Process: 174/2017-T

Date: October 27, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 174/2017-T concerned a Corporate Income Tax (IRC) dispute over the proper calculation of tax benefits for net job creation under Article 19 of the Tax Benefits Statute (Estatuto dos Benefícios Fiscais - EBF). The claimant company sought to recover €59,291.31 plus compensatory interest after the Tax Authority rejected its deduction claim. The central legal issue was whether the tax benefit - which allows a 150% deduction of labor costs for newly created jobs, capped at 14 times the guaranteed minimum monthly wage per job annually - must be proportionally adjusted when employees do not work the full fiscal year. The claimant argued that Article 19 EBF contains no proportional adjustment requirement, and that the maximum annual limit applies regardless of how many months an employee worked. The company contended that the Tax Authority's interpretation created new rules rather than interpreting existing law, and violated the prohibition against restrictive interpretation of tax benefits. The claimant cited favorable precedent from CAAD Decision 212/2013-T. Conversely, the Tax Authority maintained that proportional adjustment is necessary to prevent distortions, arguing that without it, a worker hired in December would receive disproportionately higher benefits than one hired earlier in the year. The Authority asserted that while the benefit can span six economic years when employment begins mid-year, the total computation cannot exceed five years, requiring proportional calculation in partial years. The arbitral tribunal was constituted on May 26, 2017, with Dr. Olívio Mota Amador as sole arbitrator. Following standard CAAD procedure, both parties submitted written arguments, and the tribunal waived the oral hearing. The excerpt provided does not include the tribunal's final decision and reasoning.

Full Decision

ARBITRAL DECISION

I - Report

  1. A..., legal entity no...., with registered office at Street... no...., ...-... Sintra, (hereinafter referred to as "Claimant") presented, on 15-03-2017, pursuant to article 2.º no. 1, point a) and article 10.º, nos. 1 and 2 of the Legal Framework for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228.º of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LFTA") and articles 1.º and 2.º of Ministerial Order no. 112-A/2011, of 22 March, a request for arbitral decision in which it requests the declaration of illegality of the decision dismissing the Hierarchical Appeal, which did not consider the deduction relating to the tax benefit for net creation of jobs, and the consequent reimbursement of the tax improperly overpaid in the total amount of €59,291.31 (fifty-nine thousand two hundred and ninety-one euros and thirty-one cents), plus the respective indemnificatory interest.

  2. The defendant is the Tax and Customs Authority (hereinafter referred to as "Defendant").

  3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 24-03-2016.

  4. Pursuant to point a) of no. 2 of article 6.º and point b) of no. 1 of article 11.º of the LFTA, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the CAAD Ethics Council appointed as arbitrator of the single arbitral tribunal Dr. Olívio Mota Amador who, within the applicable period, communicated acceptance of the appointment.

  5. The parties were notified on 11-05-2017 of the arbitrator's appointment, having manifested no intention to challenge the arbitrator's appointment, pursuant to the combined provisions of article 11.º, no. 1, points a) and b) of the LFTA and articles 6.º and 7.º of the Code of Ethics.

  6. In accordance with the provisions of point c) of no. 1 of article 11.º of the LFTA, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 26-05-2017.

  7. The Defendant, duly notified through the arbitral order of 06-06-2017, presented, on 29-06-2017, its Reply and remitted the Administrative File.

  8. The Arbitral Tribunal by order of 17-08-2017, waived the holding of the meeting provided for in article 18.º of the LFTA, as no objection had been raised, no request for additional evidence-gathering proceedings had been made, nor had any issues that would prevent the merits of the claim from being decided been raised, which it did pursuant to the principles of the Tribunal's autonomy in conducting the proceedings, and in order to promote the speed, simplification and informality thereof (see articles 19.º, no. 2, and 29.º, no. 2, of the LFTA).

The Tribunal also ordered notification of the Parties to declare, within 5 days, whether they intended to present written arguments. Should there be written arguments, the Tribunal determined that these should be presented within 15 days from the notification of the order, granting to the Defendant, should it so wish, the possibility of submitting its arguments successively in relation to those presented by the Claimant.

The Arbitral Tribunal designated 18-10-2017 as the deadline for rendering the arbitral decision.

  1. The Claimant, on 11-09-2017, declared that it intended to present written arguments.

  2. The Claimant presented its arguments on 18-09-2017.

  3. The Defendant's arguments were presented on 03-10-2017.

  4. By order of the Arbitral Tribunal of 18-10-2017, 27-10-2017 was established as the new deadline for rendering the arbitral decision.

  5. The position of the Claimant, in accordance with the provisions of the request for constitution of the Arbitral Tribunal and in the written arguments, is, in summary, as follows:

13.1. Article 19.º of the Tax Benefits Statute (TBS) has as its rationale to encourage the creation of jobs. When such creation occurs, the charges corresponding thereto are increased by 150%, as provided for in no. 1 of article 19.º of the TBS.

13.2. No. 3 of article 19.º of the TBS merely states that the maximum amount of the annual increase per job is 14 times the guaranteed minimum monthly remuneration. The limit provided for in this rule applies irrespective of the number of months the employee performed work for the company.

13.3. Neither the letter nor the spirit of the law intended to limit the use of the benefit by the fact that the worker did not contribute to it for 365 days of the year.

13.4. The understanding of the Tax Authority does not interpret any legal rule, but rather creates a new rule.

13.5. Law no. 72/98, of 3 November, which introduced this benefit, and the instruments that subsequently amended it make no reference to the delimitation/proportional adjustment of the tax benefit.

13.6. It was precisely in this sense that the Arbitral Tribunal decided in the Decision in case no. 212/2013-T.

13.7. Furthermore, the interpretation of the Tax and Customs Authority is restrictive of article 19.º of the TBS, and this interpretation, in the context of tax benefits, is prohibited.

13.8. The acceptance of the claim should not only determine the reimbursement of the improperly overpaid and paid tax, but also the payment of indemnificatory interest accruing thereon, pursuant to the provisions of articles 43.º and 100.º of the General Tax Law and article 61.º of the Tax Procedure Code.

  1. The position of the Defendant, expressed in the reply and in the written arguments, can be summarized as follows:

14.1. It follows from the provisions of no. 3 of article 19.º of the TBS that the tax benefit in question can be reflected in 6 economic years, whenever the beginning of the employment contract does not coincide with the beginning of the economic year, it being certain, however, that the computation of the tax benefit cannot exceed 5 years. In the taxation periods in which the beginning or end of the conditions of eligibility of the worker for purposes of this tax benefit occurs, the limit should be adjusted proportionally to the period of time in which the conditions are met.

14.2. The Defendant had a correct understanding expressed in the self-assessment of Corporate Income Tax for the year 2012.

14.3. Thus, in the economic year in which the beginning or end of the conditions of eligibility of the worker for the benefit occurs, the maximum limit of the annual increase should be adjusted proportionally to the time in which those conditions are maintained.

14.4. In cases where the tax benefit is reflected for 6 economic years, the computation thereof cannot, under the legal terms, exceed 5 years, it being necessary, therefore, to make an adjustment accordingly.

14.5. In other words, in the economic year in which the beginning or end of the conditions of eligibility of the worker for the benefit occurs, the maximum limit of the annual increase should be adjusted proportionally to the time in which those conditions are maintained.

14.6. According to the above, if the worker is hired by the Claimant in December, for purposes of that economic year, only that month and the two following months of the next year are relevant (considering the taxation period).

14.7. Otherwise, the tax benefit relating to that worker in the 2012 taxation period would be, proportionally, 12 times higher than that of a worker whose beginning of indefinite-term employment contract occurred on 1 March 2012, which, in fact, would result in a distortion of the rule.

14.8. If the Claimant's understanding were to be adopted, the tax benefit would occur for a period of 6 years, which has no adherence whatsoever to the letter of article 19.º of the TBS, reflecting a situation of inequality towards other taxpayers in which there is a coincidence between the period during which the benefit is enjoyed and the taxation period.

14.9. The Claimant sustains its argument based on the decision rendered in case no. 212/2013-T. However, in such arbitral decision, as was, in fact, noted in case no. 129/2016-T, "there is a weighty circumstance, which was not, at least perceptibly, considered in the decision of case 212/2013-T, nor in the argument of the Claimant, which is the circumstance that the interpretation that prevailed in that judgment, and on which it is anchored, contains a direct and notable violation of the constitutional principle of equality".

II - Preliminary Sanction

  1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (articles 4.º and 10.º, no. 2, of the LFTA and article 1.º of Ministerial Order no. 112-A/2011, of 22 March).

The tribunal is competent and is regularly constituted.

The proceedings do not suffer from nullities.

No objections were raised.

No other circumstances exist that would prevent the merits of the case from being decided.

In these terms, the Arbitral Tribunal is regularly constituted to examine and decide the object of the proceedings.

III - Merits

III.1. Statement of Facts

  1. Proven Facts

16.1. For purposes of assessing and deciding the issues raised, the following facts are regarded as established and proven:

  • The Claimant operates in the food distribution sector and proceeds with the recruitment of employees, in accordance with the terms defined by article 19.º of the TBS.

  • The Claimant adopts a taxation period different from the calendar year, comprised between 1 March and 28 February, that is, for purposes of analysis of the present proceedings the taxation period began on 01-03-2012 and ended on 28-02-2013.

  • The Claimant proceeded to the timely filing of the Corporate Income Tax Return Form 22 for the period of 2012, in which it increased the tax benefit, contained in article 19.º of the TBS, proportionally to the annual period of work performed by its employees.

  • The Claimant adopted the understanding expressed in the previous point, despite not agreeing with it, but in order to avoid the existence and maintenance of tax litigation with the TA.

  • In the year 2012, the Claimant for purposes of determining the taxable income deducted, as a title of tax benefit relating to net creation of jobs, the amount of €1,364,063.50.

  • The Claimant presented the voluntary claim regarding the self-assessment of Corporate Income Tax for the year 2012, which received the number ...2015..., as it considered that it had made a deduction from the net result for purposes of calculating taxable income (as a title of tax benefit provided for in article 19.º of the TBS) of a value lower than that legally due.

  • The voluntary claim, identified in the previous point, was dismissed by order of the Head of Division of the Management and Tax Assistance Division of the Large Taxpayers Unit on 11-11-2015.

  • The Claimant filed a hierarchical appeal to the Minister of Finance, which received the number ...2015..., of the dismissal decision, identified in the previous point.

  • By order of the Corporate Income Tax Services Directorate of 02-12-2016, issued in the Memorandum no. ..., of 08-06-2016, the hierarchical appeal was partially allowed, but as regards the increase of the tax benefit, contained in article 19.º of the TBS, it maintained the dismissal of the Claimant's claim.

16.2. No other facts relevant to the assessment of the merits of the case remain unproven.

16.3. Reasoning on the Statement of Facts

As to the proven facts, the conviction of the Arbitral Tribunal was based on the free assessment of the documentary evidence submitted to the proceedings, whose authenticity was not put in question, as well as on the analysis of the administrative file remitted by the Defendant.

III.2. Legal Matter

  1. The issue in the present arbitral proceedings consists of determining whether the tax benefit provided for in article 19.º of the TBS should be adjusted proportionally, for purposes of the maximum limit of the increase, in cases where the eligible employment contracts cease or begin during the respective taxation period.

It is necessary to assess.

  1. Law no. 72/98, of 3 November, created the incentive for the creation of jobs for youth, having added article 48.º-A to the TBS, which underwent various amendments over time.

The legal rules that are relevant to the present case, in the wording in force at the date of the facts, have the following content:

"Article 19.º
Creation of Employment

1 - For the determination of the taxable income of Corporate Income Tax subjects and of Individual Income Tax subjects with organized accounting, the charges corresponding to the net creation of jobs for youth and for long-term unemployed, admitted by indefinite-term employment contract, are considered at 150% of their respective amount, recorded as a cost of the year.

(...)

3 - The maximum amount of the annual increase, per job, is equivalent to 14 times the guaranteed minimum monthly remuneration.

(...)

5 - The increase referred to in no. 1 applies for a period of five years from the beginning of the employment contract, not being cumulative, either with other tax benefits of the same nature, or with other employment support incentives provided for in other instruments, when applicable to the same worker or job."

Note that prior to the republication of the TBS, carried out by Decree-Law no. 108/2008, of 26 June, the rule transcribed above was contained in article 17.º.

  1. From the reading of the rule reproduced in the previous number it follows that we are dealing with a tax benefit. Pursuant to article 2.º, no. 1, of the TBS, tax benefits are considered as measures of an exceptional character. In this respect, we fully agree with CASALTA NABAIS when he states that the exceptional nature of the legal rules that provide for tax benefits cannot be accepted "(…) since, although tax benefits are tax expenditures (which are by their own nature, passive expenditures) that integrate an exceptional legal regime derogatory from the ordinary regime of the respective tax, revealing a more favorable regime for the taxpayer than that implied in its ordinary treatment and expression of a promotional function, they constitute a normal instrument of economic and social policy of the contemporary social state and not an exceptional instrument in the manner of the understanding proper to the liberal state." (see Right to Tax, 10th ed., Almedina, 2017, pp. 402).

Regarding the interpretation of the rules that establish tax benefits, in accordance with the provisions of article 10.º of the TBS, analogical integration is forbidden. However, extensive interpretation is admissible, that is, if the interpreter concludes that the letter of the law falls short of its spirit, the letter must be adapted to its respective spirit through extensive interpretation (see BAPTISTA MACHADO, Introduction to Law and to the Legitimizing Discourse, 13th reprint, Coimbra, Almedina, 2002, pp. 185).

It is important to emphasize that the specificity of the legal situation that underlies the creation of the tax benefit imposes on the interpreter special care in preserving the legislative intent. Indeed, by representing a derogation from the principles of equality and contributive capacity, the rules creating tax benefits must be justified by a constitutionally relevant public interest superior to the corresponding interest protected by taxation (see NUNO SÁ GOMES, General Theory of Tax Benefits, Cadernos de Ciência e Técnica Fiscal, no. 165, 1991, pp. 62).

  1. Article 19.º of the TBS creates a tax benefit that consists, in the context of Corporate Income Tax, of recording as a cost of the year, at 150% of the respective amount, the charges corresponding to the net creation of jobs for youth and for long-term unemployed, admitted by indefinite-term employment contract.

As follows from the provisions of the above-mentioned article, the legislator establishes limits of amount and duration in this tax benefit.

First, pursuant to no. 3, it limits the amount of the annual increase, per job, to 14 times the guaranteed minimum monthly remuneration. The law refers to the maximum amount of the annual increase (14 times the guaranteed minimum monthly remuneration) conveying the idea that the value of this increase is variable and may be less than the maximum limit established.

Then, pursuant to no. 5, it limits the duration of the increase to a period of five years from the beginning of the employment contract. By establishing this rule a temporal limit for the tax benefit, calculated on the basis of the beginning of the employment contract, it makes full sense that the maximum increase, to which no. 3 of article 19.º refers, should be based on the same period. Consequently, the maximum limit of annual increase should be adjusted proportionally in the year in which the beginning or end of the conditions of ineligibility of the worker for the said benefit occurs.

  1. As the Arbitral Decision no. 129/2016-T of 16 October 2016 pertinently emphasizes, and to whose content we hereby make reference, accepting that the maximum limit to the increase enshrined in no. 3 of article 19.º of the TBS is applicable to all years, especially to the first and last year, when the admission of the worker eligible for purposes of the tax benefit in question does not occur on the first day of the tax year of the employing entity, "(…) one would be creating a situation of inequality, among the recipients of the tax benefit, without an axiological basis to justify it and in an absolutely arbitrary manner. That this is the case, it suffices to note the extreme example of two employing entities, which employ a worker eligible for the tax benefit, paying them the same salary (e.g., twice the national minimum salary), but in which one employs its worker on the first day of its tax year, and another in the middle. In this example, while the first entity will have a tax benefit equal to 5 times 14 national minimum salaries, the second will have a benefit equal to 5 times 14 national minimum salaries. The question, at this point, becomes one of knowing whether this solution is justified and will have been wanted by the legislator, and the answer to such question cannot but be, it is believed, negative. Indeed, the situation of inequality between the two employing entities, in the example, or, in general, among employing entities depending on the date, more or less near the middle of the tax year in which they admit workers eligible for the tax benefit, holds no material justification."

Furthermore, the cited Arbitral Decision adds that "(…) the rational or teleological element of the interpretation indeed points to an interpretation that restricts the scope of the tax benefit, and it must be concluded that the legislator will, perhaps, in the rule in question, have expressed its thought in an imperfect manner, and there being a reasonable rational justification – the full affirmation of the principle of equality – for carrying out a restrictive interpretation, which implies that, when it extends for six tax years, the maximum amount of the tax benefit enshrined in article 19.º/3 of the TBS is proportionally reduced to the duration of the 5-year period of the employment contract that justifies it, in the first and sixth year."

  1. The principle of equality, understood as an objective limit of legislative discretion, prohibits the adoption of measures that establish discriminatory distinctions, that is, inequalities of treatment manifestly unfounded, devoid of reasonable basis or minimum justification.

In summary, the principle of equality, as a binding principle of the law, is translated into the idea of prohibition of arbitrariness (see judgment of the Constitutional Court no. 186/90, of 06-06-1998).

As the judgment of the Constitutional Court no. 211/03 of 28 April emphasizes, the violation of the constitutional principle of equality implies a concrete and actual situation of unjustified or discriminatory differentiation.

Hence that principle does not prohibit the creation of distinctions, provided that these are not arbitrary or devoid of sufficient material foundation.

As was referred to in the previous number and detailed exposition in the Arbitral Decision rendered in case no. 129/2016-T, the understanding of the Claimant creates an inequality without any basis that directly entails a violation of the constitutional principle of equality.

Given the above exposition in no. 19 concerning the rules on tax benefits, a restrictive interpretation of article 19.º of the TBS is justified in the present case as a result of the affirmation of the constitutional principle of equality.

  1. In light of the above, it is concluded that the application of the Law by the TA was correct, and therefore the decision on the hierarchical appeal does not suffer from the defect of violation of law, due to an error on the legal presuppositions in the interpretation of article 19.º of the TBS, with the claim made by the Claimant being without merit.

  2. It now falls to analyze the request of the Claimant, formulated in the Request for Arbitral Decision and in the Arguments, for the payment of indemnificatory interest.

Based on article 24.º, no. 5, of the LFTA, it has been understood that recognition of the right to indemnificatory interest is possible in arbitral proceedings.

Pursuant to article 43.º, no. 1, of the General Tax Law, indemnificatory interest is due when it is determined, in a voluntary claim or judicial challenge, that there was an error imputable to the services which results in the payment of the tax debt in an amount higher than that legally due.

The necessary condition for the attribution of indemnificatory interest consists in the demonstration of the existence of an error on the factual or legal presuppositions imputable to the services of the Tax Administration, which in the present case did not occur. Thus, it is concluded, without need for further considerations, that the request for payment of indemnificatory interest to the Claimant is without merit.

IV - Decision

In light of the above, the Arbitral Tribunal decides to dismiss the arbitral claim and, consequently, to absolve the Defendant of the claim and to condemn the Claimant in the costs of the proceedings.

V - Value of the Case

Given the provisions of articles 32.º of the Administrative Court Procedure Code, 306.º, no. 2, of the Civil Procedure Code and 97.º-A of the Tax Procedure Code, applicable by virtue of the provisions of article 29.º, no. 1, points a) and b), of the LFTA, and article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the case is fixed at €59,291.31 (fifty-nine thousand two hundred and ninety-one euros and thirty-one cents).

VI - Costs

Costs charged to the Claimant, in the amount of €2,142.00 (two thousand one hundred and forty-two euros), pursuant to Table I of the RCPAT, in compliance with the provisions of articles 12.º, no. 2, and 22.º, no. 4, both of the LFTA, as well as the provisions of article 4.º, no. 4, of the RCPAT.

Notify.

Lisbon, Administrative Arbitration Center, 27 October 2017

The Arbitrator

Olívio Mota Amador

Frequently Asked Questions

Automatically Created

What tax benefit for net job creation under Article 19 of the EBF was disputed in this IRC case?
Article 19 of the Tax Benefits Statute (EBF) provides a tax benefit for net job creation allowing companies to deduct 150% of labor costs associated with newly created permanent employment positions. The benefit is capped at 14 times the guaranteed minimum monthly wage (salário mínimo nacional) per job annually. The dispute centered on whether this annual maximum must be proportionally adjusted when an employee works less than a full fiscal year, such as when hired mid-year.
Why did the Tax Authority reject the deduction for job creation tax benefits in this arbitration?
The Tax Authority rejected the deduction because it applied a proportional adjustment methodology not explicitly stated in Article 19 EBF. The Authority argued that when an employment contract begins or ends during a fiscal year, the maximum annual benefit limit should be adjusted proportionally to the time the employee actually worked. For example, an employee hired in December would only qualify for one month's proportional benefit in that tax year, not the full annual maximum of 14 times minimum wage.
What was the outcome of CAAD arbitration process 174/2017-T regarding the IRC refund claim?
The provided excerpt of Process 174/2017-T does not include the arbitral tribunal's final decision. The document contains the parties' arguments and procedural history but cuts off before presenting the tribunal's reasoning (fundamentação) and final ruling (decisão). The claimant sought €59,291.31 in refunds plus compensatory interest, while the Tax Authority defended its proportional adjustment interpretation. The tribunal was scheduled to render its decision by October 27, 2017.
How does the CAAD arbitral tribunal procedure work for challenging IRC tax benefit decisions in Portugal?
The CAAD arbitral procedure for challenging IRC tax benefit decisions follows the Legal Framework for Tax Arbitration (RJAT). The taxpayer files a request for arbitration, which is accepted by the CAAD President and notified to the Tax Authority. An arbitrator is appointed by the CAAD Ethics Council from the official roster. Parties may challenge the appointment within the legal deadline. Once constituted, the tribunal orders the Tax Authority to submit a reply and the administrative file. The tribunal may waive oral hearings if no objections or evidentiary issues arise, proceeding directly to written arguments. Finally, the tribunal issues a binding arbitral decision within the statutory timeframe, typically extendable once.
Can a taxpayer claim compensatory interest (juros indemnizatórios) when an IRC tax benefit deduction is wrongly denied?
Yes, taxpayers can claim compensatory interest (juros indemnizatórios) when an IRC tax benefit deduction is wrongly denied. In Process 174/2017-T, the claimant specifically requested compensatory interest pursuant to Articles 43 and 100 of the General Tax Law (Lei Geral Tributária) and Article 61 of the Tax Procedure Code (Código de Procedimento e de Processo Tributário). Compensatory interest compensates taxpayers for the financial loss resulting from delayed refunds of improperly collected taxes. However, entitlement depends on the tribunal finding in favor of the taxpayer on the underlying tax benefit claim.