The Portuguese Parliament approved the State Budget for 2025 (“2025 Stage Budget)”. In this newsletter, we summarise the main tax changes contemplated in the 2025 State Budget.

PERSONAL INCOME TAX

Regarding Personal Income Tax (PIT), the main changes introduced by the 2025 State Budget are as follows:

• PIT brackets update. The PIT brackets will be updated according to the following table (pdf above).
• Youth PIT. The Youth PIT rules, which partially exempt young people's employment income (dependent or self-employed), are amended as follows:

            - Young people up to the age of 35 will now be eligible.
            - The condition of completing a cycle of studies no longer applies.
            - The PIT exemptions extend to the first 10 years of income, with the following limits:
               o 100% in the first year;
               o 75% from the second to the fourth years;
               o 50% from the fifth to the seventh years; and
               o 25% from the eighth to the tenth years.
             - The exempted income cannot exceed 55 times the value of the Social Support Index (“SSI”) (i.e. €28.009,30). Taxpayers who (i) benefit or have benefited from the non-habitual resident regime, (ii) benefit or have benefited from the tax incentive for scientific research and innovation, (iii) have opted for the taxation applicable to former residents or (iv) do have tax debts will not be eligible.

• Withholding tax on income subject to Youth PIT. Income eligible for the Youth PIT program will be exempt from withholding tax, corresponding to the portion of income exempt from taxation. (*)
• Meal allowance. The increase in the value of the meal allowance that is not considered income from dependent work for IRS purposes, when it is given through meal vouchers, goes from €9.60 to €10.20.
• Withholding tax on supplementary work. Income from overtime work obtained in Portuguese territory by non-residents will be exempt from withholding tax in respect of the first 100 hours (instead of the 50 hours provided for in 2024), with the 25% withholding tax applying to the part that exceeds that limit or number of hours. It is also planned that withholding tax will apply to 50% (and not all) of the monthly remuneration for overtime work.
• Withholding tax on self-employment income. The PIT withholding tax rate applicable to income from professional activities is reduced from 25% to 23%.
• Autonomous taxation. The reference value of light vehicles acquisition cost for the calculation of the autonomous taxation will be increased, with the rate of 10% being applicable when the costs are less than €30,000 (instead of €20,000) and the 20% rate being applicable when the costs are higher. Vehicles powered exclusively by electricity are not subject to this taxation.
• Advance payments. The total amount of advance payments due by self-employed persons will now be 65% (instead of 76.5%) of the legal basis.
• Specific deductions from employment income and pensions. How the specific deductions from category A and H income are calculated has been changed from the fixed amount of €4,104 (updated annually in line with the Social Support Index (SSI)) to the amount corresponding to 8.54 times the SSI (currently €4,349.08).
• Minimum subsistence amount. The reference value for the minimum subsistence has been increased to the greater of €12,180 or 1.5 x 14 x SSI.

CORPORATE INCOME TAX

In terms of Corporate Income Tax (CIT), the following measures from the State Budget for 2025 are highlighted:

• Reduction of CIT rate. Reduction of the general CIT rate from 21% to 20% and, in the case of small and medium-sized companies and small and medium capitalization companies, from 17% to 16% on the first €50,000 of taxable income.
• Health or sickness insurance costs. Expenses associated with health or sickness insurance for employees and their families will be tax deductible at a rate of 120% when assessing the taxable net income.
• Autonomous taxation. The rates of autonomous taxation for light passenger and cargo vehicles, as well as motorcycles, will be reduced by 0.5% and the cost limits will be increased by €10,000, as follows:

           - For vehicles costing up to €37,500 (instead of €27,500) the rate will be 8% (instead of 8.5%);
           - For vehicles costing between €37,500 and €45,000 (instead of €27,500 to €35,000) the rate is 25% (instead of 25.5%); and
           - For vehicles costing €45,000 or more (instead of €35,000) the rate is 32% (instead of 32.5%).
It is also planned to exclude entertainment expenses related to shows from the scope of autonomous taxation.

VALUE ADDED TAX

Regarding Value Added Tax (VAT), the following changes are stand out:

• Extension, until December 31, 2025, of the VAT exemption (with the right to deduct the tax) applicable to transfers of certain goods, when normally used in the context of agricultural production activities, such as fertilizers and soil improvers.
• Legislative authorization for the Government to amend in 2025 item 2.18 of List I annexed to the VAT Code to apply a reduced rate to the construction or rehabilitation works on residential properties, to be defined according to criteria established by members of the Government. Properties with a value exceeding the established limit will be excluded from the scope of this rate.
• Clarification has been issued that the restrictions on VAT deductions do not apply to bicycles, whether motorized or non-motorized. (*)
• Reduction of VAT rate applicable to tauromachy performances (amendment to item 2.32 of list I annexed to the VAT Code). (*)
• The reduced VAT rate will apply to food products designed for infants and young children, including transitional formulas, as well as medical-purpose foods and complete dietary substitutes for weight management (item 1.14 of list I annexed to the VAT Code). (*)

SPECIAL CONSUMPTION TAXES

In terms of Special Consumption Taxes, the following changes are planned:

PETROLEUM AND ENERGY PRODUCTS DUTY (ISP)

Certain oil and energy products used in facilities subject to an energy consumption rationalization agreement will now be taxed at 100% instead of 65%.

TOBACCO TAX

• The total minimum reference tax to be applied to tobacco and in force each year will now correspond to the value of the national average tobacco tax.
• The tax on cigarillos will now be 50% of the minimum tax on cigarettes instead of 100%.

VEHICLE TAX (ISV)

• A rate of 25% will be applied to passenger cars registered in another EU Member State between 2015 and 2020 and with hybrid engines.
• When the taxpayer disagrees with the provisional assessment issued by customs, the fee for requesting a recalculation is waived.

REAL ESTATE TRANSFER TAX (RETT)

Regarding the Real Estate Transfer Tax, the 2025 State Budget establishes:

• Update of the brackets for calculating the IMT applicable to the transfer of urban properties or autonomous units of urban properties intended exclusively for residential use.
• An exemption is granted for registration fees and other associated costs for all acts and contracts required to facilitate land consolidation involving contiguous or adjoining rustic properties owned by the same individual, regardless of their economic use. This exemption also applies to the registration of rights and encumbrances associated with the consolidated rustic properties; and (*)
• Exemption from RETT on transfers of rustic property required for the implementation of the above-mentioned land consolidation transactions. (*)

STAMP DUTY

In terms of Stamp Duty, the following changes stand out:

• Extension until 2025 of the exemption applicable to certain housing credit restructuring operations, as well as to operations involving the temporary adjustment of payments and the capitalization of deferred amounts;
• Exemption from stamp duty on transfers of rural property required for the implementation of the above-mentioned land consolidation transactions. (*)

SPECIAL CONTRIBUTIONS

The 2025 State Budget extends the following special contributions to the year 2025:

• Audiovisual contribution;
• Banking sector contribution;
• Pharmaceutical industry contribution;
• Extraordinary contribution to suppliers of the National Health Service of medical devices; and
• Extraordinary contribution to the Energy Sector.

TAX BENEFITS

The 2025 State Budget includes the following changes to the Tax Benefits Statute:

• Incentives for salary increases. The costs related to salary increases for workers with a permanent employment agreement will be considered at 200% (instead of the 150% foreseen for 2024), provided that the following conditions are met:

           - The increase in the average annual base salary per employee is at least 4.7% (instead of 5%); and (*)
           - An average increase of at least 4.7% in the annual base salary of employees who are paid the company's average annual salary or less.
For this purpose, the expenses related to (i) workers covered by a Collective Bargaining Agreement signed or updated less than three years ago and (ii) amounts spent by the employer on the worker by way of base salary and social security contributions will be considered. The maximum deduction from taxable income per employee is increased to five times (instead of four times) the guaranteed minimum monthly salary.

• Incentives for the recapitalisation of companies. The 20% relief provided for capital contributions in cash to a company in which a shareholding is held, applied to the gross amount of profits or capital gains resulting from the sale of that shareholding, now covers any company and not only to companies with a loss of half their share capital. However, entities subject to supervision by the Bank of Portugal or the Insurance and Pension Funds Supervisory Authority, as well as branches in Portugal of credit institutions, other financial institutions or insurance companies, are excluded from this provision.
• Incentives for the capitalization of companies. An amount corresponding to the 12-month Euribor rate plus a spread of 2% (instead of 1.5%) can be deducted when determining taxable net income. This measure will now apply to any company, instead of being restricted to small or medium-sized enterprises or small-medium capitalization companies. The relief will be increased by 50% in 2025.
• PIT and social security exemption for performance rewards. If the employer complies, in 2025, with the conditions laid down for the application of the tax incentive for salary increase, there may be an exemption from PIT and social security contributions (SS) on the amounts paid in 2025 to employees as performance and productivity rewards, profit-sharing and balance-sheet bonuses, up to a limit of 6% of the annual base salary.
• Extension of the Madeira Free Trade Zone regime. Entities licensed to operate in the Madeira Free Trade Zone between 2025 and 2026 will benefit from the reduced Corporate Income Tax Rate of 5% until 31 December 2028. (*)

(*) Tax measures introduced in the final version of the 2025 State Budget.