Tax measures in the Annual Budget for 2023

The Draft Annual Budget for 2023 was delivered to the Portuguese Parliament on October 10, 2022. Analyzing its content, we will address the main tax measures affecting families and companies.

Annual Budget: individuals

Cryptoactive

For the first time, income from activities related to cryptocurrencies and other active-crypto assets will now be taxable under the IRS. However, gains from the sale of active crypto assets will continue to be exempt from tax as long as they are held for 365 days or more before the sale, and the entire period before 2023 counts for this.

The government has opted for the broad concept of “active crypto assets”, which is defined as “any digital representation of value or rights that can be transferred or stored electronically using distributed ledger or similar technology” to dispel any doubts that might arise with non-fungible tokens (NFT).

Gains obtained from the “onerous disposal of crypto-assets that do not constitute securities” will be considered capital gains (category G) taxable at a special rate of 28% if the assets are held for less than 365 days, after deducting the “necessary and incurred expenses” for the purchase and sale (such as commissions to intermediary platforms). As with most capital gains, carrying out losses for tax purposes for the following five years is only permissible if the taxpayer opts for aggregation.

However, unlike the balance between capital gains and capital losses on securities, which are compulsorily included in other income for application of the general progressive rates, if they have been held for less than 365 days and the taxpayer has a taxable income equal to or higher than the last bracket, crypto active capital gains are not subject to such an obligation.

Operations “related to the issuance of crypto active assets, including mining, or the validation of crypto active transactions through consensus mechanisms” will be taxed as commercial or industrial activities (category B). Under the simplified regime for category B, the taxable income from crypto-active activities will be determined by applying the coefficient of 0.15. In other words, only 15% of the revenue from these activities will be taxed.

Also, under the simplified IRC regime, this 0.15 coefficient will be applied to active crypto income, neither capital gains nor capital income.

Furthermore, entities “that provide crypto active custody and administration services on behalf of third parties” or “that manage crypto active trading platforms” will now be obliged to inform the Tax Authority annually of active crypto transactions carried out by Portuguese taxpayers.

Finally, we should note that the budget proposal suggests adding the subjection of crypto-active assets to the 10% rate in free transfers to the scope of the stamp duty code.

On the other hand, Item no. 30 will be added to the General Stamp Duty Table, resulting in this tax being subject to a 4% rate on commissions and consideration charged by or through crypto active service providers.

Update of Personal Income Tax brackets

The entry values in each IRS bracket will rise by 5.1% in 2023, below the expected annual inflation rate for 2022, so the amount of payable tax – for income that remains the same – will be nominally lower but higher. Furthermore, referring to category A, those who have had salary increases indexed to the inflation rate, or as long as they are above 5.1%, will run the risk of moving up the tax bracket, paying the marginal rate above and seeing more salary withheld at source.

In addition to the above, we propose changing the rate applicable to the second bracket of the progressive IRS rates from 23% to 21%.

More significant exemption for the Young Citizen’s Income Tax (IRS)

In other news, the partial exemption of the “Young IRS” is increased. As is well known, in the first five years after earning income, young people between the ages of 18 and 26 who are not dependents of another taxpayer for tax purposes, are partially exempt from Personal Income Tax (IRS) on income from dependent and independent work (categories A and B). The new partial exemptions will be as follows: 50% in the first year (up to 5983.75€, considering the value of the IAS for 2023), 40% in the second year (up to 4878.00€), 30% in the third and fourth years (up to 3590.25€) and 20% in the last year (up to 2393.50€).

Incentives for small production and sale of energy

There are also new incentives for producing and selling energy in homes and small products. The first 1000€ of income resulting from “the transaction of surplus energy produced for self-consumption from renewable energy sources, by production units for self-consumption, up to 1 MW of the respective installed capacity” and “the transaction of energy produced in small production units from renewable energy sources, up to 1 MW of the respective installed capacity” will be excluded from IRS.

Annual Budget: Legal entities

 Incentives for salary increases

As foreseen in the Medium-Term Agreement for the Improvement of Income, Wages and Competitiveness entered into in social conciliation, wage increases for workers determined “by dynamic collective work regulation instrument relative to workers with an employment contract of indefinite duration are considered at 150% of the respective amount” (and not only 100%) for IRC taxpayers or IRS taxpayers with organized accounting, provided that:

• The salary increase is at least 5.1% over the company’s tax year.
• The final salary is not equivalent to the minimum monthly salary guaranteed.
• The difference between the highest and lowest salary in the company does not increase over the same period.

Wage increases for members of corporate bodies, former or majority shareholders, and employees who are part of the employer’s household are excluded.

Incentives for the capitalization of companies

In general, 4.5% of the capital increase (“amount of net increases in eligible shareholders’ equity”) will be deductible from the taxable base, increasing to 5% in the case of SMEs and small and mid-cap companies. In each year, only the amount up to the greater of EUR 2000000 or 30% of earnings before depreciation, amortization, net finance costs and taxes (EBIDTA) will be deductible, with the surplus being deductible in one of the following five periods.

Changes to the carry forward of tax losses

The time limit of five or twelve years for carrying forward tax losses is eliminated, and they may be carried forward indefinitely until they are entirely discounted. Despite the good news, the deductible tax losses taken forward in each tax year drop from 70% to 65% of the taxable profit.

Loss carries forward is also now possible, as a general rule, for companies in which more than 50% of the share capital or majority voting rights have changed hands (provided that “it is concluded that the operation did not have tax evasion as its main objective or as one of its main objectives, which may be considered verified, namely, in cases where the operation has been carried out for valid economic reasons”), without the need for an application to the Minister of Finance.

IRC rates and incentives for the concentration of SMEs

The scope of application of the reduced IRC rate of 17% will increase for the first EUR 50000 of taxable income, instead of the current EUR 25000, covering not only SMEs but also small mid-cap companies. Furthermore, for two years, companies that result from the restructuring of SMEs and small mid-caps will also benefit from this until 2026.

Similarly, the reduced rate of 12.5% applicable to the first €25,000 of the taxable income of SMEs based in the interior or autonomous regions (subject to certain conditions) will now apply to the first €50000 and will also cover small mid-cap companies.