Process: 196/2017-T

Date: September 4, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 196/2017-T addresses a critical dispute over IRS simplified regime coefficients for Category B professional income. The taxpayer, operating electrical installation (CAE 43210), pipe installation (CAE 43221), and retail trade activities, challenged the 2014 IRS assessment that applied the 0.75 coefficient to service provision income. The taxpayer argued that electrical installation services are not listed in the Article 151 CIRS table of professional activities, therefore the 0.10 coefficient under Article 31(2)(e) should apply instead. The Tax Authority defended the assessment, asserting that field 440 encompasses all service provision activities classified under Article 3(1)(b) CIRS or with a CAE code, regardless of Article 151 listing. According to AT's interpretation, only commercial and industrial activities under Article 3(1)(a) meeting Article 4 conditions qualify for the 0.10 coefficient. The dispute centers on whether CAE classification alone triggers the 0.75 coefficient or whether explicit inclusion in the Article 151 table is required. The Tax Authority cited Circular 5/2014 and July 2015 instructions, while the taxpayer referenced CAAD Case 107/2016-T supporting their position. This case illustrates the fundamental tension between literal interpretation of Article 31(2) CIRS—which distinguishes activities 'listed in the table of Article 151'—and administrative practice that extends the 0.75 coefficient to all self-employed service provision. The outcome determines significant tax liability differences for thousands of Portuguese self-employed professionals in construction, installation, and technical services sectors operating under the simplified regime.

Full Decision

ARBITRAL DECISION

The application for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and notified to the Tax and Customs Authority on 30-03-2017. Under the terms of letter a) of item 2 of article 6º and letter b) of item 1 of article 11º of Decree-Law No. 10/2011, of 20 January, as amended by article 228º of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment and notified the parties thereof on 17-05-2017. Thus, in accordance with the provision in letter c) of item 1 of article 11º of Decree-Law No. 10/2011, of 20 January, as amended by article 228º of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 01-06-2017, following the regular procedure.

I – REPORT

1- On 23-03-2017, A…, taxpayer No. …, resident at …, No. …, …, …-… Paredes de Coura, filed an application for constitution of a single arbitral tribunal, under the terms of the combined provisions of articles 2º and 10º of Decree-Law No. 10/2011, of 20 January (Legal Framework of Arbitration in Tax Matters, hereinafter designated only as RJAT), with the Tax and Customs Authority as Respondent.

2- The Applicant challenges the assessment of Personal Income Tax (IRS), No. 2016…, the assessment of interest No. 2016… and 2016… and the statement of account reconciliation No. 2016…, for the year 2014, against which the applicant filed a gracious claim No. …2016…, which was dismissed by order of 22-12-2016 of the Finance Director of….

The applicant requests the annulment of the assessments, reimbursement of the amounts "paid" and compensatory interest, given the illegality of the aforementioned tax assessment acts.

3- The applicant invokes, briefly, in its favour:

Article 31º, item 2 of the CIRS (in the version given by Law No. 83-C/2013, of 31 December, entering into force on 1 January 2014), provides that the taxable income from service provision is the result of applying the coefficient of 0.75, when it derives from professional activities listed in the table referred to in article 151º of the CIRS, and of 0.10 to the remaining income from category B (letters b) and e) of item 2 of article 31º of the CIRS).

4- The applicant's income - electrical installation activities - does not derive from activities listed in the table referred to in article 151º of the CIRS.

Therefore, the coefficient of 0.10 should be applied, under the terms of letter e) of item 2 of article 31º of the CIRS, and the coefficient of 0.75 cannot be applied to the applicant's income for determination of taxable income.

The applicant notes that CAAD has already ruled on a situation very similar to that in the present proceedings, in case No. 107/2016-T.

For its part, the AT…

5- It alleges that the assessments in question embody a correct interpretation and application of law to the facts, not suffering from any defect of violation of law, and that, consequently, the total lack of merit of the application should be declared, maintaining the act and the Respondent should be absolved of the claim.

6- IN EFFECT, the AT understands:

Field 440 with the descriptor "Income from professional activities provided for in the Table of art. 151º of the CIRS and/or in the CAE" (emphasis ours), is intended for the indication of income earned in the exercise by self-employed persons of any service provision activity that has a classification under letter b) of item 1 of art. 3º CIRS or in accordance with the codes mentioned in the activity table approved by Ordinance 1011/2001 of 21/08.

7- Thus, as long as the activity carried out is listed in the table of art. 151º CIRS or appears in the CAE list, the income should be entered in field 440, as stated in the description of that field.

8- Excluded from taxation with coefficient 0.75 are only income from commercial and industrial activities that operate through service provision (letter a) of item 1 of art. 3º of the CIRS), provided that they are provided for in art. 4º of the CIRS.

9- Since the activities carried out by the Applicant, on 2014/12/31, were electrical installation (CAE 43210), pipe installation (CAE 43221) and retail trade of do-it-yourself materials, sanitary equipment, tiles and similar materials, in specialized establishments (CAE 47523), the coefficient 0.75, provided for in letter b) of item 1 of article 31º of the CIRS (Line 440 of Table 4-A of Annex B of tax return model 3 of IRS), applies to service provisions that have a classification under letter b) of item 1 of article 3º of the same law, which provides "Income earned in the exercise by self-employed persons, 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 previous letter."

10- Therefore, it is evident that such activities do not fall within the exclusion, and only these will apply the coefficient 0.10 (Line 443 of Table 4-A of Annex B of tax return model 3 of IRS).

11- The Tax Administration has adhered to full compliance with the applicable legal rules for the facts, since the Applicant's income could only be entered in field 440, to which the coefficient of 0.75 applies for determination of taxable income.

12- It invokes in its favour the understanding conveyed in Circular 5/2014 and Instruction issued on 2015-07-17 by the IRS Services Directorate, as well as that upheld in the decision regarding Case No. 107/2016-T of this CAAD.

II- The proceedings do not suffer from nullities.

III- There is no obstacle to the substantive examination of the case.

IV- FACTS

1- The Applicant began business on 19-07-2010, and was classified under CAE codes 43210 - Electrical Installation (main activity) and CAE 43221 - Pipe Installation (secondary activity).

2- In recent years, the Applicant completed Annex B of tax return model 3 of IRS regarding their category B income, taxed under the simplified regime.

3- With reference to the year 2014, the applicant carried out the following activities:

- electrical installation with CAE 43210;

- pipe installation with CAE 43221;

- retail trade of do-it-yourself materials, sanitary equipment, tiles and similar materials, in specialized establishments with CAE 47523.

4- In table 3A of the aforementioned Annex B, field 11, the Applicant entered the CAE code 43210 - Electrical Installation.

Field 10 - "Activity Table Code Art. 151º of the CIRS" was never completed.

5- In 2014, the Applicant declared in field 443 the amount of €23,273.61 referring to income from service provision, in field 424 the amount of €5,938.88 of operating subsidies received, and in field 401 the amount of €15,853.67 of merchandise sales.

6- The Applicant was notified of the IRS assessment No. 2016…, the interest assessment No. 2016… and No. 2016… and the statement of account reconciliation No. 2016…, for the year 2014.

The said tax assessment notice presented the amount of €5,149.03.

7- Not accepting the decision, the Applicant filed a gracious claim No. …2016…, which was dismissed in its entirety.

8- The value of the 2014 IRS assessment, object of the present proceedings, was subject to compensation with a VAT refund, as per document 11 attached.

V- Facts deemed established

All of the aforementioned.

VI- Substantiation of the facts established and not established

With regard to the facts, the Tribunal does not have to rule on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the facts established from those not established (see art. 123º, item 2, of the CPPT and article 607º, item 3 of the CPC, applicable by virtue of article 29º, item 1, letters a) and e), of the RJAT).

In this manner, the facts relevant to the judgment of the case are chosen and selected according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (see previous article 511º, item 1, of the CPC, corresponding to current article 596º, applicable by virtue of article 29º, item 1, letter e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110º/7 of the CPPT, and the documentary evidence attached to the file, the facts listed above were considered established, with relevance for the decision.

VIII- THE LAW

1- The central disputed point in the present arbitral action points to the question of which of the coefficients provided for in item 2 of article 31º of the CIRS (in force for the fiscal year 2014) should be properly applied to the income earned by the Applicant from service provision in the "electrical installation activity".

2- The question has already been addressed, to our knowledge, in two proceedings of this CAAD (as noted by the PI and the AT's Reply), resulting, nevertheless, in contradictory understanding in the decisions rendered.

Case No. 183/2016

In the year 2014, the wording of art. 31º of the CIRS was as follows:

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

2- Until the approval of the indicators mentioned in the previous item, or in their absence, taxable income is obtained by adding to the income arising from service provisions provided by the partner to a company covered by the fiscal transparency regime, under the terms of letter b) of item 1 of article 6º of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

a) 0.15 of merchandise and product sales, as well as service provisions carried out within the scope of hotel activities and similar, catering and beverages;

b) 0.75 of income from professional activities listed in the table referred to in article 151º:

c) 0.95 to income from contracts aimed at the transfer or temporary use of intellectual or industrial property or the provision of information regarding experience acquired in the industrial, commercial or scientific sector, income from capital attributable to activities generating business and professional income, to the positive result of real estate income to the positive balance of gains and losses and other patrimonial increases;

d) 0.30 to subsidies or subventions not intended for operation;

e) 0.10 of subsidies intended for operation and remaining income of category B not provided for in the previous letters."

…

In the interpretation of the Applicants, this classification of activities has a definitive character and only the activities listed in the table can be included in the context of letter b), of item 2 of art. 31º of the CIRS. Thus, the Applicants seek the annulment of the assessment in question with respect to the taxable income obtained by application of the coefficient of 0.75 to the declared value of service provisions performed in the year in question.

It is therefore a matter of interpreting the provision contained in the legal statement in letter b) of item 2 of art. 31º of the CIRS in force in the year 2014 in order to determine whether the income from service provisions obtained in the year 2014 by the Applicant B falls within its scope of application or not.

On the fundamental question at hand, it should be said that the first limit of interpretation is the letter of the law. "The determination of taxable income results from the application of objective indicators of a technical-scientific basis for the different sectors of economic activity."

According to the general rule of art. 31º, item 2 of the CIRS (in the version given by Law No. 83-C/2013, of 31 December, entering into force on 1 January 2014), with regard to service provisions, taxable income is the result of applying the coefficient of 0.75, when it derives from professional activities listed in the table referred to in art. 151º of the CIRS and of 0.10 to the remaining income from category B (letters b) and e) of item 2 of art. 31º of the CIRS).

But the literal element is not the only one to be taken into account. The interpretive task requires other elements, that is, from the text of the rule, it is necessary to discover the underlying ratio legis, "a task of interconnection and assessment that escapes the literal domain."

…

We consider that the delimitation of the scope of the tax incidence rule must follow the orientation of the letter, spirit and purpose of the law! Now, using the various elements of interpretation, we arrive at the conclusion that the coefficient of 0.75 applies to income from professional activities listed in the table referred to in art. 151º.

…. The Respondent is right when it states that "as long as the activity carried out is listed in the table of art. 151º or appears in the CAE list, the income should be entered in field 440, as stated in the description of that field."

Field 443, according to Circular 5/2014, "is intended for the indication of the remaining income of category B, namely, service provisions that, by virtue of art. 4º of the CIRS are classified under letter a) of item 1 of art. 3º of said code, provided that they are not provided for in letters a) and d) and the first part of letter e) of item 2 of art. 31º of this code and, thus, not included in the previous fields of this table."

For which reason the arbitral claim should be judged to lack merit and the tax acts which are the object of the present proceedings should be maintained.

3- NOW, notwithstanding the merits of the arguments presented in the decision (in part transcribed above) and essentially in the excellent substantiation of the AT's Reply, the truth is that there are fundamental principles which in no case can we overlook in tax law, we tend, instead, to agree with the decision rendered in Case 107/2016-T of this CAAD.

We therefore understand that, indeed, the rules of interpretation of tax rules are exactly the same as those applied to the rules of other branches of law. "In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed."

But even for this reason, (or notwithstanding), it must be borne in mind that in Tax Law the principle of specific typicality prevails, an element of the principle of legality, which, for what matters, requires the exhaustive enumeration of the facts or realities which, "within each generic type of the object normative of incidence, are indicated by law as object of incidence".

By force of the principle of legality provided for in article 106º, item 2, of the Constitution of the Republic and of the principles of typicality and determination in which it unfolds, the tax incidence rules must be pre-determined in their content, and the elements comprising them must be formulated precisely and determinately.

"The determination of the content of the tax incidence rule excludes the use of indeterminate concepts, as well as normatively determined concepts, whose application to the specific case is based on subjective or personal assessment by the applying authority, under penalty of legal certainty being undermined."

FOR THAT REASON AND MEASURE we maintain, as stated, agreement with the decision referred to last, when it states that (…) starting from the literal element, the result of the interpretation seems to us unequivocal – the coefficient of 0.75 applies, only, to income from professional activities listed in the table referred to in article 151º.

It is not seen, therefore, how it is possible to include within that scope income from activities that are not "professional activities listed in the table referred to in article 151º".

…Since the letter of the law is the maximum limit of the interpretive task, it is not possible to conclude that other income beyond these should merit the same treatment, especially when the legislator itself created, parallel to that specific category of income, a residual category provided for in letter e) of the same item 2 of article 31º of the CIRS – where the "remaining income of category B not provided for in the previous letters" is included (…).

It must be considered, therefore, that the income from service provisions in question in the proceedings, obtained in the year 2014 by the Applicant should be calculated on the basis of the coefficient provided for in letter e) and not in letter b) of item 2 of article 31º of the CIRS then in force;

WHEREFORE IT PROCEEDS, thus, the request for arbitral pronouncement since the contested assessment suffers from the defect of error as to the assumptions of fact and law, requiring its annulment.

As regards the request for compensatory interest formulated by the Applicant, article 43º, item 1, of the LGT establishes that compensatory interest is due when it is determined that there was an error attributable to the services as a result of which the tax debt is paid in an amount higher than legally due.

In the case, the error affecting the assessment is attributable to the Tax and Customs Authority, which carried out the assessment act on its own initiative.

Indeed, the Tax Administration is generically obligated to act in accordance with the Law (articles 266º, item 1, of the CRP and 55º of the LGT), so that, regardless of proof of fault by any of the persons or entities that comprise it, any illegality not resulting from an action of the taxpayer shall be attributed to the fault of the services themselves.

The Applicant therefore has the right to be reimbursed the amount that was withheld from it, (under the terms of the provisions of articles 100º of the LGT and 24º, item 1, of the RJAT) and, furthermore, to be indemnified through the payment of compensatory interest, by the Respondent, from the date of withholding, until reimbursement, at the legal supplementary rate, under the terms of articles 43º, items 1 and 4, and 35º, item 10, of the LGT, article 559º of the Civil Code and Ordinance No. 291/2003, of 8 April.

DECISION

In these terms, this Arbitral Tribunal decides to judge the arbitral claim formulated as well-founded and, consequently:

a- To declare the annulment of the tax assessment act for official assessment of IRS/2014 and respective interest;

b- To determine the reimbursement of the amounts wrongfully compensated;

c- To condemn the AT to payment of compensatory interest due from the date of compensation until full reimbursement of the compensated amount;

d- To condemn the Respondent to payment of the costs of the proceedings, fixed below.

Value of the proceedings

The value of the proceedings is fixed at €5,149.03, under the terms of article 97º-A, item 1, a), of the Code of Tax Procedure and Process, applicable by force of letters a) and b) of item 1 of article 29º of the RJAT and of item 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The arbitration fee is fixed at €612.00, under the terms of Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was considered entirely well-founded, under the terms of articles 12º, item 2, and 22º, item 4, both of the RJAT, and article 4º, item 4, of the cited Regulation.

Lisbon, 04 September 2017

The Arbitrator,

(Fernando Miranda Ferreira)

Frequently Asked Questions

Automatically Created

What simplified regime coefficient applies to electrical installation services under Portuguese IRS?
Under the Tax Authority's interpretation, electrical installation services (CAE 43210) are subject to the 0.75 coefficient under Article 31(2)(b) CIRS because they constitute service provision by self-employed persons under Article 3(1)(b) CIRS. The AT argues that having a CAE classification brings the activity within field 440 of the IRS declaration, automatically applying the higher coefficient. However, taxpayers argue that without explicit listing in the Article 151 table, the 0.10 coefficient under Article 31(2)(e) should apply to these construction installation activities.
Can a taxpayer apply the 0.10 coefficient instead of 0.75 for services not listed in Article 151 of the CIRS?
The central legal question is whether Article 31(2) CIRS allows the 0.10 coefficient for services not explicitly listed in Article 151. Taxpayers interpret the law literally: coefficient 0.75 applies only to activities 'listed in the table referred to in Article 151,' while 0.10 applies to 'remaining income from category B.' The Tax Authority contends that all self-employed service provision under Article 3(1)(b) uses 0.75, reserving 0.10 only for commercial/industrial activities under Article 3(1)(a) meeting Article 4 conditions. CAAD jurisprudence, including Case 107/2016-T, has addressed this interpretative conflict.
How does CAAD arbitration resolve disputes over IRS income category B coefficient classification?
CAAD arbitration tribunals resolve coefficient classification disputes by examining the legal framework of Article 31(2) CIRS, analyzing whether the taxpayer's activity falls within Article 151's enumerated professions or qualifies as 'remaining' Category B income. The tribunal reviews the taxpayer's CAE codes, actual activities performed, and how income was declared in Annex B fields. Arbitrators must reconcile statutory text with administrative guidance (Circulars, Instructions) and consider prior CAAD precedents. The process involves legal interpretation of Category B income categories under Article 3 CIRS and determining whether administrative practice correctly implements legislative intent regarding simplified regime coefficients.
What is the difference between professional activities listed in the Article 151 table and other Category B income for tax purposes?
Article 151 CIRS lists specific liberal professions and technical activities (scientific, artistic, technical services) subject to withholding tax and, under Article 31(2)(b), the 0.75 coefficient. These include architects, engineers, lawyers, consultants, and similar professions. Other Category B income under Article 31(2)(e) encompasses service provision not listed in Article 151, to which the 0.10 coefficient theoretically applies. However, administrative interpretation extends 0.75 to all Article 3(1)(b) self-employed service provision based on CAE codes, narrowing 0.10 application primarily to commercial/industrial activities. This creates significant tax differences: 75% versus 10% of gross income becomes taxable.
What are the taxpayer's rights to reimbursement and compensatory interest after an unlawful IRS assessment?
When an IRS assessment is deemed unlawful and annulled by CAAD arbitration, taxpayers have rights under Article 43 LGT (General Tax Law) and Article 61 CPPT to reimbursement of amounts paid and compensatory interest. Compensatory interest accrues from payment date until reimbursement at legally established rates, compensating taxpayers for the State's improper retention of funds. If the assessment was compensated against a VAT refund (as occurred in this case), annulment requires reversal of the compensation and proper crediting. The taxpayer must request reimbursement following the favorable arbitral decision, and AT must comply within statutory deadlines or face additional interest obligations.