CAAD Ruling on IRS Taxation of Employment Termination Compensation in Portugal

ARBITRAL DECISION

The arbitrators, Counselor José Baeta de Queiroz (Chairman), Dr. Henrique Nogueira Nunes (Member) and Dr. Sílvia Oliveira (Member), designated by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Collective Arbitral Tribunal, constituted on 9 June 2016, with respect to the above-identified case, decide as follows:

1. REPORT

1.1

A…, taxpayer no.…, resident at Street…, no.…, …, in ... (hereinafter referred to as "Applicant"), submitted a request for arbitral pronouncement and constitution of a Collective Arbitral Tribunal, on 11 March 2016, pursuant to the provisions of article 4 and no. 2 of article 10 of Decree-law no. 10/2011 of 20 January [Legal Regime of Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

1.2

The Applicant, having been notified "of the decision rejecting the administrative complaint presented against the additional Personal Income Tax (IRS) assessment no. 2015… relating to the year 2013 (…)", "(…) presented a request for arbitral pronouncement against the said additional IRS assessment (…) and against the decision rejecting the administrative complaint (…)", seeking "(…) the revocation of the decision on the administrative complaint issued by the Lisbon Finance Authority, on grounds of illegality, ordering, as a consequence, the annulment of the IRS assessment no. 2015… and (…) the payment of the compensatory interest owed".

1.3

The application for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 14 March 2016 and notified to the Respondent on the same date.

1.4

The Applicant did not proceed to nominate an arbitrator and therefore, pursuant to the provisions of article 6, no. 2, paragraph a) of RJAT, the signatories were designated as arbitrators by the President of the Deontological Council of CAAD, on 4 May 2016, the nomination having been accepted within the time-limits and terms provided by law.

1.5

On the same date the parties were duly notified of this designation and did not manifest any intention to refuse the designation of the arbitrators, pursuant to the provisions of article 11, no. 1, paragraphs a) and b) of RJAT, read in conjunction with articles 6 and 7 of the Deontological Code.

1.6

Thus, in accordance with the provisions of paragraph c), no. 1, article 11 of RJAT, the Arbitral Tribunal was constituted on 19 May 2016, an arbitral order having been issued on the same date, to notify the Respondent to, "(…) within 30 days, respond, submit a copy of the administrative file and request, if it wishes, the production of additional evidence"

1.7

On 15 June 2016 the Respondent submitted to the case file a copy of the administrative file and on 20 June 2016 presented its Response, having defended itself by objection and concluded that "(…) the claims should be judged entirely unfounded and, consequently, the Tax Authority should be absolved".

1.8

By arbitral order of 20 June 2016, taking into account the fact that no circumstances occurred in the case that would justify holding the meeting referred to in article 18 of RJAT, that meeting was dispensed with, and the parties were invited to, if they wished, "submit written submissions within the successive period of 10 days, with the Respondent's period commencing from notification of the Applicant's submissions".

1.9

Taking into account that neither party submitted written submissions, an arbitral order was issued on 13 September 2016, to the effect that the arbitral decision would be issued by 18 November 2016 and warning the Applicant of the necessity of payment of the subsequent arbitral fee, pursuant to the provisions of no. 3 of article 4 of the Regulations on Costs in Tax Arbitration Proceedings.

2. CAUSE OF ACTION

The Applicant supports its claim, in summary, as follows:

2.1

It begins by clarifying that "on 01.01.1993 (…) he was contracted by B… SA for the performance of General Director duties" and "on 16.03.2000, (…) he entered into an employment contract with another entity of the same corporate group, C… SGPS, S.A. (…), with seniority recognized from 01.01.1993, also for the performance of General Director duties (…)", and that "on 20.05.2004, by resolution of the General Assembly of Shareholders of C… SGPS, (…) he was appointed to the Board of Directors of that entity for the three-year term 2004/2006 (…), the employment contract (…) being suspended".

2.2

In this regard, it further clarifies that "on 24.05.2007, by resolution of the General Assembly of Shareholders of C… SGPS, (…) he was re-elected to the Board of Directors of that entity for the three-year term 2007/2009 (…)" and "on 27.05.2010, by resolution of the General Assembly of Shareholders of C… SGPS, (…) he was once again re-elected to the Board of Directors of that entity, now for the three-year term 2010/2012 (…)", and that "at the end of 2012, (…) he ceased his functions on the Board of Directors, not having been re-elected to said body for the following three-year term, 2013/2015".

2.3

Thus, according to the Applicant, "the suspension of the aforementioned employment contract ceased to be in effect on 01.01.2013, and (…) he returned to occupy his previous position as General Director".

2.4

"On 01.07.2013, (…) he was notified of the decision of his employer entity, C… SGPS, to eliminate his position (…)" and, "as a consequence, the employment contract entered into between the Applicant and C… SGPS terminated with effect on the said date of 01.07.2013".

2.5

In these terms, the Applicant clarifies that "by reason of the termination of the employment contract due to elimination of the position, C… SGPS paid to the Applicant, also on 01.07.2013, the amount of EUR 611,289.00 (…)", "an amount which (…) he did not include in his tax return on the grounds that (…) the same was excluded from taxation under Personal Income Tax".

2.6

However, the Applicant continues, "in compliance with internal service order no. OI2015…, he was subject to a partial scope internal audit inspection in the Personal Income Tax sphere for the year 2013", which served as the basis for the same "the fact that the inspection services verified in consultation with the monthly remuneration statements that the Applicant had received income from category A, without having filed the respective Personal Income Tax form 3 or declared the total income earned", because the "tax inspection services (…) understood that part of the compensation paid (…) should be subject to Personal Income Tax".[2][3]

2.7

Despite "totally disagreeing with this assessment", the Applicant on 07.07.2015 "proceeded to pay it, to avoid tax enforcement (…)" and "on 16.09.2015, (…) presented an administrative complaint (…) against the additional assessment act (…) referred to above", having been notified "on 28.01.2016, (…) of the decision rejecting the administrative complaint (…)", "not agreeing with it (…)".

2.8

In consequence, the Applicant presented the present request for arbitral pronouncement, as he understands that "(…) the compensation paid to the Applicant resulted as a consequence of the termination of the employment contract due to elimination of the position – not being in any way related to the performance of director duties – in full and exclusive compliance with the labor legislation in force at the date of the facts" and, in these terms, he argues that "(…) only in cases where compensation for the termination of the functions of manager, director or manager of a legal person is at issue would paragraph a) of no. 4 of article 2 of the Personal Income Tax Code be applicable, with the benefit paid being fully subject to tax".

2.9

Thus, according to the Applicant, "at the date of the facts (…) the subsumption of these to the norms in force was quite simple and free from any doubt", arguing that the amendment introduced by Law no. 82-E/2014 "(…) made it possible that, in the case of having performed employee functions, they could benefit from an exclusion from taxation regarding the amounts received intended to compensate for the termination of an employment contract (…)".

2.10

That is, according to the Applicant, "when the legislator conferred an interpretive nature on the amendment made, it intended to provide a tax relief (with retroactive effect) to the situation of directors who ceased functions and had been employees in the past", whereby he understands that "the Tax Authority (…) completely reversed the meaning of this norm, transforming this tax relief into a new tax charge, seeking to increase the Personal Income Tax of employees who terminated the employment contract and had been, in the past, directors or managers".

2.11

In these terms, for the Applicant "one can only conclude that the compensation for the termination of the employment contract paid (…) was due exclusively to the elimination of his position, being applicable to the said benefit, for everything stated regarding the tax classification of benefits of this nature, paragraph b) of no. 4 of article 2 of the Personal Income Tax Code".

2.12

And, the Applicant reiterates that "even if one does not agree with the above (…) still the assessment here challenged would be illegal, due to manifest unconstitutionality of article 14 of Law 82-E/2014", as he understands that "the interpretation that the Tax Authority makes of this article 14 frontally violates the Constitution (…)", since "the Tax Authority considers that this norm applies retroactively because the legislator conferred it interpretive character".[4]

2.13 - Regarding the Right to Compensatory Interest

In this regard, having the Applicant paid the Personal Income Tax (IRS) assessment in dispute, he petitions, in addition to the reimbursement of the amount of improperly paid tax, for recognition of his right to receive compensatory interest [as he understands that the requirements set forth in article 43 of the General Tax Law (LGT) are applicable to him], calculated in accordance with legal terms.

2.14

In summary, the Applicant concludes that there should be revoked "the decision on the administrative complaint issued by the Lisbon Finance Authority, on grounds of illegality", ordering, "as a consequence, the annulment of the Personal Income Tax assessment no. 2015…" and proceeding "to the payment of the compensatory interest owed".

3. RESPONDENT'S RESPONSE

3.1

The Respondent responded, defending itself by objection and arguing that "the claims should be judged entirely unfounded (…)" and, in consequence, "the Respondent should be absolved".

3.2

In this regard, the Respondent reiterates the position previously assumed, arguing that "(…) the indemnity granted was given considering the time in which the Applicant performed functions as director" and that, therefore, "(…) it was necessary (…) to determine the quantum thereof corresponded to the performance of director functions", "(…) in exact compliance with the text introduced by Law 82-E/2014, of 31/12/2014, to paragraph a) of no. 4 of art. 2 of the Personal Income Tax Code".

3.3

According to the Respondent, "had it not been for this new wording, with interpretive nature and more favorable to the taxpayer, taxation would have occurred for the total, as determined by the wording of paragraph a) of no. 4 of art. 2 of the Personal Income Tax Code, in the version prior to Law 82-E/2014, of 31/12/2014".

3.4

Thus, the Respondent argues that with the amendments introduced in the Law "what was effectively intended was to clarify what had already been the understanding and practice, expressly determining that the indemnity should be taxed, or exempt from taxation, precisely as a function of the quantum corresponding to the performance of director functions, and that corresponding to the performance of employee functions", reiterating on the matter of interpretation, citing for this purpose Batista Machado (in "Introdução ao Direito e ao Discurso Legitimador", Almedina, 1987, p. 189) that "the letter of the law is the starting point of all interpretation and is also its limit (…)", being that "(…) it is to be presumed that the legislator knew how to express his thought in adequate terms (…)" (emphasis ours).

3.5

In these terms, the Respondent does not agree with the position assumed by the Applicant, whereby it understands that "the entire argumentation of the Applicant should not succeed" and, not resulting from the facts "(…) any error imputable to the services, nor payment of undue tax", "no defect being able to be imputed to the assessment in dispute and to the act that fell upon its administrative complaint (…)", the Respondent argues that "there is no legal basis for the payment of compensatory interest, the respective claim should not succeed".

4. PRELIMINARY RULING

4.1

The request for arbitral pronouncement is timely as it was presented within the time-limit provided in paragraph a) of no. 1 of article 10 of RJAT.[5]

4.2

The parties have legal personality and capacity, are legitimate as to the request for arbitral pronouncement and are duly represented, pursuant to the provisions of articles 4 and 10 of RJAT and article 1 of Regulation no. 112-A/2011, of 22 March.

4.3

The Tribunal is competent regarding the examination of the request for arbitral pronouncement formulated by the Applicant.

4.4

No preliminary objections were raised that require examination.

4.5

No procedural defects are found and therefore it is now necessary to examine the merits of the claim.

5. FACTUAL MATTER

5.1 - Facts Found Proven

5.2

The following facts are considered proven (based on the documents hereinafter identified, attached by the Applicant, as well as the documents that form part of the administrative file attached by the Respondent):

5.2.1

The Applicant was contracted on 01 January 1993 by B… S.A. for the performance of General Director duties (fact presented by the Applicant, not contested by the Respondent and whose seniority is referred to and safeguarded in the employment contract identified in the following point).

5.2.2

The Applicant, on 16 March 2000, entered into an employment contract with another entity of the same corporate group, C… SGPS, S.A. (C…SGPS), relating to General Director duties, with his seniority being guaranteed with effect from 1 January 1993, (as per copy of the employment contract attached to the case with the claim – doc. no. 3).

5.2.3

By resolution of the General Assembly of Shareholders of C… SGPS of 20 May 2004, the Applicant was appointed to the Board of Directors of that entity, for the three-year term 2004/2006 (as per copy of minute no. 40, attached to the case with the claim – doc. no. 4).

5.2.4

By resolution of the General Assembly of Shareholders of C… SGPS of 24 May 2007, the Applicant was re-elected to the Board of Directors of that entity, for the three-year term 2007/2009 (as per copy of minute no. 43, attached to the case with the claim – doc. no. 5).

5.2.5

By resolution of the General Assembly of Shareholders of C… SGPS of 27 May 2010, the Applicant was re-elected to the Board of Directors of that entity, for the three-year term 2010/2012 (as per copy of minute no. 48, attached to the case with the claim – doc. no. 6).

5.2.6

As a consequence of the aforementioned appointments, the employment contract then in force was suspended.

5.2.7

At the end of the mandate relating to the three-year term 2010/2012, the Applicant ceased his functions on the Board of Directors, not having been re-elected to said body for the following three-year term, 2013/2015.

5.2.8

As a consequence of the non-re-election referred to in the previous point, the suspension of the employment contract referred to in point 5.2.6 ceased to be in effect, and the Applicant returned to occupy his previous position as General Director at C… SGPS.

5.2.9

On 01.07.2013, the Applicant was notified (by registered mail) of the decision of C… SGPS to eliminate his position (as per copy of the communication of the decision to terminate the employment contract due to elimination of the position, attached to the case with the claim – doc. no. 7).

5.2.10

As a consequence of the decision referred to in the previous point, the employment contract entered into between the Applicant and C… SGPS (see point 5.2.2, above) terminated with effect on 1 July 2013.

5.2.11

C… SGPS paid to the Applicant on 01 July 2013 the amount of EUR 611,289.00 under the designation of "Tax-exempt indemnity" (as per copy of the salary receipt for the month of July 2013, attached with the claim - doc. no. 8).

5.2.12

The Applicant presented the Personal Income Tax return form 3 relating to the year 2013 on 6 May 2014 (no. …-…-…-…), having declared in Annex A thereof dependent employment income in the total amount of EUR 252,717.61, not having included the amount of EUR 611,289.00 (identified in the previous point) relating to compensation for termination of the employment contract (as referred to in doc. no. 2, attached with the claim).

5.2.13

The Personal Income Tax return form 3 identified in the previous point gave rise to assessment no. 2014…, with tax to be paid, by 31 August 2014, in the amount of EUR 3,988.95 (as referred to in doc. no. 2, attached with the claim).

5.2.14

In compliance with internal service order no. OI2015…, dated 23 February 2015, the Applicant was subject to an internal inspection action, of partial scope, in the Personal Income Tax sphere relating to the year 2013, the same having as its basis the fact that the Respondent verified, in consultation with the monthly remuneration statements, "the existence of a discrepancy between the dependent employment income declared (€ 252,717.61) and the income (….) earned (€ 864,006.61)", being that "the difference of € 611,289.00 results from the fact of having earned compensation for termination of the employment contract (…)" (as referred to in doc. no. 2, attached with the claim).

5.2.15

As a result of the aforementioned inspection action, corrections were proposed, without resort to indirect methods, in the amount of EUR 494,573.84, the Applicant having been notified of Letter no.…, of 27 February 2015, relating to the draft corrections and to exercise, if he wished, the right of hearing in writing or orally within 15 days (as referred to in doc. no. 9, attached with the claim).

5.2.16

As a consequence of the previous point, and taking into account the fact that the Applicant did not exercise the aforementioned right of hearing, a document correcting the Personal Income Tax return form 3 (no. …-2013-…-…) was prepared, which gave rise to assessment no. 2015…, in the amount of tax to be paid of EUR 152,048.34 (as referred to in doc. no. 2, attached with the claim).

5.2.17

Taking into account the Personal Income Tax previously already assessed of EUR 3,988.95 (see point 5.2.13, above), the tax to be paid in the assessment bill no. 2015… amounted to EUR 148,059.39, with payment deadline of 27 July 2016 (as referred to in doc. no. 2, attached with the claim).

5.2.18

The Applicant, despite disagreeing with the said assessment bill, proceeded to pay it on 7 July 2015 (as per doc. no. 10, attached with the claim).

5.2.19

The Applicant presented, on 16 September 2015, an administrative complaint no. …2015… against the additional assessment act referred to in point 5.2.16, above (as per doc. no. 2, attached with the claim).

5.2.20

The Applicant was notified, by Letter no.… of 7 December 2015, to exercise the right of prior hearing within 15 days (as referred to in doc. no. 2, attached with the claim).

5.2.21

The Applicant did not, within the time-limit referred to in the previous point, exercise any right of prior hearing relating to the draft decision rejecting the administrative complaint identified (as referred to in doc. no. 2, attached with the claim).

5.2.22

The Applicant was notified on 28 January 2016 of Letter no. … of 26 January 2016, relating to the decision rejecting the administrative complaint identified (as referred to in doc. no. 2, attached with the claim).

5.3

No other facts capable of affecting the decision on the merits of the claim were proven.

5.4 - Facts Not Found Proven

5.5

No facts were found not proven with relevance for the arbitral decision.

6. LEGAL GROUNDS

6.1

In the case, for purposes of granting or denying the claims formulated by the Applicant:

6.1.1

For revocation of the decision on the administrative complaint filed regarding the Personal Income Tax assessment act for the year 2013 which is the subject of the claim;

6.1.2

For annulment of the said Personal Income Tax assessment and,

6.1.3

For reimbursement of the tax paid plus compensatory interest,

It will be necessary to decide whether the compensation paid to the Applicant following the termination of the employment contract on 1 July 2013 is classifiable under paragraph b), of no. 4 of article 2 of the Personal Income Tax Code (in force at the date to which the tax event relates) and, to that extent, is totally exempt from taxation [6] as it concerns compensation resulting from termination of an employment contract due to elimination of the position (as the Applicant argues) or whether, on the contrary (as the Respondent argues), it is classifiable under paragraph a), of no. 4, of article 2 of the Personal Income Tax Code, since "the (…) compensation granted (…) is intended to compensate (…) the period in which he performed dependent employment functions and the period in which he performed director functions", "whereby it was necessary (…) to determine the quantum thereof [which] corresponded to the performance of director functions", "(…) in exact compliance with the text introduced by Law 82-E/2014, of 31 December 2014, to paragraph a) of no. 4 of article 2 of the Personal Income Tax Code", that is, subjecting the said compensation to taxation in the proportion corresponding to the performance of director functions (emphasis ours).

6.2

In this regard, it is timely to state from the outset that, in the interpretation of tax incidence norms, legal certainty (the value underlying the principle of legality) does not permit any interpretation other than literal interpretation, and citing in this regard, J. Baptista Machado (in "Introdução ao Direito e ao Discurso Legitimador", Almedina, 1987, p. 189), when he argues that "the letter of the law is the starting point of all interpretation and is also its limit (…)" (a quotation which, curiously, is also used by the Respondent, in the Response presented, but in the sense of demonstrating the opposite of what the Applicant intends).

6.3

In truth, and without prejudice to the above, it is "today settled that tax laws are interpreted like any other laws, being necessary to determine their true meaning in accordance with the techniques and interpretive elements generally accepted by legal doctrine (…)" (cfr. judgment of the Central Administrative Court of the South, 21/9/2010, proc. 3748/10 and Rui Duarte Morais, Sobre o I.R.S., 2nd edition, Almedina, 2010, p. 56)".[7]

6.4

On the other hand, recall that in Tax Law, by force of the principle of legality provided for in article 106, no. 2, of the Constitution of the Portuguese Republic, as well as as a consequence of the principles of typicity and determination into which it breaks down, the norms of incidence must be pre-determined in their content, with the elements comprising them being formulated in a precise and determined manner.

6.5

Thus, and regarding the birth of the tax obligation, important here to assess the applicable conditions and, as a consequence, determine the applicable legislation, the Judgment of the Supreme Administrative Court no. 0827/06, of 29 November 2006 clarifies that, as stated "in the judgment of 26 June 2002 delivered by this Court in case no. 26811 (…) taxes are based essentially on the contributive capacity revealed through income or its use and property. Therefore, what matters is the moment at which the income is obtained or the income is used, because only then is there contributive capacity", whereby it is concluded that the tax event is born at the moment when the income (in this case, derived from payment of compensation for termination of employment contract) is paid or made available.

6.6

Citing the Judgment of the Central Administrative Court of the South, delivered in case no. 04771/11, of 22 January 2013, "the tax act always has as its basis a concrete factual situation, which is found provided abstract and typically in tax law as generating the right to taxation", being that "this factual and concrete situation is defined as a tax event, which only exists from the moment all the prerequisites legally provided for such are verified" (emphasis ours).[8]

6.7

In these terms, the tax event ("factual and concrete situation, which only exists from the moment all the prerequisites legally provided for such are verified"), is born at the moment the income is paid (or made available), being that it is at that moment when the income is obtained (or the use of that income) that determines the existence of the contributive capacity of the taxpayer, and the legislation that, at that same moment, is in force should be applied to that tax event, in strictest compliance with the principle of legality.

6.8

In general terms, at the date to which the facts underlying the case in analysis relate (1 July 2013), article 2 of the Personal Income Tax Code provided, in its nos. 1 and 2, that "dependent employment income" shall be considered to include "all remuneration paid or made available to its holder, derived from work performed on behalf of another under an individual employment contract or another legally equivalent to it (…)", including "(…) in particular, salaries, wages, fees, bonuses, percentages, commissions, participations, subsidies or prizes, attendance fees, emoluments, participations in fines and other accessory remuneration, even if periodic, fixed or variable, of contractual or non-contractual nature" (emphasis ours).

6.9

In accordance with the provisions of no. 4 of the aforementioned article 2 of the Personal Income Tax Code (in the wording in force in the year 2013, that is, at the date of the facts described in the claim), "when, in any manner, the contracts underlying the situations referred to in paragraphs a), b) and c) of no. 1 terminate, but without prejudice to the provisions of paragraph d) of the same number, regarding the benefits that continue to be owed even if the employment contract does not subsist, or the termination of the functions of public manager, director or manager of a legal person occurs (…), the amounts earned, under any title, are always subject to taxation:

a) In their entirety, in the case of a public manager, director or manager of a legal person (…);

b) In the part that exceeds the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or of performance of functions with the payer entity, in other cases, except when in the 24 months following a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts shall be taxed in their entirety" (emphasis ours).

6.10

That is, pursuant to the provisions of the Personal Income Tax Code, "the legislator considers dependent employment income any indemnities resulting, among other things, from the extinction of the legal relationship that gives rise to such income from dependent employment", being that "such indemnities for termination of the employment contract do not fit the concept of remuneration, although they receive express classification as dependent employment income subject to taxation, in the terms established in no. 4 of the same provision".[9]

6.11

Now, having regard to the facts found proven in Chapter 5 of this Decision, namely, that:

6.11.1

The Applicant was contracted on 01 January 1993 by B… S.A. for the performance of General Director duties (see point 5.2.1 of the previous chapter) and that on 16 March 2000 he entered into an employment contract relating to General Director duties with another entity of the same corporate group (C… SGPS), with his previous seniority being guaranteed, that is, with effect from 1 January 1993 (see point 5.2.2 of the previous chapter);

6.11.2

By successive resolutions of the General Assembly of Shareholders of C… SGPS, the Applicant was appointed to the Board of Directors of that entity, for the three-year terms 2004/2006, 2007/2009 and 2010/2012 (see point 5.2.3 to 5.2.5 of the previous chapter) and, as a consequence of the appointments referred to in the previous point, the employment contract previously in force was suspended (see point 5.2.6 of this Decision);

6.11.3

At the end of the mandate relating to the three-year term 2010/2012, the Applicant ceased his functions on the Board of Directors (see point 5.2.7 of the previous chapter) having, in consequence, resumed his previous position as General Director at C… SGPS (see point 5.2.8 of the previous chapter), that is, returning to his dependent employment functions which he performed until 1 July 2013, the date of termination of the said employment contract due to elimination of the position (see point 5.2.10 of the previous chapter);

It is verified that on 1 July 2013, when the Applicant ceased his functions at C… SGPS, the same related to General Director duties (inherent to his employment contract), as a dependent employee and the Respondent, at no moment of its cognitive process, manages to demonstrate and prove otherwise.

6.12

To that extent, in accordance with the legal text, at the applicable date [paragraph b), of no. 4 of article 2 of the Personal Income Tax Code], "(…) the amounts earned, under any title (…)", from the termination of the said contract, would only be subject to taxation in the part exceeding "(…) the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority (…)" (emphasis ours).

6.13

That is, the compensation paid for the termination of the employment contract on 1 July 2013 due to elimination of the position was covered by the provisions of article 2, no. 4, paragraph b) of the Personal Income Tax Code (in the wording in force in the year 2013), as the Applicant argues because the applicability of paragraph a), of no. 4, of article 2 of the Personal Income Tax Code (as the Respondent argues) would only be possible if, on that date, the Applicant were still a member of the Board of Directors of C… SGPS and it was in that capacity that he had ceased his functions which, as we have seen, was no longer the case, given that the Applicant was not re-elected as such in the respective General Assembly for the three-year term 2013/2015 (see point 5.2.7 of this Decision).

6.14

Consequently, the compensation paid for the termination of the employment contract of the Applicant will be totally exempt from taxation under Personal Income Tax, assuming it complies with the requirements provided for in article 2, no. 4, paragraph b) of the Personal Income Tax Code, namely, because it does not exceed "the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority (…)", a fact which is never contested by the Respondent.

6.15

In these terms, in light of the above, the Arbitral Tribunal understands that the provisions of paragraph a), of no. 4, of article 2 of the Personal Income Tax Code are not applicable to the situation under analysis, neither in the wording then in force, nor in the subsequent wording (introduced by Law no. 82-E/2014, of 31 December), regardless of its interpretive character, because, to reiterate, the compensation paid to the Applicant is owed by the termination of an employment contract and, to that extent, it is not that legal provision which was applicable to him on 1 July 2013, taking into account the constraints underlying the taxable event referred to in this Decision, the Respondent having, to reiterate, not proven that such was not the case.

6.16

Thus, the Arbitral Tribunal understands that the Applicant is right as to the claims formulated in the request for arbitral pronouncement, and above identified in points 6.1.1 and 6.1.2 of this Decision, whereby the decision that fell on the administrative complaint presented against the Personal Income Tax assessment in dispute should be revoked and, as a consequence, the said Personal Income Tax assessment relating to the year 2013 should also be annulled, as it is tainted with a defect of illegality.

6.17

As a consequence, in light of the above, and taking into account that "the judge does not have to analyze and assess all the arguments, all the reasoning, all the legal grounds invoked by the parties in support of their positions", the Arbitral Tribunal understands that with the conclusion expressed in point 6.15 the analysis of the remaining arguments presented by both Parties is rendered moot.[10]

6.18 - Regarding the Reimbursement of Tax Paid, with Compensatory Interest

Having regard to the conclusion referred to in points 6.6 and 6.7, above, as well as the fact that the amount associated with the Personal Income Tax assessment was duly paid (see above point 5.2.18), the Applicant has the right to reimbursement of the amounts improperly paid.

6.19

Now, as regards the payment of compensatory interest, in accordance with the provisions of no. 5 of article 24 of RJAT "payment of interest, regardless of its nature, is due in accordance with the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process", from which it results that an arbitral decision is not limited to the examination of the legality of the tax act.

6.20

Equally, in accordance with the provisions of article 24, no. 1, paragraph b) of RJAT, it should be understood that the claim for compensatory interest is a claim relating to tax acts (for example, assessment), which aims to clarify/specify the content of the obligation to "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose".

6.21

As Jorge Lopes de Sousa states "it falls within the competence of the arbitral tribunals operating at CAAD the fixing of the effects of the arbitral decision which can be defined in the process of judicial review, in particular, the annulment of the acts whose declaration of illegality is requested, the condemnation of the Tax and Customs Authority to payment of compensatory interest (…)" (emphasis ours).[11][12]

6.22

Thus, in tax arbitration proceedings there may be a place for the payment of compensatory interest, in accordance with the provisions of articles 43, nos. 1 and 2, and 100 of the General Tax Law, when it is determined that there was error imputable to the services from which resulted payment of the tax debt in an amount greater than that legally owed.

6.23

In these terms, the right to compensatory interest will always depend on the verification of an error imputable to the services of the Respondent from which resulted payment of a tax debt in an amount greater than that legally owed.

6.24

Following the illegality of the assessment act above already identified (see point 6.16) and, in accordance with the provisions of paragraph b), of no. 1, of article 24 of RJAT (in compliance with what is established there), "the arbitral decision on the merits of the claim from which no appeal or review shall lie binds the tax administration from the end of the period provided for appeal or review, the latter being obliged to restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", whereby there must be reimbursement of the amount paid by the Applicant, as a way to achieve the restoration of the situation that would have existed if the illegality had not been committed.

6.25

Thus, given what is established in article 61 of the Code of Tax Procedure and Process, the requirements for the right to compensatory interest being met (that is, the existence of error imputable to the services from which resulted payment of a tax debt in an amount greater than that legally owed, as provided for in no. 1 of article 43 of the General Tax Law being verified), the Applicant has the right to compensatory interest at the statutory rate, calculated on the amount paid, within the scope of the Personal Income Tax assessment that is the subject of the request for arbitral pronouncement, which shall be counted in accordance with the provisions of no. 3 of article 61 of the Code of Tax Procedure and Process, that is, from the date of payment of the undue tax until the date of issuance of the respective credit note.

6.26 - Regarding Liability for Payment of Arbitration Costs

In accordance with the provisions of article 22, no. 4, of RJAT, "the arbitral decision issued by the arbitral tribunal includes the fixing of the amount and the allocation among the parties of the costs directly resulting from the arbitration proceeding".

6.27

Thus, in accordance with the provisions of article 527, no. 1 of the Code of Civil Procedure (CPC) (by reference to art. 29, no. 1, paragraph e) of RJAT), it should be established that the party which gave cause to the costs shall be condemned in costs or, absent success in the action, whoever obtained benefit from the proceeding.

6.28

In this regard, no. 2 of the said article specifies the expression "gave cause", according to the principle of failure to succeed, understanding that the party loses the case and gives cause to the costs of the proceeding in the proportion in which it loses.

6.29

In the case under analysis, taking into account the above, the principle of proportionality requires that full liability for costs be attributed to the Respondent, in accordance with the provisions of article 12, no. 2 of RJAT and article 4, no. 4 of the Regulations on Costs in Tax Arbitration Proceedings.

7. DECISION

7.1

Thus, in light of all of the above, the Arbitral Tribunal decides:

7.1.1

To judge entirely well-founded the request for arbitral pronouncement presented by the Applicant, revoking the decision on the administrative complaint that fell on the Personal Income Tax assessment that is the subject of the claim and, as a consequence, annulling the said Personal Income Tax assessment, for being tainted with a defect of illegality, condemning the Respondent to reimbursement of the Personal Income Tax improperly paid, plus compensatory interest at the statutory rate, counted in accordance with legal terms;

7.1.2

To condemn the Respondent to payment of the costs of the present proceeding.

Value of the proceeding: Taking into account the provisions of articles 306, no. 2 of the Code of Civil Procedure, article 97-A, no. 1 of the Code of Tax Procedure and Process and article 3, no. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at EUR 148,059.39.

Costs of the proceeding: In accordance with the provisions of Table I of the Regulations on Costs in Tax Arbitration Proceedings, the value of the costs of the Arbitration Proceeding is fixed at EUR 3,060.00, to be borne by the Respondent, in accordance with article 22, no. 4 of RJAT.

Let it be notified.

Lisbon, 31 October 2016.

[1] Text prepared by computer, in accordance with article 138, no. 5, of the Code of Civil Procedure, applicable by reference of article 29, no. 1, paragraph e), of the Legal Regime of Arbitration in Tax Matters, with blank lines and reviewed by us, and respecting the spelling prior to the Orthographic Agreement of 1990, except as regards transcriptions made, in which the spelling of the original was maintained.

[2] In this regard, and relating to the year 2013, "the tax inspection services understood that there was a discrepancy between the dependent employment income declared (…) (in the amount of € 252,717.61) and that which the Applicant had actually earned on that account (in the amount of € 864,006.61), which gave rise to the additional Personal Income Tax assessment no. 2015…. (…)". In fact, according to what the Applicant states, "in the opinion of the Tax Authority, the mere fact that the Applicant had performed director functions in part of the period in which he was employed by C… SGPS is, in itself, sufficient to subject to Personal Income Tax part of the compensation earned", concluding that "(…) since the Applicant exercised director functions in part of the period in which he was employed by C… SGPS SA, the compensation received would not have been paid due exclusively to the performance of employee functions, but also and in part due to director functions (…)", being that "to determine which part of the compensation should be allocated to the termination of the employment contract and which part should be allocated to the termination of director functions, the Tax Authority made a calculation based on the proportion between the number of days in which each of the functions were performed, having found that the Applicant performed duties as an employee for 4196 days and as a director 3290 (…)", having concluded "(…) that the compensation for termination of the employment contract was € 342,635.41 and the compensation for termination of director functions was € 268,653.59, this latter amount being fully subject to Personal Income Tax" (emphasis ours).

[3] According to the Applicant, "in order to support its understanding, the Tax Authority invoked the new wording of paragraph a) of no. 4 of article 2 of the Personal Income Tax Code, which was introduced by Law no. 82-E/2014, of 31 December, which reformed the Personal Income Tax Code (…)", in accordance with which "(…) in cases of termination of the employment contract of directors, the amount of indemnity earned, in the part corresponding to the performance of such functions, is fully subject to taxation".

[4] To support its position, the Applicant cites the Judgment of the Supreme Administrative Court of 16 May 2012 (case no. 0675/11), as well as the position defended by J. Baptista Machado (in "Introdução ao Direito e ao Discurso Legitimador", 19th Reprint, Almedina, pages 245 and 246) and the position defended by Saldanha Sanches (in "Fiscalidade 1 - Lei interpretativa e retroactividade em matéria fiscal", 2000, page 86).

[5] In this regard, taking into account that the request for arbitral pronouncement includes the request for review of the decision rejecting the administrative complaint presented on 16 September 2015 against the tax act of Personal Income Tax assessment for the year 2013 (as a way of being able to declare, in final instance, the illegality of the Personal Income Tax assessment that is the subject of the claim), which was notified to the Applicant on 28 January 2016, the decision rejecting the administrative complaint that involves the examination of the legality of the assessment act is covered by the provisions of paragraph e) of no. 1 of article 102 of the Code of Tax Procedure and Process. Thus, taking into account the provisions of no. 1 of article 102 of the Code of Tax Procedure and Process (in the wording in force from 1 January 2013), the time-limit for filing judicial review is three months counted from the facts enumerated in that article, in particular, "from the notification of the other acts that may be subject to autonomous review in accordance with this Code", as well as that provided for in article 10, no. 1, paragraph a) of RJAT which establishes that the request for constitution of an arbitral tribunal must be presented "within 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the Code of Tax Procedure and Process, regarding acts susceptible to autonomous review (…)", whereby, taking into account the date of filing the request for arbitral pronouncement (11 March 2016), the claim is timely.

[6] Because within the limits provided by law.

[7] In this regard, the aforementioned Judgment also cites article 9 of the Civil Code, article 11 of the General Tax Law, as well as José de Oliveira Ascensão, in "O Direito, Introdução e Teoria Geral", Editorial Verbo, 4th Edition, 1987, page 335 et seq., J. Baptista Machado, in "Introdução ao Direito e ao Discurso Legitimador", Almedina, 1989, page 181 et seq. and Nuno Sá Gomes, in "Manual de Direito Fiscal, II, Cadernos de C.T. Fiscal, no. 174", 1996, page 363 et seq.

[8] In this sense, see Alberto Xavier, in "Conceito e Natureza do Acto Tributário", page 324, Nuno de Sá Gomes, in "Manual de Direito Fiscal, II, Cadernos de Ciência e Técnica Fiscal", 1996, page 57, A. José de Sousa and J. da Silva Paixão, in "Código de Processo Tributário Anotado e Comentado", 3rd Edition, 1997, page 269, all cited in the aforementioned Judgment.

[9] As stated in the Judgment of the Central Administrative Court of the South no. 05971/12, of 12 March 2013, in which are cited José Guilherme Xavier Basto, in "IRS: Incidência Real e Determinação dos Rendimentos Líquidos", Coimbra Editora, 2007, page 131 and Rui Duarte Morais, in "Sobre o I.R.S.", 2nd Edition, Almedina, 2010, page 55 et seq.

[10] In this sense, see Judgment of the Supreme Court of Justice no. 05S2137, of 29 November 2005, in accordance with which is cited Alberto dos Reis [in "Código de Processo Civil Anotado, Volume V", Coimbra Editora, 1981 (reprint), page 143], an author who argued that "it is necessary not to confuse questions raised by the parties with reasons or arguments invoked by them to assert their claims. They are indeed different things: to fail to rule on a question that should be ruled on, and to fail to assess any consideration, argument or reason produced by the party. When the parties put a specific question before the court, they resort, at every moment, to various reasons or grounds to assert their point of view; what matters is that the court rules on the question put; it is not incumbent upon it to assess all the grounds or reasons on which they rely to sustain their claim" (emphasis ours).

[11] See Leite de Campos, Diogo, Silva Rodrigues, Benjamim, Sousa, Jorge Lopes, in "Lei Geral Tributária - Anotada e Comentada", 4th Ed., 2012, page 116).

[12] On the subject of compensatory interest, see by the same author (Sousa, Jorge Lopes), Juros nas relações tributárias, in "Problemas fundamentais do Direito Tributário", Lisbon, 1999, page 155 et seq).