Process: 126/2017-T

Date: October 19, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 126/2017-T addresses a critical dispute regarding the calculation of seniority for IRS tax exemption on severance payments when an employee has worked for multiple employers in the same sector. The taxpayer received €102,606.25 in severance from Bank B in 2013, calculated based on 18 years of banking sector seniority, despite working only 6-7 years at that specific institution. Bank B treated the entire amount as tax-exempt under Article 2(4) of the IRS Code, but the Tax Authority issued an additional assessment of €19,553.50 plus compensatory interest, arguing that only seniority with the paying employer should count.

The core legal question involves whether prior service with other banking employers counts toward the tax exemption calculation. The taxpayer's position was supported by multiple factors: employment contract Clause 7 explicitly guaranteed recognition of seniority from previous credit institutions dating back to 1995; the banking sector Collective Labor Agreement (CLA) Clause 17 provided for cross-institutional seniority recognition; and the termination agreement referenced two favorable Administrative Court judgments from 2004 and 2010. The Tax Authority maintained that the exemption should be limited to service rendered to the paying employer only.

The single arbitral tribunal, constituted on April 28, 2017, under arbitrator Nuno de Oliveira Garcia, examined the employment contract, CLA provisions, and termination agreement. The case highlights the complex intersection of labor law provisions, individual employment contracts, and tax law in determining severance tax treatment, with significant implications for banking sector employees and financial institutions calculating severance exemptions under Portuguese IRS legislation.

Full Decision

Arbitral Decision

The undersigned, Nuno de Oliveira Garcia, appointed by the Deontological Board of the Administrative Arbitration Center (CAAD) to form the Single Arbitral Tribunal, decides as follows:

REPORT

On 17.02.2017, taxpayer A…, NIF …, submitted a request for the establishment of a single arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January ('Legal Framework for Arbitration in Tax Matters', hereinafter merely RJAT), in which the Tax and Customs Authority is the respondent (hereinafter merely TA).

The request for establishment of the arbitral tribunal was accepted by the Distinguished President of CAAD, and automatically notified to the TA on 24.02.2017.

The claimant did not proceed to appoint an arbitrator; therefore, pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Board of CAAD appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period, with CAAD subsequently notifying the parties of this appointment on 28.04.2017.

On that same date, 28.04.2017, the present arbitral tribunal was constituted.

On 01.06.2017, the TA submitted its Response to this Tribunal and attached the respective administrative file.

On 28.09.2017, this Tribunal issued an order dispensing with the hearing with the parties provided for in article 18 of RJAT, as well as the non-holding of a witness examination hearing, as this had not been requested by the parties. Similarly, it was ordered that written submissions be presented, further fixing 20.10.2017 as the date for pronouncement and notification of the present final decision.

On the same date, the Tribunal requested from the claimant that, within a period of 10 days, it submit and deliver to the case file the contract that gave rise to the beginning of the employment relationship that ended in 2013, namely in order to be able to determine whether in that agreement/contract there was enshrined a clause relating to the (non-)consideration of, and what its proper scope was, the claimant's seniority in the sector in question (i.e., banking sector or financial sector).

On 09.10.2017, the claimant proceeded to attach the document requested by the Tribunal annexed to its final submissions, with the TA presenting its submissions on 16.10.2017.

At issue in the present arbitral case file is an income tax (IRS) assessment with document number 2017…, and the respective compensatory interest also assessed, relating to the 2013 tax year, with a total amount of €19,553.50.

The crux of the matter relates to the consideration or non-consideration, for purposes of calculating the tax-exempt amount under income tax, of the claimant's seniority with other employers within the same sector of activity. Briefly, the claimant argues affirmatively for the consideration of such seniority, which would allow it in this case for the indemnity to be completely exempt from income tax, pursuant to article 2(4) of the Income Tax Code, while the TA argues that seniority should be limited to being assessed in relation to the entity paying the indemnity for termination of the employment contract.

FACTS ESTABLISHED AND NOT ESTABLISHED

II.I. The Tribunal considers the following facts essential to the subject matter of the request to be established:

The claimant worked at Bank B… between 10.01.2007 and 12.07.2013.

On 06.05.2013, and in the context of an Iberian business restructuring plan of Bank B…, it and the claimant signed an employment contract termination agreement in which was established in section 2 of its Clause 15:

"Having regard to the applicable terms of Clause 17 of the Collective Labor Agreements of the Banking Sector ("CLA") and given the interpretation sustained in the judgments of the Southern Administrative Court of Appeal of 11 May 2004 (Case No. 06002/01) and, in particular, of 21 September 2010 (Case No. 03478/10), both parties acknowledge their agreement in the determination of the Employee's seniority by counting his time of service in banking entities indicated in the aforesaid CLA clause, for the purposes of the provisions of article 2(4)(b) of the Personal Income Tax Code, as amended by article 108 of Law No. 64-B/2011, of 30 December".

An indemnity of €102,606.25 was paid to the claimant, corresponding to a seniority of 18 years, for the termination of the employment contract.

The said indemnity was calculated on the basis of the claimant's seniority, not only at Bank B… (where he worked for less than 7 years), but also with other employer(s) where he had previously worked.

Upon payment of the indemnity, Bank B… considered that it was not subject to income tax, to the extent that it did not exceed the limit referred to in article 2(4) of the Income Tax Code, as in force on the date of the facts.

The claimant was a union member in the 'Union of Senior Officials and Technicians of the Banking Sector'.

In 2013, Clause 2 of the Collective Labor Agreements of the banking sector established that:

"This Collective Labor Agreement applies throughout the entire national territory, within the scope of the banking sector, and binds the Credit Institutions and Financial Societies that subscribe to it (hereinafter generically referred to as Credit Institutions or Institutions), as well as all workers in their service affiliated with the Unions of Bankers of the Centre, North and South and Islands, represented by the signatory FEBASE – Federation of the Financial Sector and hereinafter referred to as Unions, covering 26 employers and with an estimated 54,300 workers covered".

Bank B… subscribed to the CLA with the following reservation:

"In calculating time of service for any purposes arising from the CLA, will count only the time of service rendered to the Credit Institutions themselves that are signatories to this reservation, plus possibly the time of service rendered to other signatories to this reservation, plus possibly the time of service rendered to other entities or companies, but, in this case, provided that such results from an individual agreement between those entities and the worker".

The individual employment contract of the claimant has a Clause 7, with the heading 'Seniority', according to which:

"1. The Bank guarantees to the second party the seniority resulting from the provision of service to other Credit Institutions, from 23/10/1995, documentarily proven, but only for the following purposes:

a) For purposes of Bank B…'s Pension Fund, the first party will take into account the time of service rendered to other credit institutions, with the amount of presumed disability retirement calculated in accordance with the regime provided for in the Collective Labor Agreements of bankers.

b) The part of retirement corresponding to the time of service rendered by the second to the first party will be calculated pursuant to Clause 6 of Bank B…'s Pension Plan.

c) The time of service rendered to other Credit Institutions prior to the signing of this contract shall also not be taken into account for the calculation of the number of seniorities".

II.II. The Tribunal considers the following facts to be not established:

Voluntary payment of the additional assessment and respective interest at issue. In effect, the claimant protested attaching document No. 4 which is not attached to the case file.

ON THE LAW

III.I. Introduction and framing of the decision

The present arbitral case falls within a relatively recent dispute which relates to the tax treatment, under income tax, of indemnities paid to workers by their respective employers. In particular, and as we have already seen above, it concerns the exemption of the indemnity received (in this case of the entirety, but in other cases only partial) and the concept of seniority to which article 2(4) of the Income Tax Code refers.

While the TA adopts a restrictive administrative interpretation (calling it, however, 'literal'), employers and taxpayers adopt a broad enough interpretation so that the Tax Law is not discriminatory between workers who remained with a single employer and those who, despite the same years of work, changed employers within the same occupation and even within the same sector of activity.

There already exists, moreover, as both parties highlight including with citations, substantial case law from the Courts and Arbitral Tribunals on this matter. Now, precisely this case law has accepted, in the majority of cases, that the concept of seniority should include previous employment relationships, provided that they have occurred in the same activity and there exist Collective Labor Agreements (CLA) in that sense.

Even the decisions, minority as they are, not entirely favorable to the taxpayers, do so always with the caveat that (i) the new employer overrode the sector CLA, and to the extent that (ii) there is an individual agreement between the worker and the new employer regarding the relevance of the time of service rendered to entities in the same sector, and (iii) the worker is affiliated with the respective union.

That is to say, all case law—from the Supreme Administrative Court to CAAD—attaches relevance, for purposes of the aforementioned income tax exemption, to the time of service rendered by the worker to entities in the same sector, always provided that the following requirements are met cumulatively; namely:

The new employer has overridden the CLA of the respective sector;

There is an individual agreement between the worker and the new employer (generally, the employment contract) regarding the relevance of the time of service rendered to entities in the same sector; and,

The worker is affiliated with the respective union.

In our view, we also share the same interpretation, all the more so because in this case, as we saw in the Facts, the CLA subscribed to by Bank B… makes relevant the "time of service rendered to other signatory institutions" of the CLA "provided that such results from an individual agreement between those entities and the worker".

In such terms, and without further considerations, it is necessary to apply the Law to the Facts held as established, that is, it is necessary to confirm or refute the occurrence in this case of the aforementioned requirements.

III.II. On the (non-)verification of all requirements essential for the relevance of time of service rendered with other sector entities for purposes of income tax assessment of the indemnity for termination of the employment contract

As we saw in the Facts, in the present case file it is established that the entity paying the indemnity (Bank B…) overrode the CLA of the respective sector, and that the claimant was affiliated with the relevant union, two of the essential requirements for which one must recognize the worker's seniority in the sector relating to previous employers.

The remaining requirement—imposed moreover by the CLA itself subscribed to by Bank B…—relates to the existence of an individual agreement between the worker and the new employer regarding the relevance of the time of service rendered to entities in the same sector. As to this aspect, it was established in the case file that, as is customary in such cases, there were two agreements; namely: (i) agreement/employment contract that gave rise in 2007 to the beginning of the employment relationship which would last until 2013; and (ii) employment contract termination agreement that gave rise in 2013, precisely the terms of the extinction of the first agreement.

It is therefore necessary to determine which of the agreements is relevant for the examination in question, a circumstance all the more relevant when, as equally results from the case file, the relevance attributed to seniority in the sector is different in this case depending on the agreement under analysis. Indeed, while in the employment contract (2007) there is a clear and exhaustive limitation of the scope of the relevance of the concept of seniority in the sector (that is, there is a clear negative limitation of this scope), whereas in the termination agreement (2013) and precisely with regard to the amount of the indemnity, seniority in the sector is effectively considered.

Now, in this regard, we follow very closely the pronouncement of Carla Trindade in case 616/2015 T, a case with contours analogous to the present one, to the effect that "one should not say that the concept of seniority that includes the provision of services with other employers flows […] from the Termination Agreement, because this cannot be considered as an addendum to the Individual Employment Contract in which, as was seen, this seniority is not even recognized for purposes of calculating indemnity for employment contract termination. All the more so because the employment contract termination agreement is precisely the contract that extinguishes the employment relationship, which does not aim to establish conditions relating to the execution of the employment relationship but rather to its termination".

We continue to cite, making express reference to the aforementioned decision, when it affirms that "not resulting from either the Individual Employment Contract concluded between the claimant and Bank B…, nor from the CLA, the claimant's seniority with previous employers, the only seniority to be considered in calculating the indemnity for employment contract termination will be the claimant's seniority at Bank B…. This is the only one to which the debtor entity was obligated to pay under the terms of labor law rules".

In such terms, and although we do not entirely follow the position of the TA—based on a restrictive and merely literal interpretation, let it be noted—there is no doubt that there are not met in this case all the essential requirements to ensure that the concept of seniority refers to previous experience in the same sector of activity.

That is to say, if the employment contract concluded between the claimant and Bank B… (2007) had enshrined the concept of seniority in the sector without limitations, our decision would be to the opposite effect.

As this is not the case in this case, the request is entirely dismissed.

In this sense, the tax assessment act is confirmed, the claimant's request is not upheld for annulment of the said act and, as will be seen, for payment of compensatory interest.

III.II. On compensatory interest

It remains, finally, to consider the request for a ruling condemning the respondent to pay compensatory interest pursuant to article 43(1) of the General Tax Law.

Now, taking into account that, in the terms set out above, the income tax additional assessment act does not suffer from the vices of violation of law attributed to it in the request for arbitral pronouncement, the request for a declaration of its illegality is thus dismissed, the request for compensatory interest necessarily is dismissed, which is raised as a consequence of the illegalities invoked.

Furthermore, it should be said that the claimant did not even prove the payment of the tax, for which reason also it could not be upheld the request for a ruling condemning the TA to pay compensatory interest.

DECISION

In such terms this Arbitral Tribunal decides:

To dismiss the arbitral request and, as a consequence, uphold the income tax assessment act at issue;

To dismiss the request for compensatory interest, absolving the TA of the request; and,

(b) To condemn the claimant to the costs of the proceedings.

VALUE OF THE ACTION

The value of the action is fixed at €19,553.50, pursuant to article 97-A(1)(a), of the Code of Tax Procedure and Process, applicable by virtue of article 29(1)(a) and (b) of RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

Costs in the amount of €1,224.00 in accordance with Table I, pursuant to article 4 of the Regulation of Costs in Tax Arbitration Proceedings.

Let notice be given.

Lisbon, 19 October 2017

Nuno de Oliveira Garcia

Frequently Asked Questions

Automatically Created

How is seniority calculated for IRS tax exemption on severance pay when an employee has worked for multiple employers in the same sector?
In CAAD Process 126/2017-T, seniority calculation for IRS exemption on severance pay with multiple employers in the banking sector was disputed. The taxpayer's employment contract Clause 7 guaranteed recognition of seniority from previous credit institutions since 1995, and the banking sector Collective Labor Agreement (CLA Clause 17) provided for cross-institutional seniority recognition. The severance of €102,606.25 was calculated based on 18 years of total banking sector experience, not just 6-7 years at Bank B. The termination agreement cited Administrative Court judgments from 2004 and 2010 supporting counting service time across banking entities for Article 2(4) IRS Code purposes. However, the Tax Authority challenged this, arguing seniority should be limited to time with the specific paying employer, resulting in an additional assessment of €19,553.50 plus compensatory interest.
What is the tax treatment of termination indemnities under Portuguese IRS rules?
Under Article 2(4) of the Portuguese Personal Income Tax Code (Código do IRS), termination indemnities receive partial tax exemption based on employee seniority. In Process 126/2017-T, the central dispute was whether seniority includes only time with the paying employer or encompasses previous service with other sector employers. Bank B treated the €102,606.25 severance as fully exempt based on 18 years of banking sector seniority. The Tax Authority disagreed, issuing an additional IRS assessment of €19,553.50 plus compensatory interest, advocating a narrower interpretation counting only 6-7 years at Bank B. This case reflects broader interpretative issues regarding how collective labor agreements and individual employment contracts interact with statutory tax exemption calculations for severance payments in Portuguese tax law.
Can years of service with previous employers in the banking sector count toward the tax-exempt severance amount?
This was the core question in CAAD Process 126/2017-T. The taxpayer argued that previous banking sector service should count toward tax-exempt severance calculations, supported by: (1) employment contract Clause 7 explicitly guaranteeing seniority recognition from other credit institutions since 1995; (2) banking sector CLA Clause 17 providing for cross-institutional seniority recognition; (3) the termination agreement referencing CLA Clause 17 and citing two Administrative Court judgments (May 11, 2004 and September 21, 2010) supporting counting service time across banking entities for Article 2(4) IRS Code purposes. Under this interpretation, the entire €102,606.25 severance would be exempt. Conversely, the Tax Authority argued seniority should be limited to time with the specific paying employer, resulting in partial exemption and taxable portions of the severance payment.
What was the outcome of CAAD arbitration process 126/2017-T regarding IRS on severance compensation?
The provided document does not contain the complete arbitration decision, as it ends mid-section in the legal reasoning. The arbitral tribunal was constituted on April 28, 2017, with Nuno de Oliveira Garcia as sole arbitrator. The Tax Authority submitted its response on June 1, 2017, and final written submissions were presented in October 2017, with the decision scheduled for October 20, 2017. The dispute concerned an IRS assessment of €19,553.50 plus compensatory interest for the 2013 tax year, regarding whether 18 years of banking sector seniority (versus only 6-7 years at Bank B) should count for calculating the tax exemption on the €102,606.25 severance payment. Established facts showed the employment contract and CLA supported cross-employer seniority recognition, and the termination agreement cited favorable court precedents, but the final ruling is not included in the excerpt.
How does the Portuguese Tax Authority (AT) assess compensatory interest on additional IRS liquidations related to employment termination?
In Process 126/2017-T, the Tax Authority assessed compensatory interest (juros compensatórios) in addition to the principal IRS amount on the additional liquidation. Compensatory interest is calculated when there is a temporal gap between when tax should have been paid and when it is actually assessed or collected. Here, the severance was paid in 2013 with Bank B treating it as fully exempt and not withholding IRS. When the Tax Authority later determined a portion should have been taxable (limiting seniority to Bank B years only), it issued an additional assessment with compensatory interest to compensate the State for delayed tax revenue receipt. The calculation methodology and applicable rates are governed by the Portuguese Tax Procedure Code (Código de Procedimento e Processo Tributário), though specific calculation details are not elaborated in this case excerpt.