IRS to be cut to the 8th tax bracket; IRC down to 17%

The newly re-elected Democratic Alliance (AD) government headed by Luís Montenegro is to shave €500 million off income tax this year while slashing IRC taxes gradually from 21% (20% in Madeira) to 17% by the end of its term.

The government is continuing its policy of “budgetary sustainability” through tax reduction and is arguing that the tax reform foreseen in its election manifesto will boost the economy and enable a significant tax reduction and a dispersal of tax benefits. The programme was delivered to the Portuguese parliament on Saturday.

The government says that its current tax reform is expected to “have a positive impact on driving growth”, although it admits that “for reasons of prudence this should not be overstated.”

In addition to this expected spur to economic activity, the government assures that “the budget sustainability of these tax cuts has been backed up by various tax benefits with a view to expanding tax bases.”

The government believes that there is a margin within the budget for this tax cut, despite institutions that monitor Portugal’s public accounts forecasting a return to budget deficits this year or next.

The Bank of Portugal forecasts a deficit of 0.1% of Gross Domestic Product (GDP) this year and 1.3% next year, while the Public Finance Council points to a balanced budget in 2025 and a deficit of 1% in 2026.