On 26 May, Law 21/2023, of 25 May came into force, amending, among others, the Personal Income Tax Code ("IRS") and the Tax Benefit Statute, introducing a new taxation regime applicable to stock option plans set up by companies which, pursuant to said law, qualify as a start-up, scaleup, micro, small, medium or small-medium capitalisation company or companies developing their activity within the sphere of innovation.

The aim was to respond to the long-standing concerns of both companies and workers, mainly from the start-up ecosystem, but also from the more traditional industries, although, in this case, with less expression, due to the characteristics of its shareholder structure.

It is clear that one of the main purposes of the new regime is to support the start-up ecosystem in attracting and retaining talent, and given that these type of companies, due to their very specific characteristics, need to offer remuneration packages that include stock options as a way of attracting qualified workers, particularly in their very early stages. This law, at last, tries to put the Portuguese regime in line with other European regimes and simplify the exceedingly onerous, complex and obsolete tax framework applicable until now, starting by clarifying which entities are qualified as start-ups and scale-ups, as well as the corresponding procedure for recognition of such status.

In brief, we would say that the two most relevant changes to the tax regime are the IRS rate applicable to the worker and the moment in which the taxation should occur. As for tax rates, the legislator's option to subject this income to the special flat rate of 28% is to be praised, without prejudice to the option of including this income in the tax return and subjecting it to the general and progressive rates. No less relevant is the fact that only half of the gain is taken into account for the purposes of applying the aforementioned 28% rate, which results, in practical terms, in a very attractive effective tax rate of 14%.

Regarding the moment of taxation, the Portuguese legislator's concern to bring it closer to the moment when the effective gain occurs is noted, in line with the European legislative trend in this type of regime, as opposed to the previous regime, in which the taxpayer was immediately taxed when the option was exercised, before any gain was made. Thus, the legislator chose to tax the income at the first of the following instances:

  • When the worker sells the shares or equivalent rights acquired through the exercise of the option, being the taxable gain computed through the positive difference between the sale price and the exercise price of the option or right, plus the amount paid for the acquisition of such option or right;
  • When the worker ceases to be resident in Portugal, being the gain computed through the positive difference between the market value and the exercise price of the option or right, plus the amount paid for the acquisition of such option or right; or
  • In the event of a donation of the shares or equivalent rights acquired through the exercise or subscription of the option or of the right with equivalent effect, being the taxable gain computed through the positive difference between the amount resulting from the application of the rules currently provided for in the IRS Code to free acquisitions and the exercise or subscription price, plus the amount paid for the acquisition of such option or right.

If, in respect to the tax rate, the regime does not raise any major issues, the innovative exit tax rule adopted by the legislator concerning the possibility of subjecting the taxation to the status of residency in Portugal, appears to be rather doubtful regarding its conformity with the fundamental principles – almost always (well) safeguarded by the European Court of Justice, and reflected in the decisions of national courts – of non-discrimination, in tax matters, on the basis of residence, as well as of the free movement in the European Union, being possible to anticipate tax litigation related with workers who may be affected by this rule. This is, in fact, a situation for which it is difficult to understand the reasons behind the legislator's stance, especially after having been drawn to this issue during the public hearing at the Portuguese Parliament in the context of the assessment of the proposal that resulted in the present law. Nor is it understandable that this is happening at a time when several European countries are trying to attract the so-called digital nomads, who are often workers or founders of start-ups.

On the other hand, one improvement note is that the regime excludes taxable persons who directly or indirectly hold at least 20% of the share capital or voting rights of the entity granting the plan, as well as the members of its governing bodies, which turns out to be one of the least attractive aspects of this law. Regarding the exclusion of the members of governing bodies, exception is made, however, to cases where, in the year prior to the approval of the plan, the granting entity is qualified as a start-up or as a micro or small company - medium-sized companies are oddly excluded here.

Two final notes to point out the more than predictable need for further clarification by the legislator as to how the new regime may be applied in the first year of a company's life and, on the other hand, to highlight as positive the fact that the regime will be applicable retrospectively, in the case of start-ups, to plans approved until 31 December 2022.

In short, while it is true that the new tax regime applicable to stock options represents a very positive evolution when compared to the previous legal framework – which, it should be noted, remains in force for all entities not covered by Law 21/2023, of 25 May –, it is also important to point out the need for a number of improvements, ideally in the near future and to the detriment of the much-acclaimed legislative stability, so that Portugal may definitively position itself as an attractive country for qualified professionals.