Remote working has become increasingly common, particularly during the COVID-19 lockdown period.
In fact, Law No. 83/2021 of 6 December amended the Portuguese Labour Code, establishing that employers are required to bear the expenses associated with employees working under a remote working arrangement.
But how are these expenses treated for Personal Income Tax (IRS) purposes?
In this article, we explain everything you need to know.
Remote Working and IRS: How are Expenses treated?
Since the beginning of 2022, when the above-mentioned legislation came into force, employees working remotely have been entitled to compensation for the additional expenses incurred as a result of performing their duties from home.
According to the law:
“The employer must fully compensate the employee for all additional expenses arising from remote working, namely those related to the acquisition or use of the computer equipment and information or telecommunication systems required to perform the work, including increased energy costs and the internet connection installed at the place of work with a speed compatible with the communication requirements of the service, as well as maintenance costs for such equipment and systems.”
However, this legislative change raised questions regarding the tax treatment of these expenses.
To clarify the matter, the Portuguese Tax and Customs Authority (Autoridade Tributária) issued an official circular in January of that year. Below are the key points addressed in that document.
Situations where IRS Exemption Applies
According to the guidance issued by the Tax Authority, IRS exemption applies only to additional expenses reimbursed by the employer when they are supported by invoices.
This means that where an employer provides a fixed monthly allowance to cover these expenses, without documentary evidence of the actual costs incurred, that reimbursement will be subject to taxation.
In practice, reimbursements made to cover remote working expenses – provided they are properly documented – are not regarded as employment income. Consequently, these amounts are not subject to IRS.
According to the Tax Authority’s official guidance, proof of additional expenses must be provided through the documentation or invoices submitted by the employee, by comparing those expenses with the corresponding expenses incurred during the same month of the year preceding the remote working agreement.
It is also important to note that the invoices do not necessarily have to be issued in the employee’s name.
This reflects the fact that, in many cases, utility and telecommunications services may be registered in the name of another member of the household.
Fixed Monthly Allowances and Taxation
On the other hand, if the employer chooses to pay the employee a fixed monthly amount instead of reimbursing the actual additional expenses incurred, that payment will be subject to IRS.
In this regard, the Tax Authority’s official circular states that:
“The payment of a fixed monetary amount intended to compensate for the increased costs arising from remote working, without a direct link to the employee’s actual additional expenses, is subject to Personal Income Tax (IRS), in accordance with paragraph 2 of Article 2 of the IRS Code.”
In other words, this compensation is regarded as employment income for IRS purposes and must therefore be reported as such in the Monthly Remuneration Declaration.
If you wish, you may consult the Tax Authority’s official circular in full through the relevant link.