Process: 135/2017-T

Date: March 23, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 135/2017-T addresses a dispute concerning the application of simplified regime coefficients under Article 31 of the Portuguese IRS Code (CIRS). The taxpayers challenged IRS assessment no. 2015... for tax year 2014, seeking annulment of €1,938.97 in additional tax and the rejection of their administrative complaint. The female claimant operated a beauty business with multiple activities: hairdressing (CAE 96021) and esthetics/beauty services (CAE 1325 and 96022). Under the simplified regime, she declared €19,584.59 as hairdressing income and €2,207.18 as esthetician income in separate fields of IRS Form 3 Annex B, applying different coefficients to each activity type. The Tax Authority (AT) challenged this approach, invoking Circular 5/2014 from DSIRS, arguing that both activities constitute professional services under Article 151 CIRS and should be declared in field 440-4A with uniform coefficient application. The core legal question concerns whether taxpayers with multiple CAE codes can apply differentiated coefficients under Article 31(2) CIRS based on the nature of each activity, or whether a single coefficient applies to all income. The arbitral tribunal was constituted under RJAT (Decree-Law 10/2011) following proper appointment procedures. This case illustrates the complexity of classifying mixed professional activities under the simplified regime and the importance of correct CAE code interpretation for coefficient application, with significant implications for beauty professionals and other service providers operating multiple business lines under different activity classifications.

Full Decision

ARBITRAL DECISION

I. REPORT

1. A…, taxpayer no. …, and spouse B…, taxpayer no. …, both residents at Place …, no. …, …, …-… … (hereinafter referred to as Claimants or Taxpayers), presented on 2017-02-23 a request for constitution of a Singular Arbitral Tribunal, in accordance with the provisions of subparagraph a) of no. 1 of article 2 and article 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority is requested (hereinafter referred to as AT or Respondent), with a view to: (i) declaration of illegality and annulment of the IRS assessment act no. 2015…, with reference to the year 2014, in the amount of 1,938.97 € and, (ii) annulment of the act dismissing the administrative objection to which fell no. …2016….

2. The request for constitution of a Singular Arbitral Tribunal was accepted by His Excellency the President of CAAD, and notified to the Respondent on 2017-02-27.

3. In accordance with and for the purposes of the provision of subparagraph a) of no. 1 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Council of CAAD, duly notified to the parties, within the prescribed periods, was appointed as arbitrator Her Excellency Dr. Andreia Firmino who communicated to the Deontological Council and to the Administrative Arbitration Center (CAAD) the acceptance of the appointment within the time limit stipulated in article 4 of the Deontological Code of Administrative Arbitration.

4. On 2017-04-11 the parties were notified of this appointment, having manifested no intention to refuse the same, in accordance with the combined provisions of articles 11, no. 1, subparagraphs a) and b) of RJAT, and articles 6 and 7 of the Deontological Code.

5. The Singular Arbitral Tribunal was constituted on 2017-04-28, in accordance with the provision of subparagraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December.

6. As a result of an arbitral ruling of 2017-05-03, the AT proceeded on 2017-06-02 to join the administrative file, and on 2017-06-05 presented its reply.

7. By ruling rendered on 05 December 2017, by His Excellency the President of the Deontological Council, the mandate of Her Excellency Dr. Andreia Firmino was terminated, and in her replacement the undersigned was appointed, who, with observance of the relevant legal provisions, communicated the acceptance of the appointment.

8. By ruling rendered on 15 January 2018, duly notified to the parties, and for the reasons contained therein was, among other things:

i- dispensed with the holding of the meeting referred to in article 18 of RJAT,

ii- dispensed with the submission of arguments,

iii- indicated as the deadline for the delivery of the decision and its notification to the parties the day 28/03/2018.

9. To substantiate their request, the Claimants (with express reference in particular to the female Claimant) invoked in summary, and as relevant to what matters here, the following (which is mentioned mostly by transcription):

9.1. The female Claimant declared the start of her activity on 29-01-2008, under the main CAE code 96021 – Hair salons and under secondary CAE codes 1325 – Estheticians. Manicures and Pedicures and 96022 - Beauty institutes (cf. article 6 of the request for arbitral opinion and document no. 3 attached thereto),

9.2. Between 2008 and 2014 the female Claimant completed Annex B of the IRS model 3 declaration regarding "Category B Income", opting to complete field 1 relating to "Simplified Taxation Regime" (cf. article 7 of the request for arbitral opinion and documents nos. 4, and 5 attached thereto),

9.3. In section 3 A of the referred Annex – "Identification of the Taxpayer(s)", field 11- "CAE Code (Professional and Industrial Income), the female Claimant always inserted the code "Beauty institutes" (cf. article 8 of the request for arbitral opinion and documents no. 4, 5, and 6 attached thereto),

9.4. In the year 2014, the female Claimant declared the amount of € 2,207.18 in field 440. amount corresponding to income from the activity of esthetician (cf. article 12 of the request for arbitral opinion and document no. 6 attached thereto),

9.5. In that same year she declared in field 444, the amount of € 19,584.59 in field 443, corresponding to income from the activity of hairdresser (cf. article 13 of the request for arbitral opinion and document no. 6 attached thereto).

9.6. The Claimants, through official letter no. … of 2015-11-06 were notified by AT of the discrepancies regarding the IRS declaration of 2014 and of its intention to make correction to the values inserted in annex B of model 3 (cf. articles 14 and 15 of the request for arbitral opinion and documents nos. 7 and 8 attached thereto)

9.7. The Claimants were notified to pay the amount of € 1,938.97, in accordance with the provision of the IRS assessment statement (cf. article 19 of the request for arbitral opinion and document no. 9 attached thereto)

9.8. The Claimants further make in their petition various considerations about the activity of the female Claimant and the applicability of the coefficients provided for in no. 2 of article 31 of CIRS;

9.9. Concluding their request as follows: "(…) the IRS assessment no. 2015…, which is the object of this request for arbitral opinion, must be annulled, and the Tax and Customs Authority must be ordered to return the amount paid plus compensatory interest until full payment".

10. The AT, duly notified to this effect, presented on 2017-06-05 its reply, (with the joining of the administrative file occurring on 2017-06-02) which fundamentally replicates the position already expressed by it in the context of dismissal of the administrative objection.

10.1. Which can be summarized in very brief note, that in defense of the maintenance of the assessment act here in question, AT subscribes to the understanding that the activities developed by the female Claimant during the year 2014 constitute Category B income, provided for in subparagraph b) of no. 1 of article 3 of CIRS and, as such, the respective values should, contrary to what occurred, have been inserted in field 440-4 A of annex B of model 3 of the IRS "income from professional activities provided for in the Table of article 151 of CIRS and/or in the CAE".

Invoking in support of its thesis the understanding contained in Circular 5/2014 of 20 March, issued by the Directorate of Services for Income Tax of Individuals (DSIRS), to conclude for the unfoundedness of the request and maintenance of the underlying assessment act in the present case, as already mentioned above.

11. The Singular Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5 and 6 of RJAT.

12. The parties have legal personality and capacity, are legitimate and are duly represented (article 3, 6 and 15 of the Code of Tax Procedure and Process, ex vi article 29, no. 1 subparagraph a) of RJAT).

13. The process does not suffer from nullities.

14. No exceptions or preliminary questions that prevent knowledge of the merits were raised.

II- SUBSTANTIATION

A.1. Facts taken as proven

1. The female Claimant declared the start of her activity on 2008-01-29, with CAE 96021 – Hair salons, as the main activity and CAE(s) 1325 - Estheticians, Manicures and Pedicures and 96022 – Beauty institutes, as secondary activities.

2. On 2015-05-25, the Claimants presented the IRS income declaration – model 3, with reference to the year 2014 to which was assigned no. …–… -….

3. The declaration in question was selected for analysis, because (in the understanding of AT) an irregularity was detected due to "need for proof of the type of income declared, considering the activity codes declared or evident in the register".

4. The Claimants presented justification for the entry of the income of 19,584.59€ of the female Claimant in field 443 which, not having been accepted by AT, resulted in the official assessment no. 2015… in the amount of 1,938.97 € to them notified by the Finance Service of….

5. Assessment with which the Claimants did not agree, having filed against it an administrative objection presented on 2016-05-16 with the Finance Service of….

6. The administrative objection in question to which fell no. …2016… was definitively dismissed on 2016-12-14 by ruling rendered by the Director of Finance of Braga, and notified to the Claimants through official letter … of 2016-12-16.

7. The Claimants proceeded to pay the additional IRS assessment here in question.

8. There is no entry in the field intended for the insertion of the Code of the Table of Activities Article 151 of CIRS – Field 10 A of Annex B of model 3 of the IRS.

9. On 2017-02-23 the Claimants presented with CAAD a request for arbitral opinion which gave rise to this present case (cf, information management system of CAAD)

A.2. Facts taken as not proven

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

A.3. Substantiation of the matter taken as proven and not proven.

Regarding factual matters, the Tribunal does not have to rule on everything that was alleged by the parties, but rather it is incumbent upon it the duty to select the facts that matter for the decision, to discriminate the proven from the unproven matter [(cf. article 123, no. 2 of CPPT and no. 3 of article 607 of the Code of Civil Procedure, applicable, ex vi article 29, no. 1 subparagraphs a) and d) of RJAT)].

In this way, the facts pertinent to the judgment of the case are chosen and selected according to their legal relevance which is established in light of the various solutions of the question(s) of law. (cf. article 596 of CPC, applicable ex vi article 29, no. 1, subparagraph a) of RJAT)

Therefore, having regard to the positions assumed by the parties, in light of article 110 no. 7 of CPPT, the documentary evidence attached to the file and the administrative file attached, the following facts are considered proven, with relevance to the decision, the facts listed above.

B. ON THE LAW

The question to be analyzed and decided in the present case is of clear identification, and can be reduced to knowing which of the coefficients provided for in article 31 of CIRS, will be duly applied to the income earned by the Claimant with reference to the fiscal year of 2014.

The regulatory framework at the time of the underlying facts

In the year 2014 the wording of no. 1 of article 3 of CIRS was as follows: "business and professional income shall be considered; a) those arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity", also providing in subparagraph "b) those earned in the exercise, on own account, of any service provision activity, including those of a scientific, artistic or technical nature, whatever its nature, even if connected with activities mentioned in the preceding subparagraph"

The wording of article 31 of CIRS being as follows, introduced by Law no. 83-C/2013, of 31 December, entering into force on 2014-01-01;

" 1. The determination of taxable income results from the application of objective indicators of technical – scientific basis for the different sectors of economic activity"

"2. Until the approval of the indicators mentioned in the preceding number, or in their absence, taxable income is obtained by adding to the income arising from service provision performed by the partner to a company covered by the tax transparency regime, in accordance with subparagraph b) of no. 1 of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

0.15 of the sale of merchandise and products, as well as service provisions carried out within the scope of hotel activities and similar, catering and beverages;

0.75 of the income from professional activities listed in the table referred to in article 151;

0.95 to income arising from contracts whose object is the assignment or temporary use of intellectual or industrial property or the provision of information concerning experience acquired in the industrial, commercial or scientific sector, income from capital attributable to activities generating business and professional income, positive result of property income, positive balance of gains and losses and other capital increases;

0.30 of subsidies or subventions not intended for operation;

0.10 of subsidies intended for operation and other Category B income not provided for in the preceding subparagraphs".

As can be seen, the entry of income in the various fields provided for in annex B of Model 3 of the IRS – Field 4 A PROFESSIONAL, COMMERCIAL AND INDUSTRIAL INCOME, has repercussions on the choice of coefficient for the determination of taxable income, in accordance with the provision of no. 2 of article 31 of CIRS, since that, and for what here is relevant, to the entry of income in field 440 of annex B of model 3 of the IRS corresponds the coefficient of taxation of 0.75%, while for income entered in field 443, the coefficient to be applied is 0.10%.

We have already seen that the Claimant entered in the IRS model 3 declaration of the year 2014, in Annex B, section A4 field 443, income in the amount of 19,584.59 € that field being intended for "Category B Income not included in the preceding fields" having, on the other hand, entered in field 440 the amount of 2,207.18 €, arising from "Income from professional activities provided for in the Table of article 151 of CIRS and/or in the CAE", sustaining AT, also as already noted, that the Claimant should have entered the amount of 19,584.59 € in field 440 and not as she did in field 443, with obvious implications within the scope of the application of the coefficients provided for in article 31 of CIRS.

This is the point of disagreement between the parties and, as emphasized, the object of this present case, having AT notified the Claimants of the discrepancy regarding the declaration in question concerning the Claimant B…, and of the intention to proceed with the correction of the values entered, in accordance with its interpretation, that is, that in its understanding the amount of 19,584.59 € entered in field 443, should appear in field 440-

If, in truth in the table of professional activities to which article 151 of CIRS refers, (Decree no. 1011/2001, of 21 August) does not expressly include the activity of "hair salons" or "beauty institute", the same are already included in the classification of Portuguese economic activities by branch of activity (CAE), specifically under codes 96021 – hair salons and 96022 – beauty institutes.

Having outlined the framework of professional, commercial and industrial income, it now falls to dissect what type of activities the Claimant exercises so as to determine which coefficient to apply for the purpose of determining taxable income.

AT maintains that the income earned by the Claimant in the year 2014 resulting from the exercise of the activities of 96021 – hair salons and 96022 – beauty institutes, are framed in the provision of article 3, no. 1, subparagraph b), and should be applied the coefficient of 0.75% provided for in subparagraph b) of no. 2 of article 31 of CIRS, whereas the Claimant argues that the "activity of hairdresser (…) because they do not derive from activities listed in the table of article 151 of CIRS, should apply the coefficient of 0.10 in accordance with subparagraph e) of no. 2 of article 31 of CIRS" (cf. article 27 of the request for arbitral opinion).

This Tribunal does not overlook the function, scope, level of binding effect and recipients of administrative guidance, namely of circulars in tax matters, subscribing in this regard the doctrine that emanates, even if by way of example, from the Judgment of the Central Administrative Court of the South, of 09-11-2010 (reported by His Excellency Judge José Correia within the scope of case no. 04292/10) [1] one tends to agree with the understanding of AT regarding the conceptualization of services as a basis for the application of the coefficients established in subparagraphs b) and e) of no. 2 of article 31 of the IRS Code, which results from Circular no. 5/2014, of the Directorate of Services for Income Tax of Individuals (DSIRS), of 20 March 2014.

There it is stated with effect that, (…) "1. Income earned in the exercise, on own account, of any service provision activity that is framed in subparagraph b) of no. 2 of article 31 of the IRS Code is covered by subparagraph b) of no. 1 of article 3 of the same Code, regardless of whether the activity exercised is, in accordance with article 151 of the IRS Code, classified in accordance with the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics, or in accordance with the codes mentioned in the table of activities approved by Decree no. 1011/2001, of 21 August, including the activity with the code "1519 Other service providers", since the regulation in question does not refer to activities identified specifically in the table of activities, contrary to what occurs in subparagraph b) of no. 1 of article 101 of the IRS Code for the purposes of withholding at source".

Being the activities of "hair salons", estheticians, manicures and pedicures" and "Beauty institutes" service provision activities, as follows from the provision of article 1154 of the Civil Code,[2] we do not see how not to subscribe to the position conveyed by AT in the sense that the income from them should have applied the coefficient provided for in subparagraph b) of no. 2 of article 31 of CIRS, with entry of the same in field 440 – Section 4-A of annex B of the IRS model 3 declaration.

It is also noted that the considerations produced by the Claimants about "taxation under Corporate Income Tax", set out under articles 41 and following of the request for arbitral opinion, have no relevance to what is at issue in the present case.

In view of what has been stated - and without need for any other developments or considerations, the request for annulment of the underlying IRS assessment is unfounded.

III- COMPENSATORY INTEREST

The Claimant files a request for payment of compensatory interest.
The reimbursement of amounts relating to them depends on the success of the request for declaration of illegality of the assessment acts.
Consequently, the request being unfounded, those for reimbursement and compensatory interest are necessarily also unfounded.

IV- DECISION

In harmony with what has been stated, this Singular Arbitral Tribunal decides:

a. to judge unfounded the requests formulated by the Claimants,

b. to condemn the Claimants in the payment of the costs of the process.

V- VALUE OF THE CASE

In accordance with what is provided for in articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 41/2013, of 26 June, 97 A- no. 1, subparagraph a) of the Code of Tax Procedure and Process and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Processes, the value of the process is fixed at 1,938.97 €.

VI- COSTS

In accordance with the provision of articles 12, no. 2, 22, no. 4 of RJAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Processes, and Table I attached hereto. the amount of costs is fixed at 306.00 €.

LET IT BE NOTIFIED

Text prepared by computer, in accordance with the provision of article 131 of the Code of Civil Procedure, applicable by reference of subparagraph e) of no. 1 of article 29 of the Legal Regime of Tax Arbitration, with blank verses, and revised by the arbitrator,

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except with respect to transcriptions made.

Twenty-three of March of two thousand and eighteen.

The arbitrator

(José Coutinho Pires)

[1] "(…)

VII- The Courts, as independent organs of sovereignty, are not subordinate to decisions taken in tax matters by the administration, even if binding on the latter, insofar as it is their responsibility to interpret and apply the tax law without any dependence on the criteria adopted by the administration and thus, if a court decision is given in a sense different from that followed in the binding guidance, the administration must respect it and have it executed.

VIII- For it is true that the courts are only bound by the law, and thus are not bound by any administrative guidance from which a certain interpretation of the law derives, administrative circulars (as well as prior information) do not bind the taxpayers, but only their respective services and, in light of the law, the procedures defined "maxime" the "circulated law" of the Administration cannot derogate from the principle of tax legality and therefore, in this light, it is possible to state the nonconformity of the content of the appealed act with the legal norms mentioned and, in this way, that the presuppositions actually existing imposed the administrative decision of the opposite sign, and it is certain that the Judge, even if he had knowledge of the binding prior information, was not bound by that administrative decision."

[2] "Service provision contract is one in which one of the parties undertakes to provide the other with a certain result of his intellectual or manual work, with or without compensation"

Frequently Asked Questions

Automatically Created

How are the simplified regime coefficients under Article 31 of the CIRS applied to IRS taxpayers in Portugal?
Article 31 of CIRS establishes the simplified regime for determining Category B (professional and business) income. Under paragraph 2, taxable income is calculated by applying statutory coefficients to gross receipts, varying by activity type. For activities listed in Article 151 CIRS (technical, artistic, and liberal professions), a 75% coefficient applies, meaning 75% of gross income is considered taxable. For other professional services not in Article 151, a 75% coefficient also applies, while sales activities use lower coefficients (15% for sales of goods, 75% for services). When taxpayers have multiple activities with different CAE codes, the critical issue is whether each activity's income can be segregated and taxed with its specific coefficient, or whether the primary activity's coefficient applies to all income. The Tax Authority's position, per Circular 5/2014, tends toward unified treatment when activities are interconnected or constitute a single economic unit.
Can taxpayers challenge an IRS tax assessment under the simplified regime through CAAD arbitration?
Yes, taxpayers can challenge IRS assessments under the simplified regime through CAAD (Centro de Arbitragem Administrativa) arbitration. Article 2(1)(a) of RJAT (Decree-Law 10/2011) grants CAAD jurisdiction over disputes concerning the legality of tax acts, including IRS assessments. Taxpayers can request arbitration for: (i) annulment of assessment acts that incorrectly apply simplified regime coefficients, (ii) annulment of decisions rejecting administrative complaints (recurso hierárquico), and (iii) correction of errors in coefficient application or income classification. The process provides an alternative to judicial courts, offering faster resolution (typically 6-12 months) with specialized tax arbitrators. Arbitration is available for assessments up to €10,000,000 and can address both legal and factual issues, including interpretation of Article 31 CIRS, classification of activities under Article 151, and application of AT circulars like Circular 5/2014.
What is the procedure for filing a CAAD arbitral tribunal request against the Portuguese Tax Authority (AT)?
The CAAD arbitral tribunal request procedure requires: (1) Filing a written request (pedido de pronúncia arbitral) within 90 days of notification of the challenged act or administrative complaint rejection, submitted electronically through CAAD's platform or by post; (2) The request must identify parties, describe the contested act (assessment number, amount, tax year), state legal grounds for annulment, and include supporting documents; (3) Payment of initial fee (€306 for amounts under €10,000); (4) CAAD President reviews admissibility within 5 days; (5) Tax Authority is notified and must submit the administrative file within 30 days (Article 17 RJAT); (6) AT files a reply (resposta) within the same period; (7) The President appoints an arbitrator from CAAD's list (or a three-member panel for amounts exceeding €10,000); (8) Parties have 5 days to challenge the arbitrator for conflict of interest; (9) The tribunal is formally constituted and schedules hearings or documentary proceedings; (10) Decision must be issued within 6 months (extendable to 12 months), with binding effect equivalent to court judgments.
What are the legal grounds for annulling an IRS tax assessment based on incorrect application of Article 31 CIRS coefficients?
Legal grounds for annulling IRS assessments based on incorrect Article 31 CIRS coefficient application include: (1) Misclassification of professional activities - applying Article 151 professional service coefficients (75%) when lower coefficients should apply, or vice versa; (2) Error in CAE code interpretation - failing to recognize multiple distinct activities warranting separate coefficient application; (3) Violation of the principle of tax legality - applying coefficients not prescribed by law or misinterpreting statutory provisions; (4) Incorrect application of AT administrative guidance - misapplying Circular 5/2014 or other interpretive circulars beyond their intended scope; (5) Factual errors - incorrect assessment of the actual nature of activities performed, leading to wrong coefficient selection; (6) Violation of acquired rights - changing coefficient treatment without proper legal basis or notification; (7) Procedural irregularities - inadequate opportunity to provide evidence about activity classification. Taxpayers must demonstrate that correct coefficient application would result in lower taxable income, establishing material prejudice. The burden shifts to AT to prove the assessment's legality once challenged.
How does the CAAD arbitration process handle disputes over the Portuguese IRS simplified regime and gracious complaint rejections?
CAAD arbitration handles IRS simplified regime disputes through a streamlined documentary process. After the taxpayer's request and AT's reply with the administrative file, the arbitrator examines: (1) whether the taxpayer properly declared activities and applied coefficients per Article 31 CIRS; (2) whether AT's correction via assessment act has legal basis in CIRS provisions and valid interpretive guidance; (3) whether the rejected gracious complaint (reclamação graciosa) or hierarchical appeal was properly analyzed. For simplified regime disputes, CAAD typically dispenses with oral hearings per Article 18 RJAT when issues are purely legal (coefficient interpretation) rather than factual. The tribunal reviews AT circulars like Circular 5/2014 as interpretive aids but not binding law, examining whether they conform to CIRS. Decisions analyze CAE codes, Article 151 CIRS activity classifications, and the economic reality of the taxpayer's work. If the tribunal finds illegal coefficient application, it annuls the assessment and orders refund with compensatory interest (juros indemnizatórios) from payment until reimbursement. The process takes 6-9 months typically, with final decisions appealable to administrative courts only on legal grounds within 30 days.