Withholding tax - what is it?
The payment of the IRS is made through a tax substitution mechanism, foreseen in article 20 of the Portuguese General Tax Law.
Withholding at source is the mechanism by which employees have part of their income "withheld" and transferred to the Portuguese State as if it were a monthly payment of the IRS.
The calculation of the monthly amount to be withheld results from the income obtained by the worker and varies according to some factors such as their physical condition, family situation, and location (Mainland Portugal, Madeira, or the Azores.
Withholding tax is levied on income subject to progressive rates.
Withholding tax in Portugal - what changes in 2023?
The Portuguese State Budget for 2023 will introduce a new withholding tax model, aiming at introducing closer proximity between the monthly withholding tax and the calculation of the amount of IRS to be paid each year.
Finding a balance in the withholding tax model has always proved to be particularly complex, especially considering the characteristics of the IRS, as a subjective tax that allows differentiated deductions and tax benefits for taxpayers.
In this sense, the legislator's option is to migrate from a single rate model to a marginal rate model, with the practical effect of increasing taxpayers' net monthly income. As we are dealing with a mere revision of the withholding tax technique and not with a reduction in tax rates, this increase in net monthly income should result in a substantial decrease in the annual reimbursement or even in the payment of tax when filing the IRS declaration.
The new model was recently detailed in Order no. 14043-B/2022, of 5 December (applicable only in mainland Portugal), which will come into force on 1 July 2023.
The current single-rate model will remain in force in the first half of the year.
This new model only comes into force on 1 July 2023
The new mechanism harmonises the IRS withholdings with the general table of annual IRS tax brackets and, consequently, avoids situations of regressivity (situations in which an increase in the gross monthly salary leads to a decrease in the net monthly salary). The monthly deduction at source will be determined by applying a marginal rate on the monthly income and, subsequently, the deduction of a portion to be deducted. The application of an additional deduction per dependent of a fixed value (which replaces the current reduction of rates per number of dependents) will also be considered.
Despite only coming into force on the 1st of July 2023, the complexity of the new model forces paying entities to make an additional effort to adapt their systems during the first half of the year.
Finally, we note the commitment made by the Government to extend this change of tax technique to business and professional income (category B) in the future.
