Under the State Budget for 2025 (Law No. 45-A/2024 of December 31), a new exemption regime from Personal Income Tax (IRS) and Social Security contributions was introduced for productivity bonuses, performance-related payments, profit-sharing and balance sheet gratuities.
This measure aims to encourage wage appreciation but raises relevant practical issues for both companies and employees.
The exemption applies to amounts paid or made available in 2025, if they:
- are not regular in nature and are granted voluntarily,
- do not exceed 6% of the worker’s annual base salary, and
- The employer ensures an eligible wage increase for the purposes of Article 19-B of the Tax Benefits Code (EBF), which requires (i) an increase in the company’s average annual base remuneration of at least 4.7% and (ii) an increase of at least 4.7% in the annual base remuneration of employees earning salaries up to the company’s average.
The recent Circular Letter No. 20282/2025, issued by the Portuguese Tax Authority, clarified how these rules must be complied with.
This Circular Letter has significant impacts for companies, which must act as instructed to align their remuneration policy with the tax incentive as well as the related reporting obligations. It also has an impact on employees, who may have been expecting to immediately benefit from a lower tax burden on their productivity bonuses, which will not be the case up front.
Belzuz Advogados assists companies with the interpretation and application of this regime, ensuring legal certainty and the maximization of tax benefits.
Even if your company is confident that it will meet all the exemption requirements, it must proceed with the mandatory withholding at source when paying productivity bonuses, performance-related payments, profit-sharing and balance sheet gratuities, treating them as employment income, declared separately from other employment income. Only at the end of 2025 will it be possible to confirm whether the exemption applies.
The company must also indicate in the annual income statement provided to employees the exempt amounts and include an express statement that the legal requirements have been fulfilled.
In relation to the Monthly Remuneration Statement (DMR), the Circular Letter created code A41 to declare the amounts effectively exempt. If, at year-end, it is confirmed that the conditions have been met, the company must replace the DMRs for the months in which the bonuses were paid, adjusting the values between taxable and exempt codes, by submitting replacement DMR(s). This can be done without penalties or fines, declaring under code A41 the exempt portion (up to the 6% limit) and subtracting it from code A (taxable). Any portion exceeding this limit remains fully taxable under code A.
For employees, in practice, IRS withholding will still apply at the time bonuses are paid (even if exempt). If, at year-end, the company confirms that the wage increases conditions have been met, the withheld tax will be adjusted, allowing the employee to recover the excess tax withheld.
It is recommended that your company’s Human Resources Department prepare the appropriate internal procedures now, to ensure that bonuses paid in 2025 comply with the Circular Letter of the Portuguese Tax Authority.
Belzuz Advogados – Branch in Portugal is available to assist your company in this process, ensuring proper legal and tax compliance.