Budget surplus is the alpha and the omega of the 2020 State Budget (SB) Proposal. Consequently, few changes to the IRS Code are proposed, the baby bonus (likely to be negligible in terms of impact) and the young employees’ benefit, applicable to income from employment but not from self-employment, being the most noteworthy.


Non-residential buildings – Deferral/elimination of the capital gains tax

A change is proposed to the capital gains tax deferral framework, namely to defer the taxation of capital gains generated by non-residential buildings that are returned to the taxable person’s personal assets.

The IRS Code currently foresees the possibility of taxing capital gains of private entities who use a building for non-residential purposes (e.g., short-term rental) and then close their business, “returning” the building to their personal assets. The capital gains tax can however be deferred if the building is earning property income (i.e., arising from its lease). The capital gains will only be taxed when the building ceases to be used for such purpose or is sold.

The SB Proposal stipulates that no capital gains will be taxed if the building generates property income for five consecutive years. What this means in practical terms is that no capital gains will be assessed if the building is let out for five years. If the building fails to meet the above five-year requirement, it is still possible to defer the taxation of the capital gains until such time as the building stops generating property income.


Short-term rental – Increase of the tax base

The SB Proposal increases the taxable income from short-term rentals of “single-family homes” and “apartments” located in so-called containment areas (i.e., tourist areas, as established by a resolution of the City Council, with a high number of such establishments).

Only 35% of the income from short-term rentals is currently taxed under IRS, but the SB Proposal increases the tax base to 50%.

Income from hostels and hostel-like accommodation, and establishments operating outside containment areas will not be subject to the increase, the 35% tax base remaining unchanged.


IRS Brackets – Adjustments

The SB Proposal changes the IRS brackets based on which the IRS rate applicable to each household’s taxable income is computed, namely the SB Proposal adjusts the IRS brackets by just 3%, which is markedly below the inflation rate estimated for 2020.


IRS tax rebates – Baby Bonus

The SB Proposal increases the IRS tax rebates given to households with two or more dependents under the age of 3 (by reference to 31 December of the relevant tax year), which currently stand at EUR 600 but are increased to EUR 726 per each child under the age of 3.

The SB Proposal increases the tax rebates from EUR 726 to EUR 900 from the second dependent under the age of 3 for households with two or more such dependents.

This means that the tax rebate given remains unchanged at EUR 726 for households with a single dependent under the age of 3.

Households with two or more dependents will see their tax rebate increase from EUR 726 to EUR 900 from the second dependent under the age of 3.

Income from employment – IRS tax relief for young employees aged between 18 and 26

The SB Proposal establishes a tax relief for income from employment (i.e., income earned from work performed under an employment agreement and from offices performed in a company’s governing bodies) earned from 2020, where the income earner:

  • Is not a member of another household for tax purposes;
  • Completed at least level 4 of their education (secondary education);
  • Earn an annual taxable income (including exempt income) not exceeding EUR 25,075.00;

The taxable persons’ income is partially exempt for three years, where the applicable relief is 30% in the first year (capped at 7.5 x IAS (social support index)), 20% in the second year (capped at 5 x IAS) and 10% in the third year (capped at 2.5 x IAS).

If we take the 2019 IAS as reference (the 2020 IAS is still unknown), the caps of the exemption will be EUR 3,268.20, EUR 2,178.80 and EUR 1,089.40, respectively.

According to the SB Proposal, taxable persons are allowed to use this exemption once. To this end, taxable persons need to submit a certificate of completion of the 4th level of education on the Official Tax Office Website by 15 February of the year following the first year of income.

Regarding withholding tax, the SB Proposal states that taxpayers must apply the tax withholding rate applicable to the total income to the non-exempt portion of the income (i.e., without prejudice to the partial exemption), as set out in the withholding tax table approved every year.

Withholding tax obligation – Crowdfunding platforms’ managers

The SB Proposal creates a withholding obligation applicable to crowdfunding platforms’ managers headquartered in Portugal or having their place of effective management or a permanent establishment in the country to which the payment must be allocated, when those entities pay or provide income subject to IRS withholding tax, including interest and/or other capital income.

Payments on account – Extension to all income classes

The SB Proposal affords taxable persons, earners of income whose debtors are not under any obligation to withhold tax (e.g. entities not resident in the Portuguese territory), a possibility to make payments of at least EUR 50 on account of the tax ultimately payable for all classes of income.

This possibility is currently only afforded to income from employment and pensions.

This could prove a useful measure for self-employed workers who mostly provide services to non-resident entities, as the payments on account would allow the taxpayer to anticipate the payment of the tax instead of paying the full tax only after the annual income tax return is filed, which would then dilute the relevant tax impact.


Renewables – Enabling Act

The SB Proposal includes an enabling act authorizing the Government to create IRS tax rebates over 2020 to encourage and boost the use of renewables.

The Government is specifically authorized to introduce an IRS tax rebate not exceeding EUR 1,000 for expenses incurred with the purchase of renewable generation units for self-consumption and heat pumps of energy efficiency class A or higher, provided that they are for personal use.

Proof of IRS tax rebates and professional expenses

In step with the 2019 General State Budget Law, the SB Proposal continues to allow taxable persons manually to declare the amount of expenses that entitle them to IRS tax rebates, as well as the amount of expenses related to their business or professional activity, as an alternative to accepting the pre-filled amounts based on the information communicated to the tax authority through the e-fatura (e-Invoice) portal.


Municipal Affordable Rental Housing Programs

In line with the authorization granted to the Government in the beginning of 2019 under an enabling act, the ST Proposal sets forth an IRS (and IRC) exemption for property income earned within the context of Municipal Programs offering rental housing at affordable prices.

The exemption applies to eligible municipal programs and is subject to the approval of the Minister for Finance.