When a company achieves positive results, it can reward its employees through so-called balance sheet bonuses, which are a mechanism that allows companies to distribute profits to their employees.
If your company achieves positive results in 2023, you can distribute part of those results to your employees, partners or members of governing bodies, and you should take this decision at the General Meeting to approve the accounts.
This way of rewarding your employees can also bring tax benefits to your company, which means you'll pay less corporate income tax. In other words, you can account for this amount of bonuses as an expense for the 2023 tax year and, if it is recognized as such, its deduction is accepted for tax purposes.
It's important to note that this bonus must be paid and processed on salary slips by the end of 2024, otherwise the deduction will not be accepted for tax purposes.
When you choose to award these balance sheet bonuses, you should bear in mind that there are different tax implications between awarding them to managing partners and employees.
If you choose to distribute profits to managing partners, the tax deduction for this award is only accepted if they hold, directly or indirectly, a stake of at least 1% of the share capital and the award is within the limit of twice the monthly remuneration earned in the tax period to which it relates.
According to the proposal for the 2024 State Budget, the distribution of profits to employees will be exempt from IRS, up to a limit of 4,100 euros.
The government is thus demonstrating its intention to strengthen this means of increasing salaries by exempting workers from social security contributions (which already existed) and tax exemption.
However, there is a prior measure that companies must comply with: increase wages for all workers by at least 5%.
The proposal states that "the amounts paid to workers as a share in the company's profits, by way of a balance sheet bonus, paid by entities whose average nominal valuation of fixed remuneration per worker in 2024 is equal to or greater than 5%, shall be exempt from personal income tax up to a limit of 5 times the RMMG".
As a result, companies wishing to distribute profits are opening up the possibility of distributing them more widely and giving greater value to those on lower salaries.
As far as the IRS is concerned, this income is always considered to be dependent work and falls under Category A and is taxed when it is paid or made available. Companies must therefore withhold IRS from the amount paid to each employee, with the rate varying according to the amount and the family situation of the recipient.
The proposed State Budget for 2024 also states that these amounts will be included for the purposes of determining the rate applicable to other income.
Finally, it is worth noting the difference between balance sheet bonuses and dividends, since the latter are distributions of profits that can only be made to shareholders and are based on the net income for the period, i.e. the company's profit after tax.
In terms of Personal Income Tax, the framework is also different because, as we have already mentioned, balance sheet bonuses are considered Category A income, while the distribution of Dividends is Category E income and is taxed differently.
Granting balance sheet bonuses can be a measure with very positive impacts on your company, however, it is always important to analyse the advantages and disadvantages in tax terms, so you can always count on the experience of the Tax Law Department of Belzuz Abogados, S.L.P - Sucursal em Portugal, which is fully available to support and advise you on this issue.
Miguel Paixão
Belzuz Abogados SLP
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