The Presidency of the Republic announced, on 28^th March 2016, the enactment of the 2016 State Budget and the new Law was published on 30^th March.

Therefore, important changes will enter into force regarding the taxation of both families and businesses, in accordance with Law 7-A/2016.

In what concerns Personal Income Tax (IRS), we would highlight the following rules:

• An increase (allbeit small) of the upper limits of the 1^st , 2^nd and 3^rd tax tiers, which will allow some taxpayers to move to the lower tax tier;
• The number of dependents and relatives in the ascending line that make up the family household (also known as family allowance) is no longer relevant to determine the applicable tax rate. The Government brought back the deductions based solely on whether the tax payers are married and not legally separated (also known as couples’ allowance);
• In contrast, the Budget established an increase of the fixed tax deductions per dependent and per relative in the ascending line, to €550,00 and €525,00, respectively;
• As for disabled dependents and/or relatives in the ascending line, the maximum tax deduction is increased from €712,50 to €1.187,50;
• Tax payers may now deduct health and education expenses that were incurred anywhere outside of the Portuguese territory and are no longer limited to those incurred in Member States of the European Union or the European Economic Area;
• In case of failure to file the tax return, the Government introduced a slight reduction of the coefficient applicable on most business and professional income (with the exception of income earned by the partner of a company subject to the tax transparency regime, whose taxation remains unchanged); 
• A duty for the Tax Authority to state its reasons for filing an official tax return on behalf of a tax payer, is now implemented; 
• Lastly, the Budget extends the ancillary obligations which apply to entities who issue and use meal vouchers, to those who issue and/or use any other social vouchers, brought together under the ‘umbrella’ of the new concept of extra-salary compensation titles (títulos de compensação extra-salarial). 

In regard to Corporate Income Tax, the most significant changes are as follows:

• New conditions on the exemption commonly known as participation exemption(tax exemption over: (1) profits and distributed reserves and (2) capital gains or lossesobtained with the onerous transfer of capital): now the beneficiary must hold at least 10% of the share capital or voting rights (instead of the previous 5%), whereas the minimum period of ownership is decreased from 24 months to 1 year; 
• Still with reference to the participation exemption, it is clarified (through an explanatory guideline) that capital gains from shares linked to technical reserves of insurance companies and mutual-type associations will only be exempt from taxation as long as they are not attributable to policyholders; 
• The existing rule excluding the participation exemption regime in cases where there are immovable assets that represent, directly or indirectly, more than 50% of the company’s assets, is extended to the transfer of other capital instruments, such as supplementary capital contributions; 
• It is stated (in the form of an explanatory guideline) that the participation exemption regime is applicable to capital gains or losses in case of transfer of a company’s home office from the Portuguese territory into another European Union or European Economic Area Member State; 
• Pertaining to double taxation avoidance mechanisms, the conditions for exemption of tax withholding and for entitlement to offsetting tax, due to international economic double taxation, were revised, in accordance with the changes to the participation exemption regime; 
• In what concerns the special tax regime for company groups, the law provides that any companies who are a part of a group and waive the applicability of a lower IRC rate (in order to be included in the group for tax purposes) must maintain that option for a minimum period of 3 years. 
• The IRC rate applicable to the total income of entities with head office or effective management in Portuguese territory that do not carry out commercial, industrial or agricultural activities as their main business, is reduced from 21,5% to 21%; 
• Penalties are introduced in case of failure to comply with the requirements for tax exemption of bonuses and other variable compensations paid to supervisors, directors or managers; 
• It is clarified that the increased autonomous taxation rates (by 10%) applied in case of capital loss are also applicable the company groups subject to the special regime; 
• The interim regulation approved by Law no. 30-G/2000, published on 29^th December 2015, is revoked, bringing about the need for company groups to declare any suspended earnings, between the tax periods of 2016 and 2018. To that effect, in 2016 taxpayers will make a payment on account in July (which will be deductible on the tax owed in 2016). 

Lastly, it is worth noting the highly criticized reduction, from 12 to 5 years, of the deadlines to report negative net results, both in regard to business and professional income (subject to taxation under IRS) as well as corporate tax loss and capital loss (subject to IRC). In both situations, the 5-year deadline will be applicable to losses arising from 1^st January 2017. 

All things considered, the new income tax rules prioritize the announced recovery of family earnings and, at the same time, curb simplification and reduction of the tax load on companies.