased Rate
1	Undocumented expenses – Regular taxpayers	50	60
2	Undocumented expenses – Tax-exempt taxpayers	70	80
3	Expenses with passenger or mixed light vehicles, with acquisition value equal to or less than the one set in Ordinance 467/2010	10	20
4	Expenses with passenger or mixed light vehicles, with an acquisition value higher than the one set in Ordinance 467/2010	20	30
7	Representation expenses	10	20
8	Expenses paid to individuals or corporations residing outside the national territory, who carry out a main activity of a commercial, industrial nature...	35	45
8	Expenses paid to individuals or corporations residing outside the national territory, who do not carry out a main activity of a commercial nature...	55	65
9	Charges with per diem and compensation for using own vehicle (paid kilometers), not billed to customers	5	15
11	Profits distributed to taxpayers who benefit from exemption	20	30
13a)	Indemnities or other compensations paid to management bodies	35	45
13b)	Bonuses and other variable remunerations paid to management bodies exceeding 25 percent of the annual remuneration and 27,500 euros	35	45

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