Youth IRS: Complete Guide for Beneficiaries

The Youth IRS regime, introduced and progressively refined within the Portuguese legal framework, represents a strategic fiscal measure designed to encourage the retention and return of qualified young people to the national labour market. By offering a set of progressive tax exemptions on earned income, the legislator aims to mitigate the impact of the initial tax burden for those taking their first steps in their professional lives, making Portugal a more attractive destination for career development.

This regime, which falls within public policies supporting youth and combating the emigration of qualified professionals, aims to provide significant financial relief in the early years of activity, allowing young people to accumulate capital, invest in their continuous training, or simply improve their quality of life. A detailed understanding of it is crucial to ensure that potential beneficiaries can fully enjoy the rights conferred upon them by law, avoiding omissions that could compromise the application of the tax benefit.

In this comprehensive guide, we will explore in depth the eligibility criteria, the specific tax benefits, the application process for different income categories, and provide practical examples illustrating the financial impact of the Youth IRS. We will also address common mistakes to avoid and relevant legal implications, with the aim of equipping the reader with all the necessary information for efficient tax management.

Legal Framework and Objectives of the Youth IRS

The Youth IRS regime was originally established by Law no. 2/2020, of March 31 (State Budget for 2020), and subsequently amended and expanded by Law no. 75-B/2020, of December 31 (State Budget for 2021), by Law no. 12/2022, of June 27 (State Budget for 2022), and more recently by Law no. 24-D/2022, of December 30 (State Budget for 2023), and by Law no. 82/2023, of December 29 (State Budget for 2024). These successive amendments reflect the adaptability of the regime and the commitment to adjust it to the needs of the market and young people.

The main objective of the Youth IRS is to encourage qualification and entry into the labour market, combating precariousness and promoting the financial stability of young people. Through a mechanism of partial income exemption, the State waives a portion of its tax revenue to boost the purchasing power and savings capacity of young workers. This regime is particularly relevant in a context of high academic qualification and challenges in the transition to adulthood.

Who can benefit from the Youth IRS?

Eligibility for the Youth IRS regime is conditional on meeting a set of cumulative criteria, which aim to ensure that the benefit is directed to the intended target audience. It is essential that taxpayers carefully verify their situation to determine if they meet all requirements.

Age and Qualification Requirements

• Age: The benefit is intended for young people who, as of December 31 of the year to which the tax relates, are aged between 18 and 35, inclusive. It is important to note that the benefit can be enjoyed until the year in which the taxpayer turns 35.
• Qualification: The taxpayer must have completed a study cycle of level 4 or higher of the National Qualifications Framework (NQF). This encompasses a wide range of training, from secondary education with professional certification (level 4) to bachelor's, master's, and doctoral degrees (levels 6, 7, and 8, respectively). The completion of the study cycle must have occurred before the start of earning the income intended for exemption, or by the end of the year in which such income is earned. Proof of completion of the study cycle is made by presenting a certificate or diploma.

Types of Income Covered

• Employment Income (Category A): Includes salaries, wages, gratuities, commissions, and other remuneration from employment. Article 2 of the IRS Code (CIRS).
• Self-Employment Income (Category B): Covers income earned by liberal professionals, sole traders, and other self-employed workers, provided they fall within the terms of Article 3 of the CIRS. It is crucial that this income results from the exercise of a professional activity and not from business activities of another nature.

Additional Conditions

• Not having been classified as a dependent: The taxpayer cannot have been considered a dependent for IRS purposes in any of the previous years in which they benefited from the Youth IRS regime. However, recent legislation has made this rule more flexible, allowing access to the regime even if the young person was a dependent in previous years, provided they did not benefit from the exemption.
• Not having benefited from the Non-Habitual Resident (NHR) regime: The Youth IRS benefit is incompatible with the Non-Habitual Resident regime (Article 16 of the CIRS) in the same year. The taxpayer will have to choose one of the regimes if they meet the conditions for both.
• Eligibility Period: The regime can be enjoyed for 5 years, consecutive or interpolated, provided the age limit of 35 is not exceeded. The counting of benefit years begins in the first year in which the taxpayer opts for its application.

Tax Benefits and Limits

The Youth IRS regime provides for a partial exemption from employment and self-employment income, with progressively decreasing percentages over the years of benefit application. It is essential to understand the exemption percentages and the maximum annual limits for each period.

Exemption Percentages (OE 2024 Amendments)

With the amendments introduced by the State Budget for 2024, the exemption percentages have been significantly revised for the years 2024 onwards. For income earned in years prior to 2024, the rules in force during that period apply.

• 1st year of benefit: Exemption of 100% of income (previously 50%).
• 2nd year of benefit: Exemption of 75% of income (previously 40%).
• 3rd year of benefit: Exemption of 50% of income (previously 30%).
• 4th year of benefit: Exemption of 25% of income (previously 20%).
• 5th year of benefit: Exemption of 25% of income (previously 20%).

It is important to emphasise that these percentages apply to the net income of categories A and/or B. Article 12-A of the CIRS.

Maximum Exemption Limits (OE 2024 Amendments)

The exemption has a maximum annual limit, which was also revised by OE 2024, and is indexed to the Social Support Index (IAS).

• 1st year of benefit: Maximum limit of 40 times the IAS value.
• 2nd year of benefit: Maximum limit of 30 times the IAS value.
• 3rd year of benefit: Maximum limit of 20 times the IAS value.
• 4th year of benefit: Maximum limit of 10 times the IAS value.
• 5th year of benefit: Maximum limit of 10 times the IAS value.

For the year 2024, the IAS value is € 509.26. Thus, the maximum limits for 2024 are:

• 1st year: 40 x € 509.26 = € 20,370.40
• 2nd year: 30 x € 509.26 = € 15,277.80
• 3rd year: 20 x € 509.26 = € 10,185.20
• 4th and 5th year: 10 x € 509.26 = € 5,092.60

These limits apply to the total amount of exempt income, regardless of whether it is from Category A or B.

How to Apply for Youth IRS: Procedures and Formalities

The procedure for applying for the Youth IRS benefit differs depending on the nature of the income earned (employment or self-employment). It is crucial to follow the correct steps to ensure the application of the exemption.

For Employment Income (Category A)

For employees, the application of the Youth IRS is, as a rule, carried out automatically when submitting the annual IRS declaration (Model 3).

• Filling in the IRS Declaration: The taxpayer must tick the box corresponding to the option for the Youth IRS regime in Annex A of the IRS declaration (Box 4-A). It is essential to indicate the year of completion of the study cycle and the qualification level.
• Withholding Tax: Although the benefit is applied in the annual declaration, the taxpayer can inform their employer that they intend to benefit from the Youth IRS. This communication allows the employer to apply a lower IRS withholding tax, reflecting the partial exemption of income. To do this, the taxpayer must fill in the Annex of Relevant Personal Data for Withholding Tax and submit it to the employer, ticking the option for Youth IRS.
• Proof: The Tax and Customs Authority (AT) may request, retrospectively, proof of completion of the study cycle. It is recommended to keep the certificate or diploma.

For Self-Employment Income (Category B)

In the case of self-employed workers, the application process is slightly different, requiring a specific declaration in Annex B of the IRS declaration.

• Filling in the IRS Declaration: The taxpayer must indicate the option for the Youth IRS regime in Annex B of the IRS declaration (Box 3-E or 3-F, depending on the simplified taxation regime or organised accounting).
• Communication of Start of Activity: At the time of starting activity, or in subsequent changes, the taxpayer can indicate that they intend to benefit from the regime, although the effective application occurs in the annual income declaration.
• Proof: As for Category A income, the AT may request proof of completion of the study cycle.

It is crucial that the taxpayer always checks the correct codes and fields to fill in the IRS declaration each year, as small changes may occur in the versions of Model 3 and its annexes.

Practical Examples of Youth IRS Application (OE 2024)

To better illustrate the financial impact of the Youth IRS, we present some practical examples, considering the IAS of € 509.26 for 2024.

Example 1: Employee (1st year of benefit)

• Situation: A 25-year-old graduate starts their first professional activity in January 2024, with an annual gross income of € 20,000.00 (approximately € 1,428.57/month over 14 months).
• Exemption Calculation: In the 1st year, the exemption is 100% of income, with a maximum limit of 40 IAS (€ 20,370.40 for 2024).
• Annual Gross Income: € 20,000.00
• Exempt Income (100%): € 20,000.00 (within the limit of € 20,370.40)
• Taxable Income: € 20,000.00 - € 20,000.00 = € 0.00
• Tax Benefit: In this case, the young person will not pay IRS on their employment income in this first year, representing significant savings.

Example 2: Self-Employed Worker (3rd year of benefit)

• Situation: A 28-year-old graphic designer, benefiting from the Youth IRS for the 3rd consecutive year in 2024. Earned gross self-employment income of € 35,000.00. It is assumed that the simplified regime is applicable and that the coefficient for determining net income is 0.75 (Article 31 of the CIRS).
• Gross Income: € 35,000.00
• Net Income (35,000 x 0.75): € 26,250.00
• Exemption Calculation: In the 3rd year, the exemption is 50% of income, with a maximum limit of 20 IAS (€ 10,185.20 for 2024).
• 50% of Net Income: 0.50 x € 26,250.00 = € 13,125.00
• Exempt Amount (limited to IAS): € 10,185.20
• Taxable Income: € 26,250.00 (net income) - € 10,185.20 (exempt income) = € 16,064.80
• Tax Benefit: The young person will pay IRS only on € 16,064.80 instead of € 26,250.00, resulting in considerable tax savings.

Example 3: Employee (5th year of benefit)

• Situation: A 30-year-old engineer, benefiting from the Youth IRS for the 5th and final year in 2024. Annual gross income of € 40,000.00.
• Exemption Calculation: In the 5th year, the exemption is 25% of income, with a maximum limit of 10 IAS (€ 5,092.60 for 2024).
• Annual Gross Income: € 40,000.00
• 25% of Gross Income: 0.25 x € 40,000.00 = € 10,000.00
• Exempt Amount (limited to IAS): € 5,092.60
• Taxable Income: € 40,000.00 (gross income) - € 5,092.60 (exempt income) = € 34,907.40
• Tax Benefit: The taxpayer will pay IRS on € 34,907.40 instead of € 40,000.00, which still represents an IRS saving, albeit in a smaller proportion than in the initial years.

Common Mistakes to Avoid in Applying for Youth IRS

Despite being an advantageous regime, its incorrect application can lead to the non-attribution of the benefit or problems with the Tax Authority. It is essential to be aware of the following common mistakes:

• 1. Not meeting age or qualification requirements: The most basic mistake is to try to apply the regime without having the age or qualification level required by law. The date of completion of the study cycle is particularly important.
• 2. Not ticking the option in the IRS declaration: Many taxpayers forget to tick the specific box in Annex A or B of Model 3, resulting in the non-application of the benefit. The option is not automatic without proper indication.
• 3. Confusing the benefit year: The regime can be enjoyed for 5 years, but the taxpayer can choose not to do so in a given year. It is crucial to know which "benefit year" they are in to apply the correct exemption percentage and limit. For example, if they opted for the regime in 2021 and 2022, but not in 2023, the year 2024 will be their 3rd year of benefit.
• 4. Exceeding the maximum exemption limits: The taxpayer must be aware that the exemption has a maximum annual ceiling (linked to the IAS). Income exceeding this limit will be fully taxed, even within the exemption percentage.
• 5. Not keeping supporting documentation: Although the AT does not require the presentation of documents at the time of submitting the declaration, it may request them at any time within 4 years. The lack of a certificate or diploma can lead to the annulment of the benefit.
• 6. Applying the regime to ineligible income: The Youth IRS is intended for employment income (Category A) and self-employment income (Category B) of a professional nature. It does not apply, for example, to capital income (Category E) or capital gains (Category G). Article 12-A, no. 1, of the CIRS.
• 7. Incompatibility with other regimes: Forgetting that the Youth IRS is incompatible with the Non-Habitual Resident (NHR) regime in the same year. The choice must be made based on an analysis of the most advantageous benefit.

Conclusion and Practical Recommendations

The Youth IRS regime represents a valuable opportunity for young people starting their professional lives in Portugal. The successive legislative changes, culminating in the significant improvements introduced by the State Budget for 2024, reinforce its positive impact on the financial capacity of young workers.

To ensure that you fully benefit from this regime, we recommend:

• Information and Updates: Stay updated on legislative changes, particularly by consulting official sources such as the Tax Portal (Portal das Finanças) or specialist publications.
• Eligibility Verification: Annually confirm that you meet all requirements, especially those of age, qualification, and type of income.
• Careful Completion: Fill in your IRS declaration with maximum attention, correctly ticking the options and indicating the necessary data in Annexes A or B.
• Document Retention: Always keep your certificates or diplomas proving your qualification, as well as other relevant documents for your tax situation.
• Tax Planning: If you are an employee, consider informing your employer of your intention to benefit from the Youth IRS to adjust withholding tax, optimising your net monthly income.

The complexity of tax rules and their constant changes can, however, generate doubts and uncertainties. For a personalised analysis of your situation and to ensure you are taking advantage of all available tax benefits, it is advisable to seek the support of qualified professionals.

Contact HVR to ensure you are taking advantage of all available tax benefits. Our team of accounting and tax specialists is prepared to assist you in understanding and applying the Youth IRS, as well as other relevant tax issues for your professional career.

Sources and Legal References

• Code of Personal Income Tax (CIRS): Article 2 (Category A Income), Article 3 (Category B Income), Article 12-A (Youth IRS) and Article 16 (Non-Habitual Residents).
• Law no. 82/2023, of December 29: State Budget for 2024, which introduces significant changes to the Youth IRS regime.
• Law no. 24-D/2022, of December 30: State Budget for 2023.
• Ordinance no. 28/2024, of January 31: Establishes the value of the Social Support Index (IAS) for the year 2024.
• National Qualifications Framework (NQF): Regulated by Decree-Law no. 396/2007, of December 31, and successive amendments, which defines qualification levels.
• Tax Portal (Portal das Finanças): Official tax information and declaration forms.