Process: 114/2017-T

Date: September 20, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 114/2017-T) addresses the legality of an IRS assessment based on the Tax Authority's reclassification of a statutory auditor from the organized accounting regime to the simplified regime. The taxpayer, who had been under organized accounting since 2001, challenged the 2014 IRS assessment of €9,547.00, arguing that the AT improperly reclassified him to the simplified regime without his consent and before completing a mandatory 3-year cycle. The AT raised a preliminary objection, claiming the arbitral tribunal lacked jurisdiction because the dispute concerned regime classification rather than the tax assessment itself. The tribunal rejected this objection, applying the principle of unitary challenge enshrined in Article 54 CPPT, which allows taxpayers to challenge interlocutory acts (such as regime classification) when contesting the final assessment act. This principle, confirmed by Supreme Administrative Court jurisprudence, recognizes that only the final assessment directly affects the taxpayer's legal sphere, while preliminary administrative decisions cannot be autonomously challenged. The substantive dispute centered on whether the mandatory 3-year permanence period applies to taxpayers who entered organized accounting by legal requirement due to exceeding income thresholds (€200,000 under the 2014 State Budget), or only to those who opted in voluntarily. This decision clarifies arbitral tribunal jurisdiction over regime classification disputes and demonstrates how taxpayers can seek full restitution plus compensatory interest under Articles 43 and 100 LGT when assessments based on incorrect regime classification are annulled.

Full Decision

ARBITRAL DECISION

  1. REPORT

On 14 February 2017, A... and B..., respectively Taxpayers nos. ... and ..., filed a request for constitution of an arbitral tribunal, pursuant to the joint provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012 of 31 December (hereinafter abbreviated as RJAT), in which they requested the declaration of illegality of the tax assessment act for Personal Income Tax (IRS) no. 2015 ..., by reference to the year 2014, in the amount of € 9,547.00, as well as the decision dismissing the administrative appeal no. ...2016... filed in relation to the same.

The Requestors further request the restitution of the entire tax paid plus compensatory interest, in accordance with Articles 43 and 100 of the LGT.

The Requestors did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the President of the CAAD Deontological Council appointed the undersigned as arbitrator, who communicated acceptance of the assignment within the applicable time limit.

The parties were notified of this appointment and did not manifest any intention to refuse it.

In accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the Arbitral Tribunal was constituted on 20-04-2017.

On 05-06-2017, the Tax Authority, hereinafter referred to as Respondent or AT, duly notified for this purpose, filed its response defending itself by exception and by substantive challenge, having attached the Administrative File (PA) to the case records.

The Tribunal notified the Requestors to comment on the raised exception, which they did by request of 09-06-2017.

Given that, in this case, none of the purposes legally entrusted to it were met, pursuant to the provisions of Articles 16(c) and 29/2 of the RJAT, as well as the principles of procedural economy and prohibition of useless acts, on 16-01-2017 the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

The parties were notified to present arguments if they wished, and they did so, sustaining and maintaining their initial positions.

  1. Subject Matter of the Case

2.1 Position of the Requestors

The Requestors allege, in summary, the following:

That the male Requestor has been engaged in the activity of statutory auditor since 1989, being classified in Category B of IRS and in the organized accounting regime since 2001 (date of commencement of the taxation reform) until 2013, continuously, as indeed results from his tax registration;

In 2013 the third cycle of 3 years permanence in the organized accounting regime commenced, which would cease in 2015;

The Requestor was classified by the AT in the simplified regime in the 2014/2015 triennium, officially and without having been previously informed, on the grounds that in the year 2013, the male Requestor had earned net income in an amount inferior to € 200,000.00;

It happens that the cessation of the 3-year cycles provided for by law depends on the manifestation of will by the taxpayer to that effect, moreover, in 2013 the limit provided for in Article 28 of the CIRS was € 150,000.00;

The IRS assessment is illegal due to incorrect quantification of Category B income.

2.2 Position of the Respondent

In response to the Requestor's petition, the AT:

By exception, invokes absolute incompetence of the Arbitral Tribunal ratione materiae, understanding that the request for arbitral decision is reduced to the declaration of illegality of the AT's decision that classified the Requestor in the simplified taxation regime, which does not fall within the scope of acts establishing taxable matter and, consequently, is outside the jurisdiction of the tax tribunal.

By substantive challenge, further alleges the following:

To Taxpayers covered by the organized accounting regime, by legal requirement, the minimum period of permanence of 3 years does not apply;

The male Taxpayer became integrated in the organized accounting regime, by legal requirement, in 2001, once his income exceeded, in the previous taxation period, the legal limit provided for in paragraph 2 of Article 28 of the CIRS, in the wording at the date of the facts;

Having the male Taxpayer, in the year 2013, earned net income in the amount of € 153,668.20, an annual net income was thus determined inferior to that established by paragraph 2 of Article 28 (€ 200,000.00) with the wording given to it by Law no. 83-C/2013 of 31 December (State Budget for 2014);

Not having the male Taxpayer exercised the option for taxation under the organized accounting regime by March 2014, he became covered by the simplified taxation regime for this year.

  1. Sanation

Given the exception of material incompetence of the Arbitral Tribunal raised, it is necessary to examine it beforehand.

The Respondent contends that the request for arbitral decision formulated by the Requestors does not have as its basis any illegality of the tax assessment act or determination of taxable matter, but is reduced to the declaration of illegality of the AT's decision that classified the Requestor in the simplified taxation regime, a defect upstream of the assessment which, consequently, is outside the scope of tax jurisdiction.

However, the Requestors expressly challenged the IRS assessment act relating to the year 2014, ultimately requesting its annulment with the consequent restitution of the tax paid, as well as condemning the AT to payment of compensatory interest.

Whence, the act reviewed by the Requestors, and the mediate object of the present arbitral action is the IRS assessment act no. 2015 ... and, subsidiarily, the declaration of illegality of the decision that dismissed the administrative appeal (RG) filed by the Requestors.[1]

In accordance with the provisions of Article 2, paragraph 1, subparagraph a) of the RJAT, arbitral tribunals have jurisdiction to declare the illegality of acts of tax assessment, self-assessment, withholding at source, and payment on account, therefore the Tribunal has jurisdiction to examine the legality of the assessment act reviewed.

As regards the interlocutory act (tax registration classification) that occurred on a date prior to the assessment, from the principle of unitary challenge enshrined in Article 54 of the CPPT, applicable by operation of Article 29 of the RJAT, it follows that any illegality committed on a date prior to the assessment may, and must be invoked when challenging the assessment. The interlocutory act is not subject to autonomous challenge, not least because it is not, in itself, harmful, as it is not capable of producing, by itself, immediate negative legal effects on the legal sphere of the challenger.

In the case at hand, the Requestors challenge the assessment act, which was based, inter alia, on the classification of the Requestor in the simplified IRS regime. And they do so by attacking precisely the legality of that classification act. The Requestors' petition is, therefore, in accordance with the principle of unitary challenge of the tax act, provided for in Article 54 of the CPPT and applicable to the present proceedings by virtue of subparagraph a) of paragraph 1 of Article 29 of the RJAT.

This understanding is accepted, inter alia, in the judgment of the Supreme Administrative Court dated 13-11-2013, delivered in the framework of proceedings no. 0897/13 "...Article 54 of the CPPT enshrines the so-called principle of unitary challenge, according to which it is only possible, in principle, to challenge the final act of the procedure, and not the interlocutory or procedural acts, since only the final act affects or prejudices, immediately, the legal sphere of the taxpayer, establishing the position of the tax administration before the latter and defining its rights and obligations. And it further results that in tax litigation, contrary to what currently occurs in administrative litigation, the criterion for challengeability of acts is that of immediate and actual harm (and not merely potential), or, in other words, depends on the production of immediate negative effects on the legal sphere of the taxpayer, through violation of its rights or legally protected interests. In this way, the interlocutory acts of the tax procedure, being merely instrumental or preparatory to the final decision, even if illegal, are not, in principle, immediately prejudicial to the interests of the taxpayer, as his tax situation is not defined or resolved by them. In truth, since the tax assessment procedure is constituted by a series of interconnected acts aimed at achieving a final legal result, that is, at assessing the amount of tax that the taxpayer must pay into the State coffers, it is understandable that only the final act (assessment in the strict sense) is capable of affecting, objectively and immediately, the legal sphere of the taxpayer, being that, consequently, the harmful and contentiously challengeable act.[2]

In this same sense it has already been decided in arbitral jurisdiction in proceedings 266/2013-T and 253/2013-T.

Finally, it is important to clarify that the arbitral decision no. 118/2012-T, as it rests on different factual matter, namely because it was requested of the tribunal the examination of the legality of an act establishing taxable matter and, at the date of the filing of that request for arbitral pronouncement, there was no tax assessment act, has no application to the present proceedings.

Given the foregoing, it is unequivocal that the illegality of the tax registration classification can only be examined judicially in the context of judicial challenge or arbitral action, in which the legality of the IRS assessment was requested to be examined, which is why the Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.

The proceedings are properly constituted.

The parties have legal personality and capacity, are legitimate and are duly represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

There are no other preliminary matters that prevent examination of the substantive merits of the action.

All considered, it is necessary to rule:

  1. Decision

4.1 Matters of Fact

4.1.a. Facts Established as Proven

With relevance for the decision on the merits, the Tribunal considers the following facts established as proven:

The male Requestor has been engaged in the activity of statutory auditor being classified in Category B of IRS under the general taxation regime – organized accounting - since 2001, by legal requirement (cf. Article 2 of the Requestors' Petition and Article 32 of the AT's Response)

In 2013 the male Requestor was classified in the organized accounting regime. (cf. Tax registration classification and Article 38 of the AT's Response).

In the year 2013, the male Requestor earned, net income, in the amount of € 153,686.20. (Cf. Document no. 1 attached by the Requestors)

The Requestors filed Personal Income Return Form 3, referring to the year 2014, but the same was not accepted due to a central error (C70) (cf. Article 4 of the petition and information no. .../15 of the IRS Services Directory).

The Requestors submitted a request to the Porto tax office contesting the central error C70, and requesting classification in the organized accounting regime, whose request was dismissed. (Cf. information no. 2814/15 of the IRS Services Directory, p. 25 of the PA)

On 22-10-2015 they filed a hierarchical appeal to the Porto Tax Authority with the same grounds, which was dismissed on the basis of the arguments set forth in information no. .../15 of the IRS Services Directory. (Cf. Document no. 2 attached to the proceedings by the Requestors)

Pending the hierarchical appeal, the Requestors were notified to submit the IRS Form 3 Personal Income Return for 2014, under penalty of being considered defaulting taxpayers, which the Requestors did within 30 days of notification (Cf. Administrative appeal and document no. 1 attached thereto)

With respect to the 2014 fiscal year, the services classified the taxpayer in the simplified taxation regime, understanding that the organized accounting regime by legal requirement had validity of only 1 year and in the year 2013 an annual income of less than € 200,000.00 was determined. (cf. Page 24 of PA, information no. .../15 of the IRS Services Directory)

The Requestors were notified of assessment no. 2005..., having paid the sum of € 9,547.00 on 11-01-2016. (cf. IRS assessment and proof of payment)

On 31 May 2016 they filed an administrative appeal of the assessment referred to in the preceding item. (Cf. PA attached to proceedings)

Notification of the dismissal of the administrative appeal was notified by letter no. ..., dated 04-11-2016. (Cf. PA attached to proceedings p. illegible)

4.1.b. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

4.2. Substantiation of the Proven and Not Proven Facts

With respect to the facts, the Tribunal does not have to rule on everything alleged by the parties; rather, it is its duty to select the facts that matter to the decision and distinguish the proven from the not proven facts (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable by operation of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to current Article 596, applicable by operation of Article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties and the documentary evidence attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, and moreover were not disputed by the parties.

  1. Question to be Decided

The question to be examined in the present proceedings is whether the AT may unilaterally alter the taxation regime for IRS of a Taxpayer classified in the organized accounting regime before the minimum period of permanence has elapsed, by virtue of the fact that in the previous fiscal year that taxpayer obtained annual net income inferior to that provided for in Article 28, paragraph 2 of the CIRS, bringing him within the simplified taxation regime.

  1. On the Law

Regarding the IRS Assessment for the Year 2014

The question to be decided concerns the taxation regime for Category B income under IRS, more specifically the interpretation of Article 28 of the CIRS, namely the minimum period of permanence in the organized accounting regime and conditions for cessation of that regime.

At the time of the facts under analysis, income earned in the year 2014, Article 28 of the CIRS, in the part relevant to us, had the following wording:

Article 28
Methods for Determination of Business and Professional Income

1 - The determination of business and professional income, except in the case of imputation provided for in Article 20, shall be made:

a) On the basis of application of the rules resulting from the simplified regime;

b) On the basis of accounting records.

2 - Covered by the simplified regime shall be passive subjects who, in the exercise of their activity, have not exceeded in the immediately preceding taxation period an annual net income amount of this category of (euro) 200,000. (wording of Law no. 83-C/2013 of 31.12 in the previous wording the limit was € 150,000)

3 - Passive subjects covered by the simplified regime may choose to determine income on the basis of accounting records. (wording of Law no. 211/2005 of 07.12)

4 - The choice referred to in the preceding paragraph must be made by passive subjects:

a) In the declaration of commencement of activity; (wording of Law no. 211/2005 of 07.12)

b) By the end of the month of March of the year in which they intend to alter the method of income determination, by means of filing an alteration declaration. (wording of Law no. 53-A/2006 of 29.12)

5 - The minimum period of permanence in either of the regimes referred to in paragraph 1 is three years, renewable for equal periods, except if the passive subject communicates, pursuant to subparagraph b) of the preceding paragraph, the alteration of the regime under which he is covered. (wording of Law no. 53-A/2006 of 29.12)

6 - The application of the simplified regime ceases only when the amount referred to in paragraph 2 is exceeded in two consecutive taxation periods or, when exceeded in a single fiscal year, in an amount exceeding 25%, in which case taxation under the organized accounting regime applies from the following taxation period to that in which either of these facts occurred. (wording of Law no. 3-B/2010 of 28.04)

(...)

The Requestors challenged the assessment for the fiscal year 2014, due to error in the legal premises on which it was based and violation of law, since the income earned by the male Requestor in the year 2014 should have been determined in accordance with the organized accounting regime and not the simplified regime.

For in truth, the male Requestor has been classified in such taxation regime since 2001 and, as from 2007, paragraph 5 of Article 28 of the CIRS, as amended by Law no. 53-A/2006 of 29 December, introduced permanence in the taxation regime, whether simplified or organized accounting, in cycles of 3 years, successively renewable, except if the taxpayer communicated his intention to alter it.

Thus, in 2007 a cycle of 3 years of permanence in the organized accounting regime commenced, which continued to be renewed, with a new cycle of 3 years commencing in 2013 that would continue until 2015, given that the Taxpayer did not manifest intention to alter it.

The AT understands that the regime of automatic renewal of 3-year cycles has application only to Taxpayers classified in the organized accounting regime by choice, but not in cases where such classification results from legal requirement.

Starting from this premise, the AT unilaterally altered the regime of classification of the male Taxpayer, because in the year 2013, he obtained annual net income below the limit established in paragraph 2 of Article 28 of the CIRS (€ 200,000.00), without having exercised the option for the organized accounting regime by March 2014, having thus become covered by the simplified taxation regime in the year 2014.

To better support its position, the AT invokes the content of circular no. 5/2007 of 13-03-2007, whose content, as is well known, neither binds taxpayers nor courts but only the respective services.

Such understanding is shared by doctrine according to which "...interpretative directives, instructions and circulars emanating from the Tax Administration to clarify or standardize the understanding of the law and the procedure of the services, having the peculiarity that they develop their effectiveness exclusively within the internal order of the Administration from which they emanate. They bind neither taxpayers nor courts, but are merely Administrative resolutions..." (See Alberto Xavier, Manual of Tax Law, I, Lisbon, 1974, pages 193 and 140).[3]

Moreover, let us see.

The simplified taxation regime provided for in Article 28 of the CIRS is a non-mandatory regime, which depends on the choice of the passive subject.[4]

Referring to the legal nature of this regime and the consequences of its choice, Professor Saldanha Sanches emphasizes that this simplified regime "...always has as its premise an action by the taxpayer who renounces his subjective right to be taxed on the basis of accounting records. And that, by carrying out an estimate of costs that he will support and declare, he chooses the standardized deduction...."[5]

Moreover, with the amendment introduced in paragraph 5 of Article 28 of the CIRS by Law no. 53-A/2006 of 29 December, the minimum period of permanence in either of the regimes referred to in paragraph 1 is three years, renewable for equal periods, except if the passive subject communicates, pursuant to subparagraph b) of the preceding paragraph, the alteration of the regime under which he is covered. (emphasis ours)

It being certain that Article 28 of the CIRS does not distinguish whether such period of permanence applies only in situations where the Taxpayer manifests will to be taxed according to the organized accounting regime, nor does it provide for any regime of expiration in situations where, such classification not resulting from the will of the taxpayer, the premises that led to his classification in the same cease to exist.

It is evident from the teachings of Professor José Xavier de Bastos that: "With the new wording of paragraph 5 of Article 28 and the consequent setting of the period of permanence in either regime at three years, a source of difficulties was thus closed for taxpayers who decide to choose the organized accounting regime. They now know that the choice is valid for three years, renewable for equal periods and that only if they wish to alter their regime (in their case, obviously, if the conditions for doing so are met) are they obligated to communicate it through an alteration declaration."[6]

Thus, having a new cycle of permanence in the organized accounting regime commenced in 2013, and the taxpayer not having chosen that alteration, pursuant to the final part of Article 28, paragraph 5 of the CIRS, it is evident that it was automatically renewed for an equal period (3 years) until the year 2015, therefore in the fiscal year 2014 the male Requestor was classified in the aforesaid regime.

It remains to be determined whether, having the male Requestor earned net income inferior to € 200,000.00 with reference to the fiscal year 2013, he was required to communicate by March 2014 the choice for the organized accounting regime, under penalty of being unilaterally classified in the simplified regime.

First and foremost, it is important to clarify that the limit provided for in paragraph 2 of Article 28 of the CIRS in force in the year 2013 was € 150,000.00,[7] and the male Requestor earned in that year net income of € 153,686.20, thus remaining in the organized accounting regime.

Even if it is understood that with Law no. 83-C/2013, State Budget for the year 2014, passive subjects who in the preceding period (2013) earned income below € 200,000.00 came to be covered by the simplified regime, the legislator did not provide for any situation causing cessation of the organized accounting regime during the three-year cycle, regardless of whether such classification results from the choice of the taxpayer or from the application of the law.

Nor does the law result in any obligation upon the Taxpayer - who earns income in an amount lower than that established in Article 28, paragraph 2 of the CIRS - to manifest his will to remain in the organized accounting regime, as the AT contends.

Indeed, it is the law itself that, expressly, in paragraph 4 of Article 28 of the CIRS, provides that the choice by the passive subject for the organized accounting regime must be made in two circumstances:

In the declaration of commencement of activity;

By the end of the month of March of the year in which they intend to alter the method of income determination.

There is, therefore, no correspondence whatsoever in the letter of the law for the interpretation defended by the AT, according to which, once the sales volume provided for in paragraph 2 of Article 28 CIRS is exceeded, its taxation according to the organized accounting regime expires.

It being certain that, in the interpretation of norms, it should be presumed that the legislator knew how to express his thought and enshrined the most correct solution, as results from the provisions of Article 9, paragraph 2 of the CC, by operation of Article paragraph 1 of Article 11 and Article 2 of the LGT.

Moreover, as Article 28, paragraph 2 contains no distinction regarding maintenance in a particular classification, the AT cannot make such distinction, as results from the maxim "ubi lex non distinguit, nec nos distinguere debemus", that is, where the law does not distinguish, the interpreter is not permitted to do so.

As the legislator has not provided for any situation causing cessation of the organized accounting regime during the three-year cycle, the interpreter must conclude, in accordance with the rules of interpretation, that its non-existence is the most correct approach.

And even if a lacuna were understood to exist, which is not conceded, it would not be subject to analogical integration, as this is expressly forbidden by Article 11, paragraph 4 of the LGT.

Therefore, as the male Requestor did not communicate any alteration to his taxation regime, he made a clear and unequivocal choice for the maintenance of the taxation regime in which he was classified, and the AT cannot proceed to alter it unilaterally when the Taxpayer does not attain income in an amount exceeding that provided for in Article 28 of the CIRS.

In light of all that has been set forth above, the interpretation that the defendant makes of paragraph 1, paragraph 2 and paragraph 4 of Article 28 of the CIRS lacks legal support, which aims to impose upon the taxpayer a burden relating to an accessory tax obligation that the law does not provide for, and which is indeed contrary to its literal meaning, violating the principle of tax legality, enshrined in Article 103, paragraphs 2 and 3 of the CRP and in Article 8, paragraphs 1 and 2 of the LGT.

For the foregoing, it is understood that the IRS assessment no. 2015 ..., referring to the year 2014, and the decision dismissing the administrative appeal filed against the same, suffer from the defect of violation of law, due to incorrect interpretation of Article 28 of the CIRS and, consequently, such acts must be annulled.

Regarding Compensatory Interest

The right to compensatory interest as a guarantee of taxpayers is provided for in Article 43 of the LGT and has, at its origin, the fact that the taxpayer has paid taxes improperly due to errors imputable to the services or the failure by them to meet certain legal deadlines.

In this particular respect, the type of error is not relevant (whether it was one of fact or of law) nor the degree of fault, not least because it is a matter of objective responsibility of the services.[8]

It has been considered in numerous case law of the Supreme Administrative Court on compensatory interest that the expression used in Article 43 of the LGT, "error" and not "defect" or "illegality" to refer to the facts that can serve as basis for the award of interest, means that the legislator had in mind error as to the factual premises and error as to the legal premises.[9]

The requirements of the right to compensatory interest provided for in Article 43, paragraph 1, of the LGT, are as follows:

That there be an error in an act of assessment of a tax;

That the error be imputable to the services;

That the existence of such error be determined in a process of administrative appeal or judicial challenge;

That as a result of such error there has been payment of a tax debt in an amount exceeding that legally due.[10]

The annulment of the IRS assessment which is the object of the present arbitral proceedings is due to an incorrect interpretation and application of the Law, which leads to the consequent annulment of the tax act based thereon, falling within the error as to the legal premises, which functions as a requirement of the right to compensatory interest enshrined in the examined Article 43, no. 1 of the LGT.

In these terms, it must be considered that the prerequisites for condemning the Public Treasury to payment of compensatory interest to the Requestors are met, by virtue of the annulment of the assessment, as all the prerequisites provided for in Article 43, no. 1, of the LGT are met.

The request for compensatory interest therefore proceeds, which should be calculated, at the established rate, in accordance with the provisions of Article 43, paragraph 4, of the LGT, between the days on which the improper payment was made until the date of issuance of the corresponding credit note.

  1. Questions Whose Determination is Made Unnecessary

As the request for arbitral pronouncement is to be judged as having merit due to violation of law, which prevents the taking of a new act with the same effect, the examination of the remaining questions raised by the Requestors is made unnecessary, by being useless.[11]

  1. Decision

In these terms, in accordance with the above, it is decided:

To judge as having merit the declaration of illegality of the IRS assessment act no. 2015 ..., due to error in the legal premises on which it was based and, consequently to order its annulment;

To judge as having merit the request for restitution of the tax paid, as well as that for payment of compensatory interest in accordance with Articles 43 and 100 of the LGT.

  1. Value of the Action

The value of the action is fixed at € 9,547.00 in accordance with the provisions of Articles 315 of the CPC, Article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT as well as paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

  1. Costs

The amount of the arbitration fee is fixed at € 918.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent, since the request was entirely meritorious, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the cited Regulation.

Let notification be made.

Lisbon, 20 September 2017

The Arbitrator

(Cristina Coisinha)

Text prepared by computer in accordance with the provisions of Article 131, paragraph 5 of the CPC, applicable by referral of Article 29 of the RJAT.

The drafting of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Judgments of the Supreme Court of Justice delivered in the framework of appeals nos.: 0793/14 of 03-06-2015, no. 01942/13 of 18-06-2014, consultable at http://www.dgsi.pt

[2] Consultable at: http://www.gde.mj.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/ddcedae527b7acf580257c2900451f6d?OpenDocument&ExpandSection=1

[3] In this sense see the Judgment delivered by the TCAS on 08-02-2011 in the framework of proceedings 0443/11, consultable at: www.dgsi.pt

[4] See, e.g., the Judgments of the STA of 17-03-2010, Proceedings no. 56/10, of 04-11-2015 and of 04-11-2015 proceedings no. 0877/15, consultable at www.dgsi.pt

[5] In Tax Law 7/8, July/October 2001, page 48

[6] In IRS Real Incidence and Determination of Net Income, Coimbra Publisher, 2007, page 181

[7] Law no. 3-B/2010 of 28 April, State Budget for 2010

[8] Rui Duarte Morais, in Manual of Tax Procedure and Process, 2014 Edition, pages 365 to 376

[9] Judgments delivered in appeals nos. 622/08 of 29.10.2008, 945/08 of 21.01.2009; 347/09 of 25.06.2009 and 665/09 of 04.11.2009.

[10] See Jorge Lopes de Sousa, CPPT Annotated and Commented, Volume I, Areas Publisher, 6th Edition, 2011, page 530).

[11] Article 24 of the RJAT paragraphs 1 and 4.

Frequently Asked Questions

Automatically Created

Can a taxpayer switch from organized accounting to the simplified IRS regime before the mandatory three-year period ends?
The dispute centers on whether the mandatory 3-year permanence rule applies universally or only to taxpayers who voluntarily opted into organized accounting. The Tax Authority argued that taxpayers placed in organized accounting by legal requirement (due to income exceeding statutory thresholds) automatically revert to the simplified regime when income falls below €200,000, regardless of the 3-year cycle. The taxpayer contended that the 3-year stability period applies to all taxpayers in organized accounting. Generally, taxpayers cannot switch regimes during the mandatory 3-year period without meeting specific legal conditions, though the AT maintains this restriction doesn't apply when taxpayers were placed in organized accounting by legal mandate rather than by option.
What is the role of the Tax Authority (AT) in determining a taxpayer's IRS taxation regime?
The Tax Authority automatically classifies taxpayers into IRS regimes based on reported income and activity type. When annual net income exceeds the statutory threshold (€200,000 as of 2014 under Law 83-C/2013), the AT places taxpayers in organized accounting by legal requirement. When income falls below this threshold, the AT may reclassify them to the simplified regime unless the taxpayer exercises the option to remain in organized accounting by the legal deadline (typically March 31). This classification determines how income is calculated and taxed. The AT's classification decisions are administrative acts that can be challenged through arbitration when they result in allegedly illegal tax assessments.
How can taxpayers challenge an IRS tax assessment related to incorrect regime classification through arbitration at CAAD?
Under the Legal Regime for Arbitration in Tax Matters (RJAT Article 2(1)(a)), taxpayers challenge the IRS assessment act itself, not the regime classification decision in isolation. Following the principle of unitary challenge (Article 54 CPPT), taxpayers must contest the final assessment while raising any illegalities in underlying interlocutory acts, including regime classification errors. The arbitral tribunal has jurisdiction to review assessment acts and all administrative decisions that led to them. Taxpayers request tribunal constitution, demonstrate how incorrect regime classification produced an illegal assessment, and may seek full restitution of taxes paid plus compensatory interest under Articles 43 and 100 LGT. The AT cannot successfully argue that regime classification disputes fall outside tribunal jurisdiction.
What are the legal requirements and deadlines for opting into the simplified regime under Portuguese IRS rules?
Taxpayers earning below €200,000 annual net income are generally eligible for the simplified regime. Those wishing to opt for or change to a specific regime must notify the Tax Authority by March 31 of the year for which the regime will apply, as provided in Article 28 CIRS. Taxpayers in organized accounting are subject to a mandatory 3-year permanence period before they can change regimes. Failure to exercise the option within the March deadline may result in automatic AT classification based on income thresholds and default rules. The regime choice significantly affects income calculation and tax burden, making compliance with these deadlines critical for effective tax planning and avoiding disputes over regime classification.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is declared illegal by an arbitral tribunal?
Yes, under Articles 43 and 100 of the General Tax Law (LGT), taxpayers are entitled to compensatory interest (juros indemnizatórios) when an arbitral tribunal declares a tax assessment illegal and orders restitution. Compensatory interest compensates taxpayers for the State's unlawful retention of funds from the payment date until restitution, using the legally established rate. This remedy applies when the assessment is annulled due to illegality attributable to the tax administration, such as incorrect regime classification leading to erroneous income calculation. Taxpayers must expressly request compensatory interest in their arbitration petition. This ensures taxpayers are fully compensated when they successfully challenge illegal assessments, recognizing both the time value of money and the prejudice from improper tax collection.