Generally speaking, gains from stock options fall into two CIRS categories. Firstly, it is income from employment (CIRS Category A), and secondly, it is income from capital gains (CIRS Category G) and/or income from dividends (CIRS Category E).
In principle, there has to be a contractual relationship before granting the right of option of a labour nature (employment contract) or the provision of services. This labour contractual relationship is a condition sine qua non for the right to be subsequently granted to the employee. Income from stock options is expressly provided for in Article 2(3)(b) 85, point 7 of the CIRS.
If the employer directly grants shares to the employee as part of their remuneration, granting said shares will be understood as income in kind.
Previous Binding Opinions from the Portuguese Tax and Customs Authority
Case: 1375/2018, sanctioned by order of the Deputy Director-General of IR, dated 2019-04-18 – according to the information provided by Dr Elizabeth as being the client’s actual situation
Content: The question concerns the tax framework of a non-resident entity’s award of shares to an employee in a control relationship with the respective employer.
- The allocation of shares to employees by their employers constitutes employment income under the terms of Article 2(3)(b)(8) of the IRS Code. Under Article 2(10), the concept of employer covers any entity that pays or makes available employment income and any other entity with which it is in a group, control or simple participation relationship, regardless of its geographical location, is assimilated to it.
- Therefore, considering that the entity paying the income is equivalent to the employer because it is in a controlled relationship with the employer, the income is, as mentioned above, taxed as employment income.
- The amount of income resulting from the allocation of shares corresponds to their value at the time of allocation under the terms of Article 24(1) (income in kind) of the IRS Code.
- It should also be noted that income in kind is exempt from withholding tax under the terms of the final part of Article 99(1)(a) of the IRS Code.
- In conclusion:
- As a result of the award of shares, the applicant earns income from employment under the terms of subparagraph 8) of paragraph 3 b) of article 2 of the IRS Code, in conjunction with paragraph 10 of the same article;
- This income is, therefore, subject to taxation using the general rate table in Article 68 of the IRS Code and must be declared in Annex A of the Model 3 declaration.
Case No. 3545/2002, with the Director General’s order of 17.05.04, based on opinion No. 44/2004 of the Centre for Fiscal Studies.
Tax framework for the allocation of shares on favourable terms to employees. The subscription of shares by employees of a specific company under privileged conditions (below market value) is based on the existence of an employment relationship, constitutes a benefit earned as a result of the provision of work, and is dependent on employment income that falls under Article 2(3)(b), (7) of the CIRS.
In this situation, the tax rules defined for the income from employment must be applied, although there is no exemption from withholding tax under article 99(1) of the CIRS. Under the provisions of article 24(4)(b) of the CIRS, the moment at which the gains resulting from the acquisition of shares are considered to have been obtained is the moment of subscription.
This is not the case when the allocation plans are subject to several
cumulative conditions:
- Failure to acquire or register securities or rights acquired in favour of the employee;
- The employee is unable to enter into a transaction to dispose of or encumber securities or similar rights;
- Subjection to a restriction period that excludes workers from the allocation plan in the event of termination of employment, at least in cases of initiative with just cause by the employer;
- Impossibility of acquiring other rights inherent to the ownership of securities or equivalent rights, such as the right to income or shareholding.
In this case, the gain is deemed to have been made when the employee is fully invested in the corresponding right (Article 24(4)(e) of the CIRS).
Income is the difference between the amount paid for the shares and their market value.
Dividends and any capital gains that the employee may subsequently realise through the Fund are not to be confused with ancillary remuneration for work resulting from these share purchase plans.
As such:
- Dividends paid to the Fund for shares previously acquired do not lose this nature, regardless of whether the respective amount is applied to the acquisition of new shares or to the payment of the financial charges inherent in the financing granted to the Fund to acquire new shares.
- Gains from the sale of participation units constitute capital gains to be taxed under the general regime.
- Capital gains are considered to have been obtained at the time of disposal. They are made up of the difference between the realisation value and the acquisition value (Article 10(3) and (4)(a) of the CIRS).
Additional tax understanding
Stock options are remuneration plans in which employees are allowed to acquire shareholdings in their employer or another Group company after meeting specific requirements and objectives under particularly favourable terms – that is, by paying a lower price than the market value of such shares. The effectiveness of this sort of instrument is directly tied to various elements, including the value of the employee’s job and financial and tax considerations. In reality, among the critical advantages mentioned concerning the granting of option plans, we would emphasize the following: It is an element of devotion to the institution’s success because it immediately benefits the employee. Developing an “emotional connection” with the employer; Possibility of monetizing shareholdings obtained at a lower price than their market worth.
Stock option plans, which, while complex, frequently compel enterprises to seek expert assistance when establishing this sort of remuneration scheme. To begin, it should be highlighted that the simple execution of an option plan, i.e. the prospect of the employee obtaining some shares under favourable terms (the so-called “granting”), does not constitute a taxable event and hence does not result in taxation. When the option is exercised, the shareholding becomes the employee’s property (“vesting”).
At this stage, Portugal will only tax the difference between the price/cost of obtaining the shares and their market value. This sum is classified as income from employment income – Category A; however, there will be no withholding tax. Furthermore, the revenue earned is not subject to social security contributions.
Vesting occurs when the employee is located in a country other than where the work was performed – which commonly occurs after the respective employment relationship has terminated – and specific intriguing concerns arise regarding international tax law. Such scenarios need careful consideration, notably the rules of the relevant Double Taxation Agreements.
Some option plans specify that the employee will be eligible for corporate earnings through dividend distributions while holding the acquired shares.
Any dividends paid in this context are taxed under the general terms, i.e. at the special IRS rate of 28%, as capital income – Category E.Stock options plans allow for free market selling of shares, making the final taxable event when sold or disposed of. However, most merely allow for the potential of reselling to the employer, although under market circumstances. The capital gain will be taxed as Category G income at a special rate of 28%. In the case of Portuguese firms classified as micro and small enterprises, the estimated capital gain may be evaluated at just 50% of its value, providing significant tax savings. Despite the broad system stated above, it is conceivable (and desirable) for the tax legislator to go further, with Portugal, like other nations, considering implementing a beneficial tax policy for employee ownership acquisitions.
Portuguese Certified Accountants Guild’s (Ordem dos Contabilistas Certificados) understanding of stock options plans and the corresponding applicable taxation
The following income is considered employment income, even if it materialises after the employment relationship has ended:
- Gains resulting from option, subscription, allocation or other plans with equivalent effects on securities or similar rights, even if of an ideal nature, including:
- Gains resulting from the sale or financial settlement of options or rights or resulting from the onerous renunciation of the exercise of these options or rights in favour of the employer or third parties;
- Gains resulting from the repurchase by the employer, insofar as they are remunerative, of securities or similar rights.
- Income in cash or kind derived from subscription, allocation or other plans with equivalent effect, paid or made available as:
- The right to income inherent in securities or similar rights, even if they are ideal;
- The capital appreciation of those values or rights, regardless of the index used to determine it.
The time of taxation and the way of determining income resulting from share plans (stock options) and other securities created for the benefit of employees or members of governing bodies are defined as described in the following table:
| Moment of Incidence | How Earnings Are Determined Employment Income |
| Exercise of option or equivalent right | The positive difference between the asset’s or right’s value on that date and the exercise price of the option or suitable, plus any amount paid by the employee or member of the governing body to acquire the right. |
| Subscription or exercise of a right with equivalent effect | The positive difference between the subscription or exercise price of the right with equivalent effect for the generality of subscribers, or in the absence of other subscribers, the market value, and that for which the employee or member of the corporate body exercises it, plus the price that may have been paid to acquire the right. |
| Disposal, financial settlement or waiver of the exercise, in favour of the employer or third parties, of options, subscription rights or others with equivalent effect. | The positive difference between the price or value of the economic advantage received and what may have been paid by the employee or member of the governing body to acquire the options or rights. |
| Repurchase of securities or similar rights by the employer. | The positive difference between the price or value of the economic advantage received and its market value or, if that price or value has been previously fixed, the amount that has been considered as the value of those goods or rights (in option plans) or as the subscription or exercise price of the right for the generality of the subscribers or holders of the right (in subscription plans) or the market value (in allotment plans). |
| Full vesting, by employees or members of the governing bodies, in the plans for the allotment of securities or similar rights, of the rights inherent in those securities. | The positive difference between the market value on the end date of the restriction period and what may have been paid by the employee or member of the statutory body to acquire those securities or rights |
Conclusion
The taxation of stock options plans in Portugal is a complex matter that requires careful analysis by a Certified Accountant to ensure that beneficiaries comply with the tax regulations and understand the impact of said benefits paid by their employees.
Remember, this article provides a general overview of stock options taxation in Portugal. Still, for more detailed information, we recommend seeking the expertise of our team at MCS, who are here to support you throughout your business journey.
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