Portuguese Tax Treatment of Benefits in Kind - Company Car

Pursuant to article 2.º, n.º3, b) paragraph 9 of the Personal Income Tax Code (Código do Imposto sobre o Rendimento das Pessoas Singulares - hereinafter "CIRS"), the personal use by an employee of a vehicle of the employer entity, which generates expenses to the employer (because such vehicle belongs to the employer entity or this entity has a lease or rental contract regarding such vehicle), is regarded as employment income and taxable as such at the sphere of the employee, when there is a written agreement on the attribution of the vehicle to the employee.

When the attribution of the use of a car to an employee is not foreseen in a written agreement, such use is not taxable on Personal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares - hereinafter "IRS"), taking into consideration the wording of article 2.º, n.º3, b) paragraph 9 of CIRS. As such, most companies do not mention the attribution of the use of the vehicles to the employees in the employment contract or in any other written document.

It should, however, be noted that the reference contained in article 2.º, n.º3, b) paragraph 9 of CIRS to the written agreement that attributes the use of the vehicle to the employee is interpreted by the tax authorities as referring to any written document that reveals the attribution of the use of a specific vehicle to a certain employee (even if this is an internal document of the company).

Therefore, the situation of effective attribution of the use of company cars to employees without written documentation evidencing such attribution, although very common in Portuguese companies, might, if not adequately monitored, involve a certain degree of tax risk.

The annual taxable value regarding the use of the vehicle by the employee corresponds to the following formula: 0,75% of the vehicle's cost of acquisition multiplied by the number of months that the vehicle was used by the employee in a given year (article 24.º, n.º 5 CIRS).

In this case, the value corresponding to the use of the vehicle by the employee should be declared by the Company as employment income paid or put at the disposal of the employee and therefore this will be treat as a cost in the sphere of the Company, regarding the Corporate Income Tax Code (Código do Imposto sobre o Rendimento das Pessoas Colectivas – hereinafter “CIRC”)

Such value should also be declared by the employee for tax purposes, when filing his/her annual individual income tax return. It will then be taxable at the progressive IRS tax rates applicable to the global taxable income of the individual or family (if the employee is a Portuguese tax resident).

However, it should be noted that the value corresponding to the use of the vehicle by the employee is not subject to withholding tax (article 99.º, n.º1 CIRS), since it is expressly excluded from the scope of withholding tax on employment income.

In relation to social security payments and until now, the personal use by an employee of a vehicle of the employer entity is not, in general terms, considered as being subject to social security payments.