The use of share-based incentive plans has been gaining ground in the remuneration policies of Portuguese companies.

The tax framework applicable to these plans presents important specificities, both at the level of employees and members of statutory bodies, for Personal Income Tax (PIT) purposes, and at the level of companies, for Corporate Income Tax (CIT) purposes, warranting an integrated review of these matters – ideally from the design stage of the plan.

SHARE-BASED INCENTIVE PLANS: A TWOFOLD TAX PERSPECTIVE

At a time when attracting and retaining talent is of growing importance to companies, share-based incentive plans (Stock Option Plans, Restricted Stock Unit plans and similar arrangements) have become established as instruments of variable remuneration and long-term incentives, allowing employees to be associated with the creation of value and promoting the alignment of their interests with those of shareholders.

The tax relevance of these plans has, however, a twofold dimension.

From the employees’ perspective, Portuguese tax legislation currently provides, in the Tax Benefits Statute (EBF), since Law n.º 21/2023, of 25 May, subsequently amended by Law n.º 82/2023, of 29 December, a specific tax regime applicable to certain plans which, provided that the legal requirements are met, allows for the deferral of taxation and for only 50% of the gain assessed to be taken into account for PIT purposes.

From the companies’ perspective, the implementation of these plans is, first and foremost, a management and remuneration policy decision, which may represent an alternative or a complement to traditional forms of variable remuneration and contribute to the preservation of cash resources when compared with models based exclusively on cash remuneration. That decision entails, however, specific tax implications, which should be considered from the design and implementation stage of the plan.

It is important to review, first of all, the requirements on which the application of the regime depends, which relate, to a large extent, to the entity granting the plan.

At the level of the company, the tax treatment of the costs associated with the plan and the timing of their recognition for tax purposes, the particularities arising from implementation within corporate groups (notably where the equity instruments relate to an entity other than the employer), the potential application of autonomous taxation and the applicable reporting obligations are also relevant.

The recent evolution of the Portuguese tax regime, notably the broadening of the universe of potentially eligible entities, thus reinforces the relevance of reviewing these plans in an integrated manner. And the tax framework applicable to these plans is relevant today not only for employees – namely in the decision on where to work and reside, in a context of increasing international mobility – but also for companies, as an instrument for structuring their remuneration policy and a factor of competitiveness in attracting and retaining qualified talent.

A MORE FAVOURABLE TAX FRAMEWORK FOR EMPLOYEES

Gains arising from option, subscription, award or other plans of equivalent effect in respect of securities or equivalent rights, established for the benefit of employees or members of statutory bodies, qualify, as a general rule, as employment income for PIT purposes.

In the absence of a special regime, taxation occurs, as a rule, at the moment of exercise of the option or right of equivalent effect, on the positive difference between the value of the asset or right at the date of exercise and the respective exercise price, plus any amount paid for the acquisition of the option or right, in accordance with the rules on the valuation of income in kind set out in the PIT Code.

The income thus assessed is subject to the general progressive PIT rates, which may reach 48%, plus, where applicable, the additional solidarity rate. In the case of plans without an option (such as Restricted Stock Unit plans), the relevant moment is, as a rule, that of the effective award of the securities to the beneficiary.

The Tax Benefits Statute establishes, however, a specific tax regime applicable in the context of certain share-based incentive plans, the main advantage of which lies in the combination of two elements:

Deferral of taxation

Provided that the legal requirements are met – notably, the maintenance of the underlying rights for a minimum period of one year, a period which the Portuguese Tax Administration, in binding tax rulings made public, takes the view should be counted as from the effective exercise of the option, or the award of the right, to the beneficiary –, the regime provides for the deferral of taxation of the gains arising from these plans until the first of the following events: (i) the sale of the securities or equivalent rights acquired under the plan; (ii) the loss of Portuguese tax resident status; or (iii) their gratuitous transfer.

In most cases, taxation is thus deferred until the beneficiary effectively realises the economic gain, upon the occurrence of a liquidity event, thereby avoiding immediate taxation at a time when the beneficiary may not yet have liquidity corresponding to the economic value of the benefit (a phenomenon commonly referred to as “dry income”).

Only 50% of the gain taken into account

Where this special tax regime applies, only 50% of the gain is taken into account for tax purposes at the level of the beneficiary.

The relevant income is, as a rule, subject to the special 28% rate, without prejudice to the option to aggregate such income under the general PIT rules. Accordingly, where the 28% rate applies, only 50% of the gain being taken into account results, in simplified terms, in an effective tax rate of 14% on the full amount of the gain.

WHO CAN GRANT?

The application of the EBF regime depends, first and foremost, on the characteristics of the entity granting the plan, assessed, as a rule, by reference to the year preceding that of the plan’s approval.

Specifically, the regime applies to gains arising from plans granted by entities which, in the year preceding that of the plan’s approval (or in the year of approval of the plan whenever that is the company’s first year of activity), are recognised as a startup under the legal framework applicable to startups and scaleups, approved by Law n.º 21/2023, of 25 May.

In addition, the regime also covers gains arising from plans of such a nature granted by entities which, in the year preceding the approval of the plan, qualify as a micro, small or medium-sized enterprise or as a small mid-cap company, or carry out their activity in the field of innovation, meaning entities that have incurred expenditure on investment in research and development (R&D), patents, industrial designs or models or computer software equivalent to at least 10% of their costs or turnover.

This latter criterion allows the regime to cover entities which, regardless of their size, have a significant innovation investment profile, extending the scope of application of the regime well beyond the startup ecosystem.

Founders and other holders of qualifying shareholdings, i.e., taxpayers holding, directly or indirectly, at least 20% of the share capital or voting rights of the entity granting the plan, only benefit from the regime where the latter qualifies, in the year preceding the approval of the plan, as a startup or as a micro or small enterprise.

It should also be noted that, under the wording currently in force, members of statutory bodies may benefit from this special regime, the access restrictions initially provided for in this respect having meanwhile been revoked.

Finally, it should be mentioned that the regime takes effect from 1 January 2023 and is also applicable to plans approved up to 31 December 2022, provided that the granting company is recognised as a startup, under the applicable legal framework, or demonstrates that, at the date of approval of the plan, it fulfilled the respective requirements.

From the companies’ perspective, the fulfilment of these requirements should be considered at the plan design stage: the eligibility of the granting entity - and the ability to substantiate such eligibility, notably as regards recognition as a startup or evidence of the investment in innovation - directly determines the tax treatment of the gains at the level of the beneficiaries and, to that extent, the attractiveness of the plan itself as an instrument for attracting and retaining talent.

The regime also places a direct risk on the granting entity: the beneficiary may request from it, in writing, confirmation that it met the conditions for access to the regime. If the entity confirms – or fails to reply within 90 days – it becomes subsidiarily liable for any tax that may be found lacking as a result of non-compliance with those conditions.

Demonstrating eligibility is, therefore, also a matter of protecting the company itself.

A FAVOURABLE TAX FRAMEWORK FOR COMPANIES

The relevance of share-based incentive plans is not limited to the special regime applicable to the gains obtained by employees. For companies, the structuring of these plans also raises specific considerations for CIT purposes, notably as regards the treatment of the associated costs.

In this respect, the CIT Code sets out a specific rule on the point in time at which costs associated with share-based payments are recognised for tax purposes, the consideration of which is essential for the proper assessment of taxable profit.

Under the CIT Code, share-based payments made to employees and members of statutory bodies, by reason of the provision of work or the holding of office or function, are taken into account in determining the taxable profit for the tax period in which the respective rights or options are exercised, and for the amount effectively settled or, where applicable, for the difference between the value of the equity instruments awarded and the exercise price paid.

This rule is particularly relevant in this context since the tax treatment does not, as a rule, coincide with the accounting treatment: under the applicable accounting frameworks, the cost associated with the plan is generally recognised over the period during which the underlying rights vest (i.e., the vesting period), whereas, for tax purposes, it may only be recognised in the period of exercise. This timing mismatch should be considered from the design and scheduling stage of the plan.

Furthermore, in corporate group structures, it is common for the shares or equivalent rights granted under a plan of this nature, even if of a notional nature, to relate to the group’s parent company, with the subsequent recharge of the costs to the Portuguese employer company.

In such cases, it is important, in particular, to review the terms of the recharge and the deductibility of the corresponding costs under the CIT Code.

Finally, where the beneficiaries of the plan are members of statutory bodies, consideration should also be given to the potential tax treatment of costs relating to bonuses and other variable remuneration paid to managers, directors or officers.

In this context, costs or charges relating to bonuses and other variable remuneration paid to managers, directors or officers are generally subject to autonomous taxation at a rate of 35% where such remuneration represents more than 25% of the annual remuneration and exceeds € 27,500, unless its payment is subject to the deferral of a portion of at least 50% for a minimum period of three years and is conditional upon the positive performance of the company during that period.

As these are conditions which depend, to a large extent, on the design of the plan (notably the vesting schedule and the performance conditions to which the grant is made subject), this is a matter which should be assessed having regard to the specific terms of each plan and, ideally, before its approval.

REPORTING OBLIGATIONS

The establishment, exercise and termination of these plans are subject to specific reporting obligations in Portugal, notably the submission of the Modelo 19 return, with identification of the plans and their respective beneficiaries, in addition to the general reporting obligations regarding employment income, in the Monthly Remuneration Statement (DMR) or, in the case of non-resident beneficiaries, in the Modelo 30 return.

As income in kind, the income in question is not subject to withholding tax in Portugal, which is not the case for plans settled in cash (phantom shares and similar arrangements), which are subject to withholding tax under the general rules. In any case, compliance with the aforementioned reporting obligations remains required.

THE GRANT OF SHARE-BASED INCENTIVE INSTRUMENTS OUTSIDE THE CONTEXT OF EMPLOYMENT RELATIONSHIPS

The use of instruments of this nature need not, however, be limited to the relationship between the company and its employees or members of statutory bodies.

In certain structures, it may be justified to consider granting these plans to service providers, as a means of reinforcing the alignment of interests and their commitment to the development of the business.

In such cases, however, the applicable tax framework should be subject to a separate assessment, taking into account the nature of the contractual relationship established: the qualification of the income at the level of the beneficiary, the timing and form of its taxation, the tax treatment of the corresponding costs at the level of the company and the applicable reporting obligations may follow rules different from those provided for employees and members of statutory bodies.

A similar consideration is warranted, moreover, in situations of international mobility of the beneficiaries, in which the allocation of taxing rights between the jurisdictions involved may call for the application of Double Tax Treaties. It should also be recalled that the loss of Portuguese tax resident status is, under the EBF regime, one of the events that brings taxation forward, which should be considered in the management of internationally mobile beneficiaries.

CONCLUSIONS

Share-based incentive plans have today become an established instrument of remuneration policy and of attraction and retention of talent, the tax framework of which is relevant simultaneously at the level of employees and at the level of companies.

Access to the regime begins, however, with the granting entity: only plans granted by startups, by micro, small or medium-sized enterprises or small mid-cap companies, or by entities carrying out their activity in the field of innovation fall within the special tax regime, and it is important to verify (and to be in a position to demonstrate) the fulfilment of these requirements at the plan design stage. The written confirmation of such eligibility by the issuer itself may, moreover, as seen above, render it subsidiarily liable for the tax due by the beneficiary.

In the sphere of companies, the moment at which the cost becomes relevant for tax purposes, the intra-group implications, autonomous taxation and the reporting obligations are, to a large extent, determined by the design of the plan. Added to these are the specificities of the grant of these instruments outside the employment context and of situations involving the international mobility of the beneficiaries.

In this context, the design and implementation of a Share-based Incentive Plan should be accompanied, from the outset, by an integrated tax review, with a view to ensuring the appropriate tax treatment in the sphere of the beneficiaries and of the companies.

The recent legislative developments and the interpretative uncertainties that the tax framework applicable to these arrangements continues to raise reinforce the importance of a timely consideration of these matters, in light of the specific circumstances of each company, its corporate structure and of each plan.

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Rogério Fernandes Ferreira
Álvaro Silveira de Meneses
João de Freitas Jacob
José Sousa Guerreiro
Mafalda Andrade
Lara Fernandes da Silva
Bernardo Mendonça Rodrigues
Mariana de Oliveira Monteiro