The Portuguese Tax and Customs Authority (AT) has recently issued a binding information clarifying the tax framework applicable to compensation paid upon termination of employment contracts in cases where the employee has also held management or director positions within the company.
The question raised concerns situations in which a professional alternates, throughout their career, between labour duties and director positions in companies belonging to the same group. The question is whether the period during which the employee performed duties as a director — with their employment contract suspended — should be taken into account for the purposes of calculating the partial income tax exemption provided for in Article 2(4)(b) of the Income Tax Code.
AT’s understanding
According to the AT’s interpretation:
- Transfers of contractual positions between companies in the same group do not interrupt seniority, as long as there is job continuity and agreement between the parties.
- However, the period of performing duties as a director cannot be considered for the calculation of the tax exemption applicable to employment-related compensation.
Thus, only the years in which the employee actually held subordinate positions are considered for the purposes of relevant seniority in calculating the exempt portion.
The AT bases its position on Article 398 of the Commercial Companies Code, which stipulates that the employment contract is suspended during the exercise of directorial duties, and on Article 295 of the Labour Code, which — although it recognises the maintenance of rights and length of working relationship — does not change the tax nature of the directorial relationship.
Tax exemption criterion
According to Article 2(4)(b) of the IRS Code, the exempt portion of the compensation corresponds to the average value of regular taxable remuneration for the last 12 months, multiplied by the number of years of seniority as an employee.
The amount exceeding this limit is taxed as Category A income.
This understanding reinforces the distinction between employment and corporate relationships, preventing the period of administration from being used to maximise the tax-exempt portion of severance pay.
Practical implications
Employees who have alternated between employment and management roles should carefully review their contractual and corporate documentation, ensuring consistency between the legal regime (Labour Code and Commercial Companies Code) and the applicable tax regime (Income Tax Code).
The Binding Information issued by the AT, although not a source of law, binds the Tax Administration itself as to the interpretation and application of tax rules to the specific facts analysed, and therefore has significant legal relevance.
Labour Department
Hugo Martins Braz | Mariana Lacueva Barradas | Catarina Almeida
