Process: 20/2015-T

Date: September 21, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

Process 20/2015-T addresses a critical Portuguese tax dispute concerning IRS withholding obligations when the Tax Authority reclassifies payments from independent service provision (Category B income) to dependent employment income (Category A). The claimant company faced assessments totaling €191,948 for tax years 2009-2012 after tax inspectors determined that contracts with six single-member limited companies (F..., G..., H..., I..., J..., K... Lda) actually constituted disguised employment relationships requiring withholding tax at higher rates. The company challenged these assessments on two grounds: procedural violation of the right to prior hearing under Article 60 of the General Tax Code (LGT), and substantive error in income classification under Articles 59 and 63(4) LGT. The procedural issue centered on whether the Tax Authority properly considered the claimant's request for clarification about the temporal scope of the inspection before deeming the hearing response untimely. The substantive issue required analyzing whether the economic reality of the relationships demonstrated subordination, exclusivity, and other employment characteristics that would override the contractual form of independent service agreements. This case exemplifies the Portuguese tax principle of substance over form, where authorities can pierce corporate structures to assess the true nature of working relationships. The arbitration proceeded under Decree-Law 10/2011 (RJAT) before CAAD, with the tribunal examining both whether proper administrative procedures were followed and whether the reclassification from Category B to Category A income was legally justified based on the actual working conditions and relationship characteristics.

Full Decision

Case No. 20/2015 - T

Claimant: A…, Lda.

Respondent: Tax and Customs Authority

Subject: Withholding tax on personal income tax. Provision of services and employment contract.

Arbitral Award

I – Report

  1. The taxpayer A…, Lda, with the Tax and Social Security Registration Number … (hereinafter "Claimant"), filed, on 12 January 2015, a request for constitution of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT"), in which the Tax and Customs Authority is the Respondent (hereinafter "TCA" or "Respondent").

  2. The Claimant seeks arbitral pronouncement on the illegality of the withholding tax on personal income tax assessments for the years 2009, 2010, 2011 and 2012, regarding which the inspection action determined the existence of personal income tax not withheld at source in the amount of €91,651.00 (2009), €44,954.00 (2010), €36,896.00 (2011) and €18,447.00 (2012), alleging in summary that such assessments violate the duty of prior hearing, and are further illegal, either by violation of the provisions of Articles 59(1)(f) and 59(3), and 63(4) of the General Tax Code, or by error in the classification of income taxed (as dependent work income).

  3. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the TCA on 13 January 2015.

  4. Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of the LRAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of such appointment on 6 March 2015.

  5. The Collective Arbitral Tribunal was constituted on 26 March 2015; it was regularly constituted and is materially competent, in accordance with the provisions of Articles 2(1)(a), 5, 6(1), and 11(1) of the LRAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December).

  6. Pursuant to Articles 17(1) and (2) of the LRAT, the TCA was notified on 2 April 2015 to submit its response.

  7. The TCA submitted its response on 12 May 2015, accompanied by the Administrative File.

  8. In that response the TCA alleges, in summary, the complete lack of merit of the Claimant's request.

  9. The Arbitral Order of 14 May 2015 determined the dispensation of the hearing referred to in Article 18 of the LRAT, requesting from the parties written final arguments and dismissing the request for witness evidence production, considered unnecessary for the subject matter of the case (Articles 16(c) and (e) and 19(1) of the LRAT and Articles 6 and 130 of the Code of Civil Procedure, by virtue of Article 29 of the LRAT).

  10. The Claimant submitted its arguments on 22 May 2015; and, in a request of 25 May 2015, requested the attachment to the file of 2 documents, specifically containing the arbitral decision in Case No. 411/2014-T.

  11. The Respondent submitted its arguments on 5 June 2015.

  12. The Arbitral Order of 15 August 2015 fixed the date of 23 September 2015 as the deadline for pronouncing the Arbitral Decision.

  13. The case does not suffer from nullities and no prior or subsequent questions, prejudicial or of exception, were raised that would prevent the examination of the merits of the case, the conditions being present for a final decision to be rendered.

  14. The TCA appointed its representatives in the file and the Claimant attached a power of attorney, thus the Parties are duly represented.

  15. The Parties have legal personality and capacity and have standing, pursuant to Articles 4 and 10(2) of the LRAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

II – Grounds: Factual Matters

II.A. Facts considered proven

a) The Claimant received Statements of Assessment of Withholding of Personal Income Tax, computation notes and respective compensatory interest, relating to the years 2009, 2010, 2011 and 2012.

b) The Claimant had been subject to an inspection action covering those years, carried out by the Tax Inspection Services of the Finance Office of Porto and credited by Service Orders No. … and ….

c) From that inspection resulted corrections regarding personal income tax not withheld at source, with additional assessments in the amounts of €91,651.00 (2009), €44,954.00 (2010), €36,896.00 (2011) and €18,447.00 (2012) – amounts owed plus compensatory interest.

d) The Claimant was notified of the draft inspection report on 26 November 2013.

e) On 10 December 2013 the Claimant submitted a request seeking clarification regarding the temporal scope of the draft report, namely the consideration of facts from the year 2008, and requesting suspension of the period to exercise the right of hearing.

f) On 16 December 2013 the Respondent replied to the request, taking a position on the temporal scope issue and denying the claim for suspension of the period for exercising the right of hearing.

g) The Claimant exercised its right of hearing on 30 December 2013.

h) On the same date, 30 December 2013, the Claimant was notified of the Inspection Report (sent by official letter No. …/0507, dated 23 December 2013).

i) On 16 January 2014 the Claimant was notified of a dispatch that deemed the exercise of the right of hearing as untimely (official letter No. ../0507).

j) By contract executed on 30 September 2008 between the Claimant, on one hand (at that time designated as "B…, Lda"), and on the other C…, S.A., and D…, S.A., the transfer of the economic unit "E…" was carried out, transmitting its assets to the Claimant.

k) F…, Lda, was created in 2002 and entered into a service provision contract with the Claimant on 24 October 2008.

l) G…, Lda, was created in 1996 and entered into a service provision contract with the Claimant on 24 October 2008.

m) H…, Lda, was created in 1995 and entered into a service provision contract with the Claimant on 3 November 2008.

n) I…, Lda, was created in 2002 and entered into a service provision contract with the Claimant on 3 November 2008.

o) J…, Lda, was created in 2002 and entered into a service provision contract with the Claimant on 3 November 2008.

p) K…, Lda, was created in 1999 and entered into a service provision contract with the Claimant on 3 November 2008.

II.B. Facts considered not proven

Based on the documentary evidence available in the file and jointly accepted by the parties, the following facts are considered not proven and relevant for deciding the case:

a) The existence of dependent work relationships with the Claimant as employer and the holders of companies F…, Lda; G…, Lda; H…, Lda; I…, Lda; J…, Lda; and K…, Lda as workers.

b) Payment by the Claimant of the assessments in question.

III – Grounds: Legal Matters

III.A. Position of the Claimant

a) The Claimant begins by arguing that there is a nullity of the inspection procedure as a result of a formal defect, consisting in the violation of the duty of hearing by the Administration.

b) The Claimant alleges that, having raised in a request a question relating to the inspection concerning the year 2008, which in its view would be crucial to its defence, this led to the Respondent's dispatch that deemed the exercise of the right of hearing as untimely.

c) In the Claimant's view, this disregard by the Respondent of the request for clarification is what led to the position of considering the period for exercising the right of hearing as exhausted.

d) The right of hearing that applies to the Claimant would thus be violated, which in its view would render the Inspection Report, the additional assessments and the corresponding compensatory interest null.

e) On the other hand, the position taken on 16 December 2013 by the Respondent, that of not pronouncing itself on the question of the temporal scope of the inspection, raised by the Claimant on 10 December 2013, would constitute, in the Claimant's view, a violation of the duty of cooperation imposed by Article 59(1) and (3)(f) of the General Tax Code.

f) Furthermore, the alleged duplication of data contained in the Inspection Report relating to the year 2008 would constitute, in the Claimant's view, a duplication of inspection procedures with respect to the same period of time, in violation of Article 63(4) of the General Tax Code.

g) Both violations of provisions of the General Tax Code would determine, also in the Claimant's view, the nullity of the Inspection Report, the additional assessments and the corresponding compensatory interest.

h) To these arguments are added that one relating to an alleged erroneous qualification of the income on which the personal income tax was assessed, and which the Claimant maintains are not dependent work income, not being thus subject to the withholding tax regime – whereby such subjection would violate Articles 98, 99 and 103 of the Personal Income Tax Code and Circular No. 1/2008).

i) Indeed, the Claimant alleges that all situations referenced in the Inspection Report that gave rise to the additional assessments constitute cases in which there are mere service providers, or else dependent workers of companies that provided services to the Claimant.

a. This is alleged with respect to F…, Lda, and L… as a partner of F…. The Claimant emphasizes that F… did not invoice in all months of 2009 and 2010, which in its view would demonstrate that there was no regularity of remuneration characterizing dependent work – the same occurring as regards the absence of other remunerations and allowances, absence of working hours and vacation period or functional dependence. Being further that L… was not the only natural person providing services on behalf of F….

b. The same is alleged, "mutatis mutandis", with respect to G…, Lda, and M….

c. And the same with respect to H…, Lda, and N….

d. The same also with respect to I…, Lda, and O….

e. The same equally with respect to J…, Lda, and P….

f. The same also with respect to K…, Lda, and Q….

j) The Claimant further adduces some arguments against the acts now impugned, such as:

a. The irrelevance, for the case, of the sentence pronounced in the precautionary procedure in the 2nd Mixed Court of the Court of Vila Nova de Gaia (Case No. …/…….), relating to the Ordinary Action …/….TBOER, of the Court of Oeiras, subsequently annulled, on 12 January 2012, by the Court of Appeal of Lisbon, as the Claimant did not intervene therein, and therefore the irrelevance of the reasons adduced in the Inspection Report that are based on that sentence.

b. The irrelevance, for the same reasons, of the materiality alleged in opposition to the aforesaid precautionary procedure – as it only applies within the scope of a process that led to a sentence that was annulled, and cannot be taken as an admission by the party, and much less by the Claimant, who was not a party to that process.

c. The Claimant further maintains that it was only with the transfer of the economic unit "E…", by contract executed on 30 September 2008 between the Claimant, on one hand (at that time designated as "B…, Lda"), and on the other C…, S.A., and D…, S.A., that some of the service providers entered the Claimant's structure and came to be placed in situations of dependent work – which, in its view, would make the demarcation between the situations of genuine dependent work and the others more clear.

d. The Claimant further alleges that it was mere convenience and speed that dictated the accounting in the "CS – Salary Recording" journal of payments made to independent entities for service provisions, adding that it is possible to distinguish situations, in particular through the accounting entry in sub-accounts of the "FSE – Supply and External Services" account.

k) In conclusion, the Claimant alleges that, by disregarding the legal personality of the service-providing companies, to intend to directly tax, as dependent, the work provided by their partners, the TCA forgets that such companies were already taxed on VAT, on corporate income tax, and on withheld personal income tax; and, worse, that it intends to obscure the existence of service provisions that already served as the basis for taxation of the providers of those services.

l) Furthermore, the Claimant questions the economic advantage that allegedly would result from the concealment of dependent work situations – arguing that the "saving" in personal income tax would be more than offset by tax burdens on VAT, corporate income tax and by Social Security contributions, not excluding the taxation in personal income tax of the income of the partners and workers of the companies.

m) Finally, the Claimant claims compensatory interest for error attributable to the services, pursuant to Article 43 of the General Tax Code.

n) The Claimant reiterates the same arguments in its arguments, availing itself of some of the statements obtained in Case No. 411/2014-T, as it understands that the requirements of Article 421(1) of the Code of Civil Procedure are met.

III.B. Position of the Respondent

a) In its response, the TCA maintains the understanding that the disputed assessments constitute a correct application of the Law, not suffering from any defect.

b) In support of that understanding, the Respondent analyzes the consequences of the transfer that occurred on 30 September 2008, which brought into the sphere of the Claimant the positions of employer that belonged to C…, S.A.

c) Specifically, the Respondent maintains that from the Tax Inspection Report (hereinafter, "TIR") it was concluded that there transitioned to the Claimant situations already detectable in C… (Portugal), of the existence of dependent work relationships concealed as service provisions by companies held by those workers, against the corresponding issuance of invoices that do not correspond to the relationship actually existing between the parties.

d) From that finding resulted the determination of the amounts owed, corresponding to the withholding of personal income tax that was omitted.

e) As for the alleged violation of the prior right of hearing, the Respondent argues that all periods were strictly observed, namely the one resulting from Article 60 of the General Tax Code, and that it was the Claimant who did not take advantage of them – rather seeking to obtain a suspension of period with an argument that did not permit it (either because the reference to facts from 2008 does not interfere with the facts and legal questions that are relevant; or because that reference to facts from 2008 is crucial to assess the situation of the subsequent years). And it refers to the arguments that were expounded, and communicated to the Claimant, in the Dispatch of 16 January 2014, relating to the untimeliness of the exercise of the right of hearing.

f) As for the alleged defect of violation of law by non-compliance with Article 59(1) and (3)(f) and Article 63(4) of the General Tax Code, the Respondent maintains that not only was there no lack of cooperation, but also that there was no duplication in the inspection procedures.

g) In the first case, because in the Respondent's view there was no question that would justify suspension of the period for exercising the prior right of hearing; in the second case, there was no duplication of procedures, being that, in the Respondent's view, the references to 2008 in the TIR demonstrate precisely the opposite (the reference to what was already known as a way to avoid the repetition of inquiries).

h) As for the alleged defect of violation of law by erroneous qualification of income as dependent work, the TCA refers to the conclusions reached in the TIR, in which it was demonstrated that payments for "consulting services" were not contractual counterparts of service provisions by companies, but rather remunerations of the Claimant's own employees.

i) The invoices issued not being corresponding to the true relationship existing, it is understood that from the TIR resulted the disregard of those forms that removed such contractual relationships from the incidence of personal income tax and social security contributions, and that resulted in the circumstance that those income were not recorded in accordance with their true nature, nor reported as income subject to withholding, nor subject to effective withholding at source.

j) Moreover, the TCA understands that in none of the situations listed by the Claimant itself did the latter make proof, as was incumbent upon it, of facts that contradicted the conclusions already drawn in the TIR as to the nature of the underlying relationships.

k) The Respondent maintains that the materiality revealed in the precautionary procedure in the 2nd Mixed Court of the Court of Vila Nova de Gaia, indicating the existence of genuine dependent work relationships, is valid only within the limits of procedural good faith, without collision with the principles of res judicata.

l) On the other hand, the Respondent considers as revealing the same underlying materiality the existence of a list of "persons authorized to enter the computer system of C…" that was attached to the transfer contract; and the existence of provisions expressly intended to remunerate amounts corresponding to vacation and Christmas allowances.

m) Finally, the Respondent dismisses the possibility of compensatory interest being due, as it rejects the existence of error attributable to the services, a requirement of Article 43(1) of the General Tax Code.

n) Concluding, the TCA with the position that the present case should be judged to lack merit, being absolved of the request.

o) In counter-arguments, the Respondent opposes the use, in the Claimant's arguments, of statements obtained in Case No. 411/2014-T, as it understands that such practice violates the provisions of the Order of 14 May 2015, issued in the present case and which does not admit the production of witness evidence.

p) In the remainder of the counter-arguments, the Respondent reiterates the arguments already adduced in its response.

III.C. Issues to be decided

III.C.1 Violation of the prior right of hearing

The first issue to be decided is the one concerning the formal defect consisting in the alleged violation of the right of hearing by the Administration, sustained by the Claimant.

The Claimant alleges that, having raised in a request a question relating to the inspection concerning the year 2008, which in its view would be crucial to its defence, this led to the Respondent's dispatch that deemed the exercise of the right of hearing as untimely. In the Claimant's view, this disregard by the Respondent of the request for clarification is what led to the position of considering the period for exercising the right of hearing as exhausted. The right of hearing that applies to the Claimant would thus be violated, which in its view would render the Inspection Report, the additional assessments and the corresponding compensatory interest null.

The Tribunal considers that, in this matter, the Claimant is not correct.

First, it is noted the absence of the indication by the Claimant of a rule that sustains the alleged nullity, the rule in administrative procedures being that of voidability, pursuant to the provisions of the Code of Administrative Procedure.

This matter is subscribed to the reasoning of the Arbitral Award of Case No. 411/2014-T, according to which the doubt raised by the Claimant "was neither founded nor capable of compromising the exercise of the right of hearing that was, in fact, afforded to it, since, from the outset, the Claimant could always have chosen to pronounce itself on the facts relating to 2008 that it considered relevant, without any prejudice resulting therefrom", whereby it is considered that the prior duty of hearing was not violated.

III.C.2 Lack of cooperation

A second issue to be decided is the one concerning the alleged violation of the duty of cooperation by the Administration, sustained by the Claimant.

According to the Claimant, the fact that the Administration decided not to pronounce itself on the question posed by it – whether its hearing should focus on facts relating to 2008 – constitutes a violation of the rule contained in Article 59(1) and (3)(f) of the General Tax Code.

Article 59(1) of the General Tax Code provides that "[t]he organs of the tax administration and the taxpayers are subject to a reciprocal duty of cooperation". And Article 59(3) of the same article of the General Tax Code provides that this cooperation comprises, in particular, "[t]he regular and timely clarification of well-founded doubts about the interpretation and application of tax rules" [paragraph f)].

Now, in the question posed by the Claimant to the Administration was not at issue a doubt "about the interpretation and application of tax rules", but rather, as is stated in the Arbitral Award of Case No. 411/2014-T, about the "content of the report notified", whereby it cannot be considered that the Administration violated the duty of cooperation provided for in Article 59 of the General Tax Code.

Thus, the Tribunal considers that, also in this matter, the Claimant is not correct.

III.C.3 Duplication of inspection procedures

According to the Claimant, it is "excessive and violative of the rights of the Claimant", the "copy of 84 pages of the report relating to the year 2008, since this matter was already subject to pronouncement by the Claimant, as well as to its impugnation", concluding from this the existence of a duplication of inspection procedures against it regarding the same facts, whereby it sustains the nullity of the inspection procedure from the elaboration of the draft report, by violation of Article 63(4) of the General Tax Code, which provides as follows:

"The inspection procedure and the duties of cooperation are the adequate and proportional to the objectives to be pursued, with more than one external audit procedure relating to the same taxpayer or tax obligor, tax and taxation period being permissible only by decision, substantiated on the basis of new facts, of the senior manager of the service, except if the audit is aimed only at confirmation of the assumptions of rights that the taxpayer invokes before the tax administration and without prejudice to the determination of the tax situation of the taxpayer by means of inspection or inspections directed to third parties with which it maintains economic relationships".

The Tribunal considers that, also in this question, the Claimant is not correct.

In fact, and as is stated in the Arbitral Award of Case No. 411/2014-T, "the use of facts determined in the inspection of the year 2008, in the inspection of the years 2009 to 2012, embodied in the notification within this of the report of that one, does not integrate a new inspection of the facts of that first year, especially since no new facts were sought or raised", whereby it cannot be considered that the rule contained in Article 63(4) of the General Tax Code is violated.

III.C.4 Erroneous qualification of income as dependent work

The central issue in the case is the one concerning the alleged erroneous qualification of the income in question as dependent work income.

According to the TCA, the inspection action in discussion "was opened following the conclusions reached within the scope of the inspection action for the year 2008, under service order No. OI …, because there was verified the accounting of invoices or equivalent documents that did not correspond and do not correspond to the true relationship between the Claimant and the entities that issued them (cf. page 9 of the TIR)".

The TCA maintains that "[f]rom the analysis carried out by the Tax Inspection Services, in particular of the content of the contractual clauses, it was possible to conclude that the Claimant's workers, formerly workers of C… Portugal, received their remuneration corresponding to the functions they exercised on an individual basis through companies held by them, under the concealed form of provision of consulting services against the corresponding issuance of invoices that do not correspond to the relationship truly existing between the parties (cf. page 159 of the TIR)", concluding that withholding of personal income tax was omitted, due under Article 103(1) and (4) of the Personal Income Tax Code.

The TCA considers that the Tax Inspection Service "collected strong and sufficient indicia that call into question the truthfulness of the operations underlying the invoices, it being incumbent on it, as imposed by Article 342 of the Civil Code and Article 74 of the General Tax Code, the burden of proof of the verification of the assumptions of taxation", and that "it was incumbent on the Claimant to demonstrate, clearly and unequivocally, that, notwithstanding the facts determined, these were actual provisions of consulting services with taxation under VAT and without any reflection under personal income tax, which it failed to do".

Pursuant to Article 74(1) of the General Tax Code, "[t]he burden of proof of the facts constituting the rights of the tax administration or of the taxpayers rests with whoever invokes them".

Thus, as the TCA itself acknowledges, it was incumbent on the TCA the burden of proof "of the verification of the assumptions of taxation".

It is important, then, to identify the assumptions of taxation whose proof would have to be made in the case.

The TCA considers that we are dealing with dependent work income, paid by the Respondent, and as such subject to withholding at source by virtue of the provisions of Article 103 of the Personal Income Tax Code.

Pursuant to Article 2(1) of the Personal Income Tax Code, "the following are considered dependent work income all remunerations paid or made available to its holder proceeding from:

a) Work for another carried out under an individual employment contract or another legally equivalent to it;

b) Work carried out under a service acquisition contract or another of identical nature, under the authority and direction of the person or entity that occupies the position of active subject in the resulting legal relationship;

c) Exercise of function, service or public office;

d) Situations of early retirement, pre-retirement or reserve, with or without work performance, as well as benefits granted, regardless of the title, before the requirements provided in the mandatory social security regimes applicable for the transition to the retirement situation are verified, or, even if the employment contract does not subsist, if they appear to be subject to the condition of being owed until such requirements are verified, even if, in any of the cases previously provided, they are owed by pension funds or other entities that substitute for the entity originally owing them."

Thus, the taxation of certain income as dependent work income presupposes that the same will be originated by one of the situations typified in the paragraphs of Article 2(1) of the Personal Income Tax Code.

In the present case, we are clearly not dealing with the exercise of function, service or public offices, nor are we dealing with any situation of early retirement, pre-retirement or reserve, whereby the possibility of being dealing with income taxable under paragraphs c) and d) of Article 2(1) of the Personal Income Tax Code is ruled out from the outset.

We are also not, in the present case, before the situation described in paragraph b) of Article 2(1) of the Personal Income Tax Code, which refers to the provision of services by the taxpayer, but under the authority and direction of the entity that occupies the position of active subject in the respective legal relationship, which refers us to the problematic of "false green receipts" (cf. José Guilherme Xavier de Basto, Personal Income Tax: real scope and determination of net income, Coimbra, Coimbra Publisher, 2007, pp. 57-58). Even so, it is emphasized the fact that in these situations proof must be made that one is dealing with work performed under the authority and direction of another, otherwise the income in question will be taxed as income of category B – business and professional income.

It is concluded, then, that the TCA, in the present case, would have to prove the existence of a true legal work relationship, subsumible to paragraph a) of Article 2(1) of the Personal Income Tax Code to be able to qualify the income in question as dependent work income, taxable in accordance with the rules of personal income tax category A and subject to the withholding rules at source corresponding.

As stated in case law of the Supreme Court of Justice, the employment contract is characterized "essentially by the state of legal dependence in which the worker places himself in relation to the employing entity, being that the bond of legal subordination results from the circumstance that the worker is subject to the authority and direction of the employer who gives him orders, while in service provision that subordination is not verified, considering only the result of the activity" (Supreme Court of Justice Award of 04/02/2015, in Case No. 437/11.0TTOAZ.P1.S1).

The Supreme Court of Justice further states, in the same award, the following:

"Now, as has been repeatedly stated, the extreme variability of concrete situations often makes the subsumption of facts into the notion of subordinate work difficult, implying the need to frequently resort to approximate methods, based on the interpretation of indicia.

In borderline cases, doctrine and case law accept the necessity of having recourse to indicia revealing the elements that characterize legal subordination, the so-called internal contractual indicia (the designation given to the contract, the place where the activity is carried out, the existence of fixed working hours, the use of goods or utensils furnished by the recipient of the activity, the fixing of remuneration as a function of the result of the work or as a function of working time, right to vacation, payment of vacation and Christmas allowances, incidence of the risk of performance of work on the worker or on account of the employer, insertion of the worker in the productive organization, resort to collaborators by the provider of the activity, existence of external control of the mode of performance of labor activity, obedience to orders, subjection to company discipline) and external contractual indicia (the number of beneficiaries to whom the activity is provided, the type of tax paid by the provider of the activity, the registration of the provider of the activity in Social Security and its unionization).

Each of those indicia naturally has a very relative value and, for that reason, the judgment to be made is always a judgment of globality (MONTEIRO FERNANDES, Labor Law, 12th edition, Almedina, Coimbra, 2004, p. 145), to be formulated on the basis of the totality of the available information elements, based on a greater or lesser correspondence with the type-concept."

Now, taking into account the concept of employment contract, as well as the various indicators that allow testing the existence of a dependent work legal relationship, this Tribunal concludes that the Respondent did not make proof that the Claimant had paid the income in question under dependent work relationships.

And since the existence of such relationships is not proven, the Respondent cannot require the amounts corresponding to withholdings that would be due by virtue of payment of dependent work income.

In the same sense, although from a different perspective, concludes the Arbitral Tribunal in Case No. 411/2014-T when, with respect to the same facts, it states that in the probative inventory "there are no facts that support the conclusion of the TCA, that it is "possible to conclude that the Claimant's workers, formerly workers of "B…", received their remuneration corresponding to the functions they exercised on an individual basis through companies held by them, under the concealed form of provision of consulting services against the corresponding issuance of invoices that do not correspond to the relationship truly existing between the parties" [quote from the TCA's arguments in the respective case]".

As stated by the Arbitral Tribunal in Case No. 411/2014-T, "[a]nd in fact, it is not possible, in view of the probative accumulation determined, to detect "indicia of facts, from which an inference regarding the facts indicated will be sought to be extracted (...) through a normal relation judgment between the indicium and the theme of proof"[quote from the Decision of the Administrative Court of Appeal-South of 05-02-2015, rendered in case 08097/14]".

In view of the above, the Tribunal concludes by the merits of the request for annulment of the additional personal income tax assessments, by erroneous qualification of income as dependent work.

III.C.5 Compensatory interest

The process of judicial impugnation (which includes tax arbitration) despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as can be inferred from Article 43(1) of the General Tax Code, in which it is established that "compensatory interest is due when it is determined, in amicable reclamation or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in amount greater than legally due" and from Article 61(4) of the Tax Procedure and Process Code (in the wording given by Law No. 55-A/2010, of 31 December, which corresponds to Article 61(2) in the original wording).

Thus, Article 24(5) of the LRAT, in stating that "payment of interest is due, regardless of its nature, under the terms provided in the general tax law and in the Tax Procedure and Process Code", should be understood as permitting recognition of the right to compensatory interest in the arbitral process.

However, in the case before us, it is not demonstrated that the Claimant proceeded to payment of the assessments.

Thus, that necessary payment not occurring, there is obviously no place for condemnation to compensatory interest.

The request will therefore fail, in this part.

IV. Decision

In view of all the foregoing, it is decided:

a) To judge the request for annulment, by illegality, of the withholding tax on personal income tax assessments and compensatory interest, relating to the years 2009, 2010, 2011 and 2012 subject of the present case, in the amounts of €108,033.79, €51,138.37, €40,497.15 and €19,534.51, as merited, condemning the TCA to proceed to their immediate annulment with the legal consequences inherent thereto;

b) To judge the request for condemnation in the payment of compensatory interest as lacking merit, absolving the Respondent Tax and Customs Authority from that request.

V. Value of the Case

In accordance with the provisions of Article 306(2) of the Code of Civil Procedure and Article 97-A(1)(a) of the Tax Procedure and Process Code and Article 3(2) of the Regulation of Costs in Tax Arbitration Processes, the value of the case is fixed at €219,203.82

VI. Costs

The amount of costs is fixed at €4,284.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Processes, and the payment thereof is charged to the Respondent Tax and Customs Authority.

Lisbon, 21 September 2015

The Arbitrators

José Poças Falcão
(President)

Paulo Nogueira da Costa

Fernando Araújo

Frequently Asked Questions

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What is the difference between service provision and employment contract income for IRS withholding tax purposes in Portugal?
In Portugal, employment contract income (Category A - rendimentos do trabalho dependente) and service provision income (Category B - rendimentos empresariais e profissionais) are treated differently for IRS withholding tax purposes. Employment income is subject to monthly withholding at progressive rates according to withholding tax tables that consider the employee's salary level and family situation, with rates typically ranging from 0% to over 40%. Independent service provision income is generally subject to withholding at a flat rate of 25% for most professional services (or 16.5% in some cases). The key distinction lies in the nature of the relationship: employment involves subordination, regularity, exclusivity, use of the employer's means and tools, and integration into the company's organizational structure. Independent services involve autonomy, ability to organize one's own work, use of own means, assumption of economic risk, and provision of services to multiple clients. For withholding purposes, the entity making payments must correctly classify the relationship, as this determines the applicable withholding rate and reporting obligations.
Can the Portuguese Tax Authority reclassify independent service income as dependent employment income for withholding tax?
Yes, the Portuguese Tax Authority has the legal power to reclassify independent service income as dependent employment income for withholding tax purposes under the principle of substance over form (prevalência da substância sobre a forma). Article 63(4) of the General Tax Code (LGT) allows the Tax Authority to disregard contractual arrangements that do not reflect economic reality. During tax inspections, authorities examine the actual working relationship beyond the written contract, analyzing factors such as: subordination to employer's instructions and control; fixed working schedule and location; exclusivity or near-exclusivity of services to one entity; integration into the company's organizational structure; use of employer's equipment and facilities; lack of entrepreneurial risk; and payment of fixed monthly amounts resembling salaries. If these employment characteristics are present despite a formal service provision contract, the Tax Authority can reclassify the income from Category B to Category A and assess the entity for unpaid withholding tax, compensatory interest, and potentially penalties. This reclassification power is frequently exercised in cases involving payments to single-member companies (unipessoais) owned by individuals providing personal services.
What are the legal consequences of failing to withhold IRS tax on payments reclassified as employment income?
When the Tax Authority reclassifies payments as employment income and determines that IRS withholding tax was not properly withheld, several legal consequences apply. First, the entity that made the payments (the employer/payer) becomes directly liable for the unpaid withholding tax amounts, even if the service providers reported and paid tax on the income received. Second, compensatory interest (juros compensatórios) accrues from the date the tax should have been withheld until payment, calculated according to the legal rate. Third, the entity may face administrative penalties under the General Tax Infraction Regime (RGIT) for failure to withhold, which can be substantial fines. Fourth, assessment notices are issued for each tax year with unpaid withholding obligations. Fifth, the taxpayer must either pay the assessments or challenge them through administrative proceedings (hierarchical review) or judicial/arbitral means (tax court or CAAD arbitration). The liability for withholding tax cannot be transferred to the workers/service providers, as withholding obligations are statutory duties of the payer. However, the entity may seek to recover amounts from the individuals concerned through civil proceedings if contractual provisions exist.
Does the taxpayer have a right to a prior hearing before the Tax Authority issues IRS withholding tax assessments?
Yes, taxpayers have a fundamental right to a prior hearing (direito de audição prévia) before the Tax Authority issues acts that adversely affect their rights, including IRS withholding tax assessments. This right is enshrined in Article 60 of the General Tax Code (LGT) and derives from constitutional principles of defense rights and good administration. The right to hearing requires that: the Tax Authority notify the taxpayer of the proposed adverse act and its factual and legal grounds; the taxpayer be given a minimum period (typically 10-15 days) to submit written observations, documents, and arguments; the Authority analyze and consider the taxpayer's submissions; and a reasoned decision be issued. In tax inspection procedures, the right to hearing is exercised after notification of the draft inspection report (projecto de relatório), allowing the taxpayer to contest findings before the final report is issued. Violation of the right to prior hearing constitutes a formal defect that can lead to nullity of the assessment under Article 163 of the Tax Procedure Code (CPPT). However, the nullity may be cured if the taxpayer was given effective opportunity to be heard, even if procedural irregularities occurred.
How does CAAD arbitration resolve disputes over IRS withholding tax classifications under Decree-Law 10/2011 (RJAT)?
CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative dispute resolution mechanism for IRS withholding tax classification disputes under Decree-Law 10/2011, known as RJAT (Regime Jurídico da Arbitragem em Matéria Tributária). Taxpayers can request arbitration to challenge the legality of withholding tax assessments instead of pursuing litigation in tax courts. The process involves: filing an arbitration request within the legal deadline (typically the same as for judicial appeals); constitution of an arbitral tribunal (single arbitrator or three-member panel); submission of response by the Tax Authority with the administrative file; written or oral proceedings as determined by the tribunal; and issuance of a binding arbitral award (decisão arbitral). CAAD arbitrators examine both procedural legality (such as violation of the right to hearing) and substantive legality (whether the reclassification from independent services to employment income was legally justified). The tribunal analyzes the actual characteristics of the working relationships, applying tax law principles including substance over form. Arbitral awards have the same force as court judgments and can be enforced through execution proceedings. CAAD arbitration typically resolves disputes faster than traditional courts, usually within 6-12 months, making it an increasingly popular option for withholding tax classification disputes.