Clarifications from Portuguese tax authorities regarding exemptions on bonuses

The State Budget Law for 2025 and the State Budget Law Proposal for 2026 establish an exemption from personal income tax (“PIT”) and social security contributions on productivity and performance bonuses, profit-sharing, and balance-sheet bonuses. The exemption is capped at 6% of an employee’s basic annual salary, as explained in the Cuatrecasas Guide on the State Budget Law 2025 (in point 2.3).

However, the exemption is subject to certain conditions, such as companies increasing salaries by at least 4.7% of the average annual basic salary in 2025.

Recent clarifications from the Portuguese tax authorities (Circular 20284 of October 21, 2025) address key uncertainties regarding the application of the exemption to PIT and social security, including the following:

Definition of annual basic salary for calculating the exemption limit

According to the tax authorities, the “annual basic salary” comprises the employee’s basic salary earned over 12 months, plus the 13th-and 14th-month salaries (holiday and Christmas allowances). This definition is essential for accurately calculating the 6% exemption limit based on the employee’s annual basic salary.

Definition of “voluntary and non-regular payments”

Payments eligible for the exemption must be voluntary and non-regular –  not mandated by legal obligations such as employment contracts. The tax authorities stipulate the following criteria for determining the non-regular attribute of payments under article 47 of the Contributory Code:

(i)          Payments cannot constitute an employee’s right based on a pre-established objective or general criteria, even if conditional. Employees cannot anticipate receiving these payments

(ii)         Employers can make these payments no more frequently than once every five years.

These conditions significantly restrict the scope of bonuses qualifying for the PIT and social security exemption.

Eligible salary increase

To be eligible for the exemption, employers must implement a qualifying salary increase in 2025, set at 4.7% in article 19-B of the Tax Benefits Code, which establishes the tax incentive for salary increases under corporate income tax (“CIT”).

To calculate the average annual basic salary, the tax authorities highlight that the annualized basic salary of all employees working for the company at the end of the tax period must be considered, including those who are not eligible for the tax benefit increase.

Therefore, the tax authorities clarify that all employees working for the company at the end of each tax period must be considered, regardless of their employment relationship with the company.

Also, for the increase in the annual basic salary, the tax authorities clarify that the annual/annualized basic salary of employees with a salary equal to or below the employer’s average annual basis salary should be considered.

Withholding tax

The recent circular reaffirms earlier guidance from the tax authorities (circular 20282 of September 9, 2025), mandating employers to withhold income tax on bonuses at the time of payment, irrespective of whether they expect to meet the requirements for exemption eligibility.

After verifying eligibility, companies must subsequently submit replacement monthly income declarations and, in the annual income declaration for 2025 provided to employees, disclose (i) the amount of income covered by the exemption, and (ii) a statement confirming compliance with the salary increase requirement.

Conclusion: Spontaneous bonuses to counter regularity restrictions

Although the tax authorities’ recent clarifications address many uncertainties surrounding the PIT and social security exemption, confirmed restrictions tied to the concept of regularity may limit the measure’s practical impact.

However, “spontaneous bonuses”—those payments that employees cannot anticipate—offer a viable path to meet exemption requirements. However, these bonuses are less transparent and may be misaligned with best management practices. For this reason, companies must ensure full compliance with the legal requirements for exemption while maintaining clear communication with employees regarding bonuses awarded in 2025 and 2026.