Equity incentive plans have become a widely used compensation instrument and have gained increased visibility in Portugal following the approval of the special tax regime enacted in 2023. Nevertheless, stock option plans and their tax treatment remain surrounded by misconceptions that often discourage both employers and employees from making effective use of such instruments.
The Start-up Law, which introduced a special tax regime applicable to stock options, has significantly reshaped the landscape, making Portugal far more competitive and attractive. Despite this legislative development, ungrounded interpretations persist. This article addresses several key aspects of the regime, focusing on the most widespread misconceptions, with a view to clarifying the framework applicable under Portuguese law.
The taxable event
A first and particularly relevant misconception concerns the taxable event. Stock options are not immediately taxed upon exercise under the new regime. Contrary to the standard regime, taxation is deferred until the occurrence of a liquidity event, which is deemed to take place upon:
The sale of shares or comparable rights;
A transfer of ownership for no consideration; or
The loss of Portuguese tax residency.
This approach is aimed at preventing the taxation of so-called dry income and aligns the tax burden with the effective realisation of economic value.
Applicable tax rates
A second recurring misconception relates to the level of taxation applicable to stock option gains. While under the general tax regime such gains may indeed be subject to high marginal rates, this no longer reflects the reality for qualifying plans granted by eligible entities.
Under the special regime, the income is classified as employment income but is subject to a 28% flat tax rate, applicable to only 50% of the gain, resulting in an effective tax rate of 14%. By contrast, under the standard regime, gains derived from stock options are taxed at progressive personal income tax rates of up to 53%, including surtaxes. This difference is significant and materially affects the design of remuneration packages.
Eligibility of entities
Another area of frequent debate concerns the scope of eligible entities. The favourable tax treatment is not of general application and is limited to entities meeting specific legal criteria. This targeted approach reflects the policy objective underlying the regime; namely, the promotion of innovation, medium-scale entrepreneurship, and talent retention within the early-stage ecosystem, while excluding large enterprises that remain subject to the general tax framework.
Eligibility is therefore restricted to:
Qualified start-ups and micro, small, and medium-sized enterprises;
Small mid-cap companies; and
Other entities whose activity is carried out through innovation.
In this context, it is relevant to clarify the concept of a small mid-cap undertaking, defined as a company that, although forming part of a group exceeding 250 employees, and thus not qualifying as a small or medium enterprise, individually employs fewer than 500 employees.
Under the current interpretation, the headcount threshold is assessed on a standalone basis, whereas the turnover and balance sheet total thresholds are assessed on a consolidated basis. Accordingly, even where the consolidated financial thresholds would otherwise lead to a classification as a large enterprise, an entity employing fewer than 500 employees should still qualify as a small mid-cap undertaking.
It should be noted that, pursuant to European Commission Recommendation C(2025) 3500 final of May 21 2025, the qualification of small mid-cap undertakings is expected to be harmonised at EU level, with all relevant criteria assessed on a consolidated basis. Member states are requested to inform the European Commission by December 31 2026 of the measures adopted to give effect to that recommendation. Until such measures are implemented into domestic law, the current definition and assessment criteria remain applicable.
A further commonly raised issue concerns the eligibility of founders/shareholders. While individuals holding, directly or indirectly, more than 20% of the company’s share capital are generally excluded from the regime, this limitation does not apply where the company qualifies as a start-up or a micro or small enterprise, in which case founders/shareholders may still benefit from the favourable tax treatment.
Phantom shares
Finally, questions frequently arise regarding the inclusion of phantom shares within the scope of the regime.
Although the initial draft legislation appeared to restrict eligibility to plans that foresee the issuance of physical shares, the final wording of Law No. 21/2023 expressly broadened the scope to include rights underlying securities or equivalent rights, even if of an ideal nature. This wording encompasses phantom or virtual shares and similar arrangements. Moreover, such instruments have been expressly recognised under the Personal Income Tax Code since 2002, confirming their long-standing acceptance under Portuguese tax law.
Key takeaways
In conclusion, the Portuguese special stock option regime represents a substantial evolution towards greater competitiveness and alignment with international best practices. Clarifying the most common misconceptions is essential to ensuring the correct interpretation and application of the regime as currently in force.
