The 2025 State Budget Law exempts productivity, performance, profit-sharing, and balance sheet bonuses from PIT and social security, up to 6%
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SubscribeThe 2025 State Budget Law introduced a personal income tax (“PIT”) and social security exemption for productivity and performance bonuses, profit-sharing, and balance sheet bonuses (collectively, “Bonuses”). This exemption applies up to a limit of 6% of an employee’s basic annual salary. For more information, refer to section 2.3 of the Cuatrecasas Guide: State Budget Law 2025).
However, this exemption is contingent on companies providing a salary increase of at least 4.7% of the average annual basic salary in 2025, along with meeting other requirements.
In Circular Letter 20282, issued on September 9, 2025, the Portuguese tax authorities outlined how companies must handle PIT withholding for Bonuses. However, these clarifications fail to resolve uncertainties surrounding the application of the exemption.
Mandatory withholding tax: a preventive procedure
The Portuguese tax authorities mandate that employers must always withhold PIT when paying Bonuses, regardless of whether they comply with exemption requirements.
This obligation arises because companies cannot confirm at the time of payment whether they will meet the salary increase requirement necessary to qualify for the exemption by year-end. Consequently, companies that have already paid Bonuses without withholding PIT risk noncompliance, exposing themselves to penalties and interest for failing to withhold the required tax.
Monthly remuneration return
Bonuses must be reported in the monthly remuneration return during the payment month using the proper code for employment income subject to PIT. To prevent distortions in the applicable withholding rate, the withholding tax must be deducted separately from other income.
After December 31, and provided it meets the exemption requirements, the company must file a replacement monthly remuneration return for the months when it paid Bonuses. To identify the exempt income, this statement must use the new A41 code. Submitting this adjustment will not result in fines or other penalties for employers.
Refund of PIT withheld: timing and procedure
A critical question for employees and companies is when the excess PIT withheld will be refunded.
There are two possible scenarios for the refund process:
- Employees may receive their refund directly after submitting their annual PIT return—between April and June 2026.
- Alternatively, companies may refund the withheld tax between February and March, after receiving the tax refund from the tax authorities.
However, despite the clarifications from the Portuguese tax authorities, the refund’s exact timing remains unclear.
Practical implications for companies and employees
For companies, this mechanism requires extra administrative steps. Specifically, they must:
- monitor compliance with exemption requirements;
- file replacement monthly remuneration returns if eligible; and
- specify in the annual declaration of income earned in 2025—provided to the employee—the exempt amounts and provide an explicit confirmation of compliance with the salary increase requirement.
For employees, this regime means initial withholding taxes will apply even in cases of exemption eligibility, causing short-term liquidity impacts. Refunds are then delayed until the following year.
Conclusion: persisting doubts and procedural complexity
Although the Portuguese tax authorities have resolved certain procedural questions, uncertainties remain. Chief among these are the exact timing of PIT refunds and ambiguities in defining fundamental concepts for exemption eligibility, such as the meaning of “annual basic salary” and “voluntary and non-regular basis.”
The complexity of this regime may deter companies from awarding Bonuses due to potential risks and administrative burdens. For this reason, we recommend that companies closely monitor their compliance with legal requirements and inform employees of the PIT refund process and timeline.
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