RFAI 2009 Tax Benefits Under IRC: CAAD Arbitration on Corporate Tax Self-Assessment Annulment

ARBITRAL TRIBUNAL DECISION

CAAD - ADMINISTRATIVE ARBITRATION CENTER

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Prof. Dr. Nina Aguiar and Dr. Júlio César Nunes Tormenta (arbitrator-members), appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 31-10-2013, agree as follows:

1. Report

A, with registered office at …, …, .., legal entity no. ... (hereinafter Claimant), filed a request for arbitral decision, pursuant to Article 10 of Decree-Law No. 10/2011, of 20 January (hereinafter RJAT).

The Claimant presented the following requests:

a) the annulment of the decisions issued on 09-05-2013, in the context of a hierarchical appeal filed against the partial grants of gracious complaints no. ... (filed against the self-assessed IRC no. 2004 …, of 22-9-2004, relating to the taxation period of 2003), and no. ... (filed against the self-assessed IRC no. 2005 ..., of 01-08-2005, relating to the taxation period of 2004), insofar as they partially reject the relief sought;

b) the reimbursement of the amount of € 775,059.36 relating to tax unduly paid due to error in self-assessment; and

c) the payment of compensatory interest for the deprivation of the amount of € 775,059.36.

The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to Article 6, No. 2, letter a), of the RJAT, the undersigned were appointed by the President of the Deontological Council of the CAAD to form the present collective Arbitral Tribunal, having accepted in accordance with legal provisions.

The Tax and Customs Authority presented a response, arguing that the request for arbitral decision should be ruled entirely unfounded.

On 14-02-2014, the meeting provided for in Article 18 of the RJAT took place, with it being agreed that witness testimony was not necessary and the Parties having dispensed with pleadings.

The arbitral tribunal was regularly constituted and is substantively competent, in light of the provisions of Articles 2, No. 1, letter a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.

The parties have legal personality and capacity and are legitimate (Articles 4 and 10, No. 2, of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The cumulation of requests is admissible insofar as they essentially depend on the assessment of the same factual circumstances and the interpretation and application of the same principles or rules of law, pursuant to Article 3 of Decree-Law No. 10/2011, of 20 January and 104 of the CPPT.

The proceedings do not suffer from nullities and no exceptions were raised.

Thus, there is no obstacle to the assessment of the merits of the case.

2. Factual Matter

2.1. Proven Facts

Based on the elements contained in the proceedings and in the administrative file attached to the record, the following facts are considered proven:

a) The Claimant, "A", is a company operating in the area of food distribution (Article 1 of the request for arbitral decision);

b) The Claimant adopts a taxation period comprised between 1 March and 28 February (Article 3 of the request for arbitral decision);

c) The Claimant proceeded, on 29-07-2004, to file the Income Statement – Form 22 of the IRC, relating to the fiscal year 2003, in which a taxable income of € 139,020,910.15 and a total tax to be paid of € 18,449,047.30 was determined (Articles 4 and 8 of the request for arbitral decision);

d) In determining the taxable income for the fiscal year 2003, the Claimant deducted, as a tax benefit relating to net job creation, the amount of € 3,101,690.48 (Article 7 of the request for arbitral decision);

e) On 28-7-2006, the Claimant filed a gracious complaint on the grounds of error in the self-assessment made in the declaration referred to in the previous letter (Article 5 of the request for arbitral decision and administrative proceedings);

f) The gracious complaint was rejected by decision of 05-03-2009, issued by the Deputy Finance Director of the Finance Directorate of Lisbon, pointing out to the Claimant, by the Tax and Customs Authority, a lack of probative evidence of net job creation (administrative proceedings relating to the year 2003);

g) The Claimant was notified of the total rejection of the gracious complaint relating to the year 2003, on 11-03-2009;

h) The Claimant filed a hierarchical appeal against the decision rejecting the gracious complaint relating to the year 2003 and, in analyzing the appeal, the Finance Directorate of Lisbon partially revoked that decision, understanding that the tax benefit calculated for the years 1999 to 2003 should be € 3,116,802.10, and therefore proposed a correction of € 15,111.62;

i) By decision of 09-05-2013, issued by the Deputy General Director of Taxes in substitution of the General Director of Taxes, the hierarchical appeal relating to the year 2003 was partially granted, with reference to the grounds set forth in Information No. 667/2013 of the Service Directorate for Corporate Income Tax, whose content is reproduced, which contains, among other things, the following:

1. It is established that with the decision granting partial relief issued in that complaint, net job creation was validated for the fiscal years 1999 to 2004 and the benefit value accepted for the fiscal year 2004 was presented broken down by the various fiscal years in which there was net job creation: 1999 — €363,347.08; 2000 — €779,008.13; 2001 — €762,173.32; 2002 — €598,846.46; 2003 — €425,058.58; and 2004 — €413,683.62";

2. In conformity therewith, regarding the fiscal year 2003, the benefit arising from the previous fiscal years must necessarily be accepted, namely 1999, 2000, 2001, 2002 and 2003, with respect to the workers considered in the analysis conducted for the fiscal year 2004 (workers with indefinite-term contracts in written form);

(...)

1. The appellant alleges that in that period there was a total of 2,520 entries and a total of 1,039 exits, whereby there was the creation of a net total of 1,481 jobs.

2. Based on the various and numerous elements contained in the gracious complaint proceedings and in the hierarchical appeal proceedings, namely copies of the employment contracts concluded with the workers considered for purposes of tax benefit, identity cards, social security cards, model registration forms for social security of employees, tax identification cards, and all information contained in the AT's information system, we verified, by sampling, the fulfillment of the legal requirements for the tax benefit in question, having concluded that:

a. The appellant alleges that the creation of new jobs occurs in two forms:

i. By hiring workers with indefinite-term employment contracts and age not exceeding 30 years;

ii. By conversion of fixed-term employment contracts into indefinite-term employment contracts for workers aged not exceeding 30 years at the date of conversion;

b. According to the elements submitted with the record, and by sampling, it appears to us that it is the company's policy to hire workers with indefinite-term and fixed-term contracts.

c. It should be noted that many of the fixed-term employment contracts are on a part-time basis, and after two automatic legal renewals are considered as indefinite-term contracts.

d. In the absence of other means of proof that the worker with a fixed-term contract had knowledge of his/her effective status in the company on a certain date for purposes of verifying the date of job creation, we compared the date indicated by the appellant in the schedules submitted for the purpose of calculating net job creation with the date obtained by adding to the date on which the fixed-term contract ends the two legally possible renewals.

e. In a sample of 1,355 entries analyzed, only one case was detected in which there was only one renewal of the fixed-term contract (employee no. … – x) and four cases in which there was no renewal with workers becoming permanent at the end of the fixed-term contract (employee no. … – …, employee no. … -…, employee no. … …, and employee no. … -…). All these workers perform administrative functions in the company (clerical, secretarial, administrative assistant).

f. Therefore, as a general rule, the date of job creation for workers initially hired on a fixed-term basis coincides with the end of the two renewals.

g. We also detected one case in which the date of job creation indicated by the appellant is incorrect. The worker … was wrongly considered in job creation for 1999. In the schedule submitted by the appellant for purposes of proving net job creation, the fixed-term employment contract would have the date of 08 September 1997 with the worker becoming permanent on 08 June 1999. The appellant also informs that this worker left the company on 09 May 2003. However, based on our analysis of the evidence submitted by the appellant in the proceedings, we found that the employment contract proving this worker's professional situation is a fixed-term employment contract on a part-time basis with start on 06 December 2003 (see page 679 of the gracious complaint record). We conclude that this worker does not constitute job creation in 1999 nor departure in 2003 for purposes of calculating net job creation, and the corresponding corrections have been made, namely by not considering the worker in calculating the tax benefit.

h. The conversion of fixed-term employment contracts into indefinite-term employment contracts is not subject to written form, nor did the appellant present any communication to the worker regarding that conversion.

i. However, based on our analysis of the information contained in the income statements filed by the workers and schedules filed by the appellant with social security, we were able to verify, by sampling, that the workers in question remain in the company's service beyond the end of the two successive renewals of the fixed-term contract. In other words, it is possible, through these elements, to draw a reasoning that allows us to conclude that the conversion of fixed-term contracts into indefinite-term contracts permits us to judge the existence of the indefinite-term employment contract.

j. With respect to the consideration for purposes of this tax benefit of workers with whom part-time employment contracts were concluded, this does not constitute a violation of the legally required requirements, nor of the higher-level sanctioned interpretations of Article 19 of the EBF. There is no legal impediment to their non-consideration in the calculation of the tax benefit related to job creation for young people provided that compliance with the other legal requirements is verified. However, also in these cases the limit value must be adjusted proportionally to the number of part-time working hours, under penalty of being considered a tax benefit superior to what is provided in the law. Until 31 December 2002, the limit of monthly charges to be considered as tax cost (150%), per job, corresponds to 14 times the highest national minimum wage. This limit was changed effective 01 January 2003, with the wording given by No. 1 of Article 38 of Law No. 32-B/2002, of 30 December, which established as the annual limit of the increase per job the amount of 14 times the highest national minimum wage. As can be seen, the calculation of that limit has in its composition the value of the national minimum wage. This is legally determined for full-time/complete employment contracts, that is, employment contracts with a normal weekly working period that at that date is forty hours. Thus, for part-time employment contracts, this limit should be adjusted proportionally for purposes of determining the limit of the tax benefit.

k. Summarizing, based on our analysis of the elements submitted by the appellant, we conclude that between 01-03-1998 and 28-02-2004 there were 2,519 entries and a total of 1,038 exits, whereby there was the creation of a net total of 1,481 jobs distributed as follows by taxation periods:

[Table reference]

l. Based on our detailed analysis of the schedule for calculation of the amount of €9,093,089.45 of tax benefit related to job creation for young people submitted by the appellant in the present petition, we found that various irregularities were committed that we summarize as follows:

m. Thus, we found that, in the case of workers for whom the beginning or end of eligibility conditions for purposes of that calculation occurs in the taxation period of 2003, the proportional adjustment of the tax benefit limit to the period of time in which the conditions occur was not correctly performed. This irregularity resulted in the appellant calculating a tax benefit superior to what is provided in the law. On this matter there are various clarifications from this Service Directorate in various information communications, namely in information no. 1385/09 with decision of the Deputy General Director dated 03-07-2009, in which it is concluded that, regarding net job creation that occurred after entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, "in the fiscal year in which the beginning or end of eligibility conditions of the worker for the benefit occurs, the maximum annual increase limit must be adjusted proportionally to the time in which those conditions were maintained". Stipulating No. 3 of that provision establishes a temporal limit for the tax benefit, which is calculated based on the period of the contract's duration, the maximum increase referred to in No. 2 must also be based on the same period. Thus, and as stated in information No. 1109/2006 of this Service Directorate, which received publication on the Internet as binding information – doctrinal note (process 1498/2006 with decision of 26-09-2006 of the Director General), the tax benefit may reflect over 6 fiscal years, but the amount of the benefit corresponds to 5 years.

n. We also found that the appellant did not correctly apply the limit established in No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, in the wording applicable to net job creation that occurred prior to 01 January 2003, resulting in a tax benefit superior to what is provided in the law. This matter was also the subject of various information communications that reflect the services' understanding that it is the charges already increased that cannot exceed 14 times the highest national minimum wage. Thus:

i. In situations where monthly charges actually incurred with the worker already exceed the value of 14 times the highest national minimum wage (as is the case, for example and among others, of employee no. … -…), the employer has no right to any increase, contrary to the procedure adopted by the appellant which indicates a tax benefit of €27,573.70 in the example mentioned.

ii. In situations where monthly charges actually incurred with the worker are below the value of 14 times the highest national minimum wage, the 50% increase of charges is accepted, but the total value of charges actually incurred with the increase value has as maximum limit the value corresponding to 14 times the highest national minimum wage. Thus, if the calculation of the 150% results in a value superior to 14 times the highest national minimum wage, then, for purposes of calculating the benefit, only this latter amount will be considered.

o. It was also found that the appellant did not correctly apply the limit established in No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, for purposes of calculating the tax benefit related to job creation in situations where the worker was hired by indefinite-term contract but on a part-time basis. Also in these cases the limit value must be adjusted proportionally to the number of part-time working hours, under penalty of being considered a tax benefit superior to what is provided in the law.

p. We also found that between the taxation period of 2003 and that of 2004, the claimant made alterations to the workers selected for purposes of determining the tax benefit in question. When questioned about this fact, the claimant alleged that it proceeded to substitute workers, that is, for purposes of calculating the tax benefit of the taxation period being analyzed, it substituted workers who initially had been selected for purposes of net job creation in the taxation period in which they met the conditions of eligible entries and who had since left for reasons unrelated to the company, with other eligible entries in the same period but which for some reason were not selected.

q. However, on this matter there is information that reflects this services' understanding and which conclude that the worker substitution model advocated by the claimant lacks legal support, the latter having been specifically informed (Official Letter No. … of 03-09-2010) of these conclusions following a request for clarification.

r. The concept of tax benefit shown in Article 2 of the EBF characterizes it as measures of exceptional character instituted to protect relevant extra-fiscal public interests that are superior to those of taxation itself, that is to say, the fiscal expenditures originated by the introduction of a tax benefit are more than compensated by the macro-economic benefit that it seeks to achieve. In the specific case of Article 19 of the EBF, the macro-economic action measure was directed at creating stable and lasting employment for population groups with greater employment difficulties (youth in the wording in force until the taxation period of 2006 and the long-term unemployed included from the taxation period of 2007). Therefore, when an entity, in the normal course of its activity, concludes employment contracts with a view to filling a certain number of jobs, this does not necessarily mean immediate access to the fiscal economy that Article 19 of the EBF makes available to taxpayers because all the requirements stipulated throughout that article must cumulatively be met.

s. Specifically, according to Article 19 of the EBF in the wording in force at the date of the facts, entities subject to IRC that concluded indefinite-term individual employment contracts with persons aged not more than 30 years, assessed on the date of the employment contract and provided that there was "net job creation", could access the tax benefit established in Article 19 of the EBF translated into the increase of charges with workers considered in that net job creation for purposes of determining the taxable result, within the quantitative and temporal limits (5 years from the beginning of the contract's duration) stipulated in that article.

t. "Net job creation" means the positive difference in a given taxation period between the number of eligible hirings under No. 1 of Article 19 of the EBF and the number of departures of workers who, on the date of their respective hiring, were in the same conditions, with the nominative selection of workers who comprise that net job creation being the absolute responsibility of entities subject to IRC.

u. It is therefore established that it is the date of hiring (or of conversion) to an indefinite-term contract that is relevant for purposes of determining net job creation in a given taxation period and that allows entities subject to IRC the increased deduction of charges incurred with workers who generated it and only those, over the five years following the beginning of that contract, within the quantitative limits legally expressed.

v. Thus, should any of the entries (workers) chosen "ab initio" by the entity subject to IRC for purposes of the tax benefit and under the conditions of Article 19 of the EBF cease the contractual relationship with the company, the corresponding tax benefit ceases to apply, given the absence of charges with that specific worker.

w. Based on the foregoing we conclude that the substitution procedure adopted by the claimant has no legal basis and contradicts the higher public interest here translated into a macro-economic action measure – incentive for creating stable and lasting employment for population groups with greater employment difficulties.

1. Having regard to all that was set forth in the preceding items, and with the collaboration of the claimant who submitted the elements requested by this services, we proceeded to calculate the values to be considered as tax benefit in the taxation period of 2003 under Article 19 of the EBF with the wording in force at the date of the facts, regarding net job creation, by worker (entry) selected by the claimant, in accordance with the schedules attached to this information:

a. In Annex I (151 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBE) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis and whose eligibility conditions for the tax benefit in question did not cease until 28 February 2004 totaling €6,240,661.18.

b. In Annex II (40 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis when it was found that, until 28 February 2004, the worker's eligibility conditions for this tax benefit ceased (worker departure from the company or end of the benefit duration period) totaling €1,010,445.66.

c. In Annex III (4 pages) we present the calculation of the tax benefit regarding net job creation that occurred after the entry into force of the amendment made to No. 2 of Article 17 of the EBF – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis, with the corresponding proportional adjustment of the maximum annual increase limit in cases where the beginning or end of the worker's eligibility conditions for the benefit occurred, totaling €611,407.26.

d. In Annex IV (5 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a part-time basis, totaling €99,307.32.

e. In Annex V (1 page) we present the calculation of the tax benefit regarding net job creation that occurred after the entry into force of the amendment made to No. 2 of Article 17 of the EBF currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a part-time basis, totaling €15,077.63.

1. As we demonstrated in the calculations presented, the value to be considered as tax benefit in 2003 under Article 19 of the EBF regarding net job creation in the fiscal years 1998 to 2003 amounts to €7,976,899.04 and not €9,093,089.45 requested by the claimant:

[Table reference]

1. Thus, the value to be considered in field 234 of schedule 07 of the periodic income statement model 22 of IRC (deduction to be considered in determining the taxable profit of the taxation period of 2003 as a result of the tax benefit arising from job creation pursuant to Article 19 of the EBF) should be €7,976,899.04 corresponding to:

i. €7,350,414.15 – Relating to net job creation between 1998 and 2002;

ii. €626,484.89 – Relating to net job creation in 2003;

It should be noted that the claimant already considered in that field of the periodic income statement Model 22 the amount of €3,101,690.48.

VI - CONCLUSION

In light of the higher-level sanctioned interpretations of Article 19 of the EBF at the date of the facts of this hierarchical appeal and the calculations and grounds presented above, we are of the opinion that the value of the deduction to be considered in determining the taxable profit of the taxation period of 2003 as a result of the tax benefit arising from job creation amounts to €7,976,899.04 and not the amount of €9,093,089.45 initially requested by the claimant in the hierarchical appeal petition.

Thus, the value to be considered in field 234 of schedule 07 of the periodic income statement model 22 of IRC of the economic period of 2003 (deduction to be considered in determining taxable profit) regarding net job creation (Article 19 of the EBF) should be €7,976,899.04.

Based on the foregoing, it is proposed that partial relief be granted to this hierarchical appeal.

j) The Claimant proceeded, on 28-07-2005, to file the Income Statement – Form 22 of the IRC, relating to the fiscal year 2004, in which it calculated a taxable profit of €155,613,868.43, in which it considered the tax benefit relating to job creation for young people, provided for in Article 17 of the EBF, in the amount of €2,777,926.42;

k) The Claimant filed, on 27-07-2007, a gracious complaint (2004) based on error in self-assessment, by understanding that the total of the tax benefit relating to net job creation was not considered, under No. 1 of Article 17 of the EBF, in the wording given by Law No. 32-B/2002, of 30 December, expressing the understanding that the amount of €8,272,079.47 should have been considered for purposes of that benefit (document 6 of the request for arbitral decision and hierarchical appeal 2004);

l) The gracious complaint was partially granted by decision of 13-03-2009, issued by the Chief of the Administrative Division of the Finance Directorate of Lisbon, with the following grounds, in summary:

"In accordance with the reasoning set forth in various understandings/information issued by the Central Services, the absence of any means of proof that proves the conversion to indefinite-term contract of the company's employees hired on a fixed-term basis should lead to the rejection of the Gracious Complaint, which should be formalized in writing. No amendments to employment contracts signed by both parties were submitted to the proceedings, nor is there even a conversion communication of that contract to indefinite-term, signed by the employer and signed by the worker stating that he/she took knowledge of the conversion of the fixed-term contract to an indefinite-term contract.

1. Thus, in this case only indefinite-term employment contracts, concluded and reduced in written form, are capable of enjoying the benefit granted in Article 17 of the EBF. It is only lawful for the Taxable Subject to use the Tax Benefit measured at €3,342,117.19, resulting from net job creation. Given that in field 234 of the Income Statement model 22, the value of €2,777,926.42 had been stated, it is proposed that an increase of €564,190.77 be added to the amount previously considered";

m) The Claimant was notified of the partial rejection of the gracious complaint relating to the year 2004, on 20-03-2009;

n) The Claimant filed a hierarchical appeal against the decision rejecting the gracious complaint relating to the year 2004;

o) By decision of 09-05-2013, issued by the Deputy General Director of Taxes in substitution of the General Director of Taxes, the hierarchical appeal relating to the year 2004 was partially granted, with reference to the grounds set forth in Information No. 188/2013 of the Service Directorate for Corporate Income Tax, whose content is reproduced, which contains, among other things, the following:

1. Based on the various and numerous elements contained in the gracious complaint proceedings and in the hierarchical appeal proceedings, namely copies of the employment contracts concluded with workers considered for purposes of the tax benefit, identity cards, social security cards, model registration forms for social security of employees, tax identification cards, and all information contained in AT's information system, we verified, by sampling, the fulfillment of the legal requirements for the tax benefit in question, having concluded that:

a. Net job creation under No. 1 of Article 19 of the EBF occurs in two forms:

i. By hiring workers with indefinite-term contracts and age not exceeding 30 years;

ii. By conversion of the fixed-term employment contract into indefinite-term contract for workers aged not exceeding 30 years at the date of conversion;

b. In accordance with the elements submitted with the record, it appears to us that it is the company's policy to hire some workers on a part-time basis. In the taxation period being analyzed, 51 workers were in that arrangement.

c. In the absence of other means of proof that the worker with a fixed-term contract had knowledge of his/her effective status in the company on a certain date for purposes of verifying the date of job creation, we conducted some tests, namely comparing the date indicated by the appellant in the schedules submitted for the purpose of calculating net job creation with the date obtained by adding to the date on which the fixed-term contract ends the two legally possible renewals.

d. In the sample analyzed we found that the date of job creation for workers initially hired on a fixed-term basis coincides with the end of the two renewals.

e. The conversion of fixed-term employment contracts into indefinite-term employment contracts is not subject to written form, nor did the appellant present any communication to the worker regarding that conversion.

f. However, based on our analysis of the information contained in the income statements filed by the workers and schedules filed by the appellant with social security, we were able to verify, by sampling, that the workers in question remain in the company's service beyond the end of the two successive renewals of the fixed-term contract. In other words, it is possible, through these elements, to draw reasoning that allows us to conclude that the conversion of fixed-term contracts into indefinite-term contracts permits us to judge the existence of the indefinite-term employment contract.

g. With respect to the consideration for purposes of this tax benefit of workers with whom part-time employment contracts were concluded, this does not constitute a violation of the legally required requirements, nor of the higher-level sanctioned interpretations of Article 19 of the EBF. There is no legal impediment to their non-consideration in the calculation of the tax benefit related to job creation for young people provided that compliance with the other legal requirements is verified. However, also in these cases the limit value must be adjusted proportionally to the number of part-time working hours under penalty of being considered a tax benefit superior to what is provided in the law. Until 31 December 2002, the limit of monthly charges to be considered as tax cost (150%), per job, corresponds to 14 times the highest national minimum wage. This limit was changed effective 01 January 2003, with the wording given by No. 1 of Article 38 of Law No. 32-B/2002, of 30 December, which established as the annual limit of the increase per job the amount of 14 times the highest national minimum wage. As can be seen, the calculation of that limit has in its composition the value of the national minimum wage. This is legally determined for full-time/complete employment contracts, that is, employment contracts with a normal weekly working period that at that date is forty hours. Thus, for part-time employment contracts, this limit should be adjusted proportionally for purposes of determining the limit of the tax benefit.

h. With respect to confirmation of net job creation, we found that the worker … was wrongly considered in job creation for 1999 because based on our analysis of the evidence submitted by the appellant in the proceedings, we found that the employment contract proving this worker's professional situation is a fixed-term employment contract on a part-time basis with start on 06 December 2003. Thus, this worker does not constitute job creation in 1999 nor departure in 2003 for purposes of calculating net job creation. However, this situation has no impact on the calculation of the tax benefit related to job creation for young people regarding the taxation period of 2014.

i. Thus, we conclude that there was the creation of a net total of 1,513 jobs distributed as follows by taxation periods:

[Table reference]

j. Based on the detailed analysis of the calculation schedule of the amount of €8,272,079.47 relating to the tax benefit related to job creation for young people submitted by the appellant in the present petition, we found the existence of various errors, namely:

i. In workers for whom the beginning or end of eligibility conditions was verified in the taxation period of 2004 for purposes of calculating the tax benefit, the proportional adjustment of the tax benefit limit to the period of time in which the conditions occur was not correctly performed. This irregularity results in the claimant calculating a tax benefit superior to what is provided in the law. On this matter there are various clarifications from this Service Directorate in various information communications, namely in information no. 1385/09 with decision of the Deputy General Director dated 03-07-2009, in which it is concluded that regarding net job creation that occurred after entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, "in the fiscal year in which the beginning or end of eligibility conditions of the worker for the benefit occurs, the maximum annual increase limit must be adjusted proportionally to the time in which those conditions were maintained". Stipulating No. 3 of that provision establishes a temporal limit for the tax benefit, which is calculated based on the period of the contract's duration, the maximum increase referred to in No. 2 must also be based on the same period. Thus, and as stated in information No. 1109/2006 of this Service Directorate, which received publication on the Internet as binding information – doctrinal note (process 1498/2006 with decision of 26-09-2006 of the Director General), the tax benefit may reflect over 6 fiscal years, but the amount of the benefit corresponds to 5 years.

ii. We also found that the appellant did not correctly apply the limit established in No. 2 of Article 17 of the Tax Benefits Statute (EBE), currently Article 19, in the wording applicable to net job creation that occurred prior to 01 January 2003, resulting in a tax benefit superior to what is provided in the law. This matter was also the subject of various information communications that reflect the services' understanding that it is the charges already increased that cannot exceed 14 times the highest national minimum wage. Thus:

1. In situations where monthly charges actually incurred with the worker exceed the value of 14 times the highest national minimum wage (as is the case with worker no. … …), the employer has no right to any increase, contrary to the procedure adopted by the appellant which indicates a tax benefit of €28,267.99.

2. In situations where monthly charges actually incurred with the worker are below the value of 14 times the highest national minimum wage, the 50% increase of charges is accepted, but the total value of charges actually incurred with the increase value has as maximum limit the value corresponding to 14 times the highest national minimum wage. Thus, if the calculation of the 150% results in a value superior to 14 times the highest national minimum wage, then, for purposes of calculating the benefit, only this latter amount will be considered.

iii. It was also found that the appellant did not correctly apply the limit established in No. 2 of Article 17 of the Tax Benefits Statute (EBE) – currently Article 19, for purposes of calculating the tax benefit related to job creation in situations where the worker was hired by indefinite-term contract but on a part-time basis. Also in these cases the limit value must be adjusted proportionally to the number of part-time working hours under penalty of being considered a tax benefit superior to what is provided in the law.

k. We also found that the claimant proceeded to alter the workers considered for purposes of determining the tax benefit in question. When questioned about this fact, the claimant alleged that it proceeded to substitute workers, that is, for purposes of calculating the tax benefit of the taxation period being analyzed, it substituted workers who initially had been selected for purposes of net job creation in the taxation period in which they met the conditions of eligible entries and who had since left for reasons unrelated to the company, with other eligible entries in the same period but which for some reason were not initially selected.

l. However, on this matter there is information that reflects this services' understanding and which conclude that the worker substitution model advocated by the claimant lacks legal support, the latter having been specifically informed (Official Letter No. 17332 of 03-09-2010) of these conclusions following a request for clarification.

m. The concept of tax benefit shown in Article 2 of the EBF characterizes it as measures of exceptional character instituted to protect relevant extra-fiscal public interests that are superior to those of taxation itself, that is, the fiscal expenditures originated by the introduction of a tax benefit are more than compensated by the macro-economic benefit that it seeks to achieve. In the specific case of Article 19 of the EBF, the macro-economic action measure was directed at creating stable and lasting employment for population groups with greater employment difficulties (youth in the wording in force until the taxation period of 2006 and the long-term unemployed included from the taxation period of 2007). Therefore, when an entity, in the normal course of its activity, concludes employment contracts with a view to filling a certain number of jobs, this does not necessarily mean immediate access to the fiscal economy that Article 19 of the EBF makes available to taxpayers because all the requirements stipulated throughout that article must cumulatively be met.

n. Specifically, according to Article 19 of the EBF in the wording in force at the date of the facts, entities subject to IRC that concluded indefinite-term individual employment contracts with persons aged not more than 30 years, assessed on the date of the employment contract and provided that there was "net job creation", could access the tax benefit established in Article 19 of the EBF translated into the increase of charges with workers considered in that net job creation for purposes of determining the taxable result, within the quantitative and temporal limits (5 years from the beginning of the contract's duration) stipulated in that article.

o. "Net job creation" means the positive difference in a given taxation period between the number of eligible hirings under No. 1 of Article 19 of the EBF and the number of departures of workers who, on the date of their respective hiring, were in the same conditions, with the nominative selection of workers who comprise that net job creation being the absolute responsibility of entities subject to IRC.

p. It is therefore established that it is the date of hiring (or of conversion) to an indefinite-term contract that is relevant for purposes of determining net job creation in a given taxation period and that allows entities subject to IRC the increased deduction of charges incurred with workers who generated it and only those, over the five years following the beginning of that contract, within the quantitative limits legally expressed.

q. Thus, should any of the entries (workers) chosen "ab initio" by the entity subject to IRC for purposes of the tax benefit and under the conditions of Article 19 of the EBF cease the contractual relationship with the company, the corresponding tax benefit ceases to apply, given the absence of charges with that specific worker.

r. Based on the foregoing we conclude that the substitution procedure adopted by the claimant has no legal basis and contradicts the higher public interest here translated into a macro-economic action measure – incentive for creating stable and lasting employment for population groups with greater employment difficulties.

s. Based on the foregoing in the preceding items, and with the collaboration of the claimant who submitted the elements requested by this services, we proceeded to calculate the values to be considered as tax benefit in the taxation period of 2004 under Article 19 of the EBF with the wording in force at the date of the facts, regarding net job creation, by worker selected by the claimant, in accordance with the schedules attached to this information:

a. In Annex 1 (97 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBE) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis and whose eligibility conditions for the tax benefit in question did not cease until 28 February 2005 totaling €3,946,010.48.

b. In Annex II (54 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis when it was found that, until 28 February 2005, the worker's eligibility conditions for this tax benefit ceased (worker departure from the company or end of the benefit duration period) totaling €1,413,442.28.

c. In Annex III (7 pages) we present the calculation of the tax benefit regarding net job creation that occurred after the entry into force of the amendment made to No. 2 of Article 17 of the EBF – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a full-time basis, with the corresponding proportional adjustment of the maximum annual increase limit in cases where the beginning or end of the worker's eligibility conditions for the benefit occurred, totaling €1,253,359.67.

d. In Annex IV (5 pages) we present the calculation of the tax benefit regarding net job creation that occurred prior to the entry into force of the amendment made to No. 2 of Article 17 of the Tax Benefits Statute (EBF) – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a part-time basis totaling €109,822.44.

e. In Annex V (1 page) we present the calculation of the tax benefit regarding net job creation that occurred after the entry into force of the amendment made to No. 2 of Article 17 of the EBF – currently Article 19, through Law No. 32-B/2002, of 30 December, for workers hired by indefinite-term contract on a part-time basis totaling €42,221.89.

1. As we demonstrated in the calculations presented, the value to be considered as tax benefit in 2004 under Article 19 of the EBF regarding net job creation in the fiscal years 1999 to 2004 amounts to €6,764,856.75 and not €8,272,079.47 requested by the claimant:

[Table reference]

1. Thus, the value to be considered in field 234 of schedule 07 of the periodic income statement model 22 of IRC (deduction to be considered in determining taxable profit regarding the fiscal year 2004 relating to net job creation) should be €6,764,856.75 corresponding to:

i. €5,469,275.19 – Relating to net job creation between 01-03-1999 and 31-12-2002;

ii. €1,295,581.56 – Relating to net job creation between 01-01-2003 and 28-02-2005;

It should be noted that the amount of €3,342,117.19 has already been considered in that field of the Income Statement Model 22 as a result of the partial grant of the gracious complaint.

VI - CONCLUSION

In light of the higher-level sanctioned interpretations of Article 19 of the EBF at the date of the facts of this hierarchical appeal and the calculations and grounds presented above, we are of the opinion that the value of the deduction to be considered in determining the taxable profit of the fiscal year 2004 as a result of the tax benefit arising from job creation for young people amounts to €6,764,856.75, the value to be considered in field 234 of schedule 07 of the periodic income statement of IRC model 22, and not the amount of €8,272,079.47 requested by the claimant nor the amount of €3,342,117.19 calculated by the DF granting partial relief to the gracious complaint.

Based on the foregoing, it is proposed that partial relief be granted to this hierarchical appeal.

p) The Claimant hired the workers listed in documents no. 5 and 8, attached with the request for arbitral decision, whose contents are reproduced, who were in the conditions indicated therein;

q) The Tax and Customs Authority issued a Doctrinal Note regarding binding information, with the following content:

DOCTRINAL NOTE

Statute: Law No. 10/2009, of 10 March

Article: 13

Subject: Tax regime for support of investment made in 2009 (RFAI 2009)

Process: 2010 001800, PIV No. 818, with Decision of 2010-07-16, of the Director General

Content: Following a request for binding information regarding various doubts raised in the context of the condition relating to job creation provided by the relevant investment and its maintenance, in light of the provisions of letter f) of No. 3 of Article 2 of the RFAI 2009, approved by Article 13 of Law No. 10/2009, of 10 March, the following understanding was sanctioned:

1. Only the hiring of workers through the conclusion of indefinite-term (or permanent) employment contracts can be part of the concept of "job creation", including the hiring of new workers and workers already in the company but under a fixed-term contract;

2. This condition is considered fulfilled when, on the date of 31 December 2009 (considering that the taxpayer's taxation period coincides with the calendar year), there is a net increase in the number of workers relative to the average of the 12 preceding months;

3. This net increase can occur with the hiring of a single worker;

4. If the investment made in 2009 constitutes only additions to investments in progress, eligible under No. 5 of Article 2 of the statute that creates the RFAI 2009, job creation can only be assessed at the end of the taxation period in which the investment is completed, and it is not possible to carry out that assessment when the investment is only completed after the deadline provided for in No. 3 of Article 3 of the statute that creates the RFAI 2009.

5. Job creation is not prejudiced if the worker(s) eligible perform auxiliary or administrative functions, provided that these jobs have been provided by the investment itself;

6. Although the company may enjoy the entirety of the benefit in the taxation period that begins in 2009, it must maintain the jobs created until the end of the taxation period that begins in 2013.

7. The maintenance of the jobs created must be assessed at any moment during the mandatory maintenance period.

Furthermore, maintenance applies to the totality of jobs that were created as a result of the investment.

1. However, if a worker with an indefinite-term employment contract leaves the company for one of the legally provided causes that is not, obviously, the extinction of the job, and another worker is hired for the same job in the same conditions, the maintenance of the job is not put into question.

2. If the jobs created are not maintained until the end of the taxation period that begins in 2013, the final part of No. 2 of Article 14 of the EBF applies, and the tax benefit lapses.

r) The Tax and Customs Authority issued a Doctrinal Note regarding binding information, with the following content:

DOCTRINAL NOTE

Statute: Law No. 10/2009, of 10 March

Article: 13

Subject: Tax regime for support of investment made in 2009 (RFAI 2009)

Process: 2010 002853, PIV No. 1212, with understanding sanctioned by Decision of 2010-10-27, of the Director General

Content: The taxpayer comes to request binding information on the conditions for application of the RFAI 2009, designedly on the obligation to create and maintain jobs and on the form of realization of the tax benefit, having in account that in 2009 it was in a situation of insufficient tax collection and that in 2010 it came to be included in the tax perimeter of a group of companies taxed under the special tax treatment regime for groups of companies (RETGS). Thus:

A. Job Creation and Maintenance

A1. Temporal Limit

1. Only the hiring of workers through the conclusion of indefinite-term (or permanent) employment contracts can be part of the concept of "job creation", including the hiring of new workers and workers already in the company but under a fixed-term contract.

2. This condition is considered fulfilled when, on the date of 31 December 2009 (considering that the taxpayer's taxation period coincides with the calendar year), there is a net increase in the number of workers relative to the average of the 12 preceding months.

3. This net increase can occur with the hiring of a single worker.

4. Although the company could benefit from the entirety of the benefit in the taxation period that began in 2009, it would have to maintain the jobs created under the terms previously referred to until the end of the taxation period that begins in 2013.

A2. Hiring by Another Group Company

1. The granting of the tax benefit being dependent on the company verifying the requirements referred to in letters a) to f) of No. 3 of the statute that created the RFAI 2009, it is lawful to conclude that jobs must be created by the company itself and not by another company belonging to the group.

2. Moreover, the group was only constituted in 2010, whereby in the taxation period in which that statute entered into force and in which the right to enjoy the RFAI 2009 was born, the group did not even exist.

3. Therefore, all employment contracts that were not concluded between the claimant and the workers cannot be eligible for purposes of verifying the requirement "job creation".

A3. Partial Affectation to the Investment and Indirect Hiring

1. Even if the hiring were conducted by the claimant, it is concluded from the reasons pointed out in 5 that neither part-time hiring nor indirect job creation could be considered relevant for purposes of the provisions of letter f) of No. 3 of Article 2 of the statute that created the RFAI 2009.

2. In fact, if the hired collaborators (even if hired by the claimant itself) are only partially affected to the relevant investment or if they belong to another company providing services on a subcontracting basis, we cannot properly speak of "job creation".

A4. Worker Substitution with Maintenance of Jobs

1. Starting again from the assumption that jobs were created by the claimant itself and that it was the one concluding indefinite-term employment contracts with the collaborators, we could advance that the departure of a collaborator for one of the legally provided causes that would not be, obviously, the extinction of the job, and was hired (by the claimant itself) for the same job another collaborator in the same conditions, would not put into question the maintenance of the job.

B. Deduction to Tax Collection of the Tax Benefit

1. As to the question of whether (or not) the taxpayer can enjoy the tax benefit by having been included in 2010 in the tax perimeter of a group of companies taxed under the RETGS, the determinant fact is that the claimant, in the taxation period of 2009, did not yet belong to this group.

2. In fact, if in the taxation period in which the right to the tax benefit in question was born (RFAI 2009) the requirements were, among others, the possibility of deduction to the claimant's individual tax collection, it cannot now, by having integrated in 2010 a group covered by RETGS, take advantage, regarding that benefit, of the regime it intends, that is, a deduction to the group's tax collection without taking into account the individual tax collection it would have calculated if it were not integrated into that group.

3. Although the statute is silent in the special case of RETGS, the claimant's specific case must be analyzed in light of the requirements existing at the date in which the right to the RFAI 2009 was born and not to the circumstances that arose later.

4. Therefore, the taxpayer can still take advantage of the benefit in the liquidations that come to be made in the group in the four following taxation periods (2010 to 2013), but the deduction to tax collection to be made must necessarily have as its maximum limit the individual tax collection that it itself would have calculated if it had not been integrated into the group in 2010.

2.2. Unproven Facts

There are no facts relevant to the assessment of the merits of the case that have not been proven.

2.3. Grounds for Establishing Factual Matters

The proven facts are based on the documents indicated and on the hierarchical appeals proceedings attached with the response, as well as on statements by the Claimant whose correspondence to reality is not questioned.

3. Legal Matters

3.1. Framework

At issue is a correction to the deduction of taxable profit relating to the tax benefit for job creation for young people provided for in Article 17 of the EBF, regarding the IRC taxation periods of 2003 and 2004, fixed in the amount of €7,976,899.04 and €6,764,856.75 respectively. The Claimant argues that these amounts should be €9,093,089.45 and €8,272,079.42 respectively.

This correction has as a consequence the assessment of IRC in the fiscal year 2003 and 2004 in the amount of €775,059.36.

The problem brought to the record thus centers on the interpretation of Article 17 of the EBF, titled "Job creation for young people", which influences the amount of tax on the income of legal entities (IRC).

Although there is at issue a deduction from the taxable income of the fiscal year 2003 and 2004, that deduction, in accordance with the proven facts, is based on net employment creation for young people that occurred between 01-03-1998 and 28-02-2004 (fiscal year 2003) and 01-03-1999 and 28-02-2005 (fiscal year 2004), a period of five years, since the Claimant adopts a taxation period comprised between 1 March and 28 February: this tax benefit, translated into a 50% increase of charges, materialized itself "...during a period of five years from the beginning of the employment contract's duration" (see Article 17, No. 3 of the EBF).

3.2. Applicable Law

The applicable law is, in principle, that which was in force on the date of the constitution of the tax benefit (Article 11 of the EBF in its original wording, maintained by Decree-Law No. 198/2001, of 3 July, current Article 12). That is, it is the law in force on the date of the fiscally relevant facts – which, in this case, was the job creation under the conditions legally provided for in No. 1 of that same Article 17 of the EBF.

On the other hand, pursuant to Article 10, No. 1, of the EBF in its original wording, maintained by Decree-Law No. 198/2001, of 3 July, current Article 11, No. 1, "norms that alter conventional, conditional or temporary tax benefits are not applicable to taxpayers who already enjoy the right to that tax benefit, to the extent that they prejudice them, unless the law provides otherwise".

There is therefore a need to pay attention to the legislative evolution that then occurred.

The first norm that must be the subject of interpretation in order to make a decision in the case in question was introduced into the Portuguese legal system through the addition, made by Law No. 72/98, of 3 November, of Article 48-A to the Tax Benefits Statute.

The initial wording of the above-mentioned Article 48-A provided the following:

Article 48-A

Job Creation for Young People

1 — For purposes of tax on the income of legal entities (IRC), the charges corresponding to net job creation for workers hired by indefinite-term contract with age not exceeding 30 years are charged at a cost value of 150%.

2 — For purposes of the preceding paragraph, the maximum amount of monthly charges per job is 14 times the national minimum wage.

3 — The increase referred to in No. 1 shall take place during a period of five years from the beginning of the employment contract's validity.

With the entry into force of Law No. 3-B/2000, of 4 April, No. 3 of Article 48-A of the EBF took on the following wording:

Article 48-A

Job Creation for Young People

1 — For purposes of tax on the income of legal entities (IRC), the charges corresponding to net job creation for workers hired by indefinite-term contract with age not exceeding 30 years are charged at a cost value of 150%.

2 — For purposes of the preceding paragraph, the maximum amount of monthly charges per job is 14 times the national minimum wage.

3 — The increase referred to in No. 1 shall take place in a period of 5 years from the beginning of the employment contract's validity.

Later, the Tax Benefits Statute underwent a renumbering through Decree-Law No. 198/2001, of 3 July, and Article 48-A became Article 17, with the following wording:

Article 17

Job Creation for Young People

1 — For purposes of tax on the income of legal entities (IRC), the charges corresponding to net job creation for workers hired by indefinite-term contract with age not exceeding 30 years are charged at a cost value of 150%.

2 — For purposes of the preceding paragraph, the maximum amount of monthly charges per job is 14 times the highest national minimum wage.

3 — The increase referred to in No. 1 shall take place during a period of five years from the beginning of the employment contract's validity.

Law No. 32-B/2002, of 30 December gave a new wording to No. 2 of Article 17, whereby, at the date the facts occurred that are the subject of this proceedings, it was as follows:

Article 17

Job Creation for Young People

1 — For purposes of tax on the income of legal entities (IRC), the charges corresponding to net job creation for workers hired by indefinite-term contract with age not exceeding 30 years are charged at a cost value of 150%.

2 — For purposes of the preceding paragraph, the maximum amount of the annual increase per job is 14 times the highest national minimum wage.

3 — The increase referred to in No. 1 shall take place during a period of five years from the beginning of the employment contract's validity.

As can be seen, the wording changed in 2002 in a detail that is significant: the maximum limit of 14 times the highest national minimum wage ceased to be attributed to the value of monthly charges and came to be attributed to the value of the annual increase – with the consequent restriction of the tax benefit in question. That is, with Law No. 32-B/2002, the tax benefit was reduced, as the value of 14 times the national minimum wage came to be the maximum limit of the annual increase, instead of allowing a 50% monthly increase of that value, as resulted from the original wording.

Given that that value of "monthly charges" initially set forth in No. 2 cannot fail to refer, by comparison with No. 1 of the same provision, to the value of "charges corresponding to net job creation" eligible for purposes of the tax benefit in question – a tax benefit which is materialized in the subsequent 50% increase of those charges for fiscal purposes.

Faced with the legislative changes, we observe that in the period between 01-03-1998 and 31-12-2002 the wording in force prior to Law No. 32-B/2002 was in effect – specifically the wording of Article 48-A added by Law No. 72/98, of 3 November and, from 2001 onwards, of Article 17 of Decree-Law No. 198/2001, of 3 July – and, in the period between 01-01-2003 and 28-02-2005, the wording of Law No. 32-B/2002 was in effect.

However, income tax is a type of periodic tax, of annual repetition (Article 8 of the CIRC), whereby the respective taxable event also has the same temporal expression, materializing itself in the uninterrupted course during the period established by law, generally from 1 January to 31 December, of the elements that the type of tax deemed relevant as its constitutively conforming elements.

In fact, that Article 8 expressly provides that the event that generates the tax, with respect to IRC, "is deemed to have occurred on the last day of the taxation period" (No. 7 of Article 8 of the CIRC, in the wording of Decree-Law No. 198/2001, to which corresponds No. 9 from the wording of Law No. 55-B/2004, of 30 December).

This rule also applies when the taxpayer "adopts a different annual tax period from the one established", as set out in No. 2 of that same article. It is in this situation provided for in No. 2 that the Claimant finds itself, adopting a taxation period comprised between 1 March and 28 February.

According to No. 1 of Article 12 of the LGT, the general rule on the application of law in time in tax matters, "tax norms apply to facts occurring after their entry into force, and no retroactive taxes can be created".

It is further provided in Article 11 of the EBF (current Article 12), titled "Constitution of the right to tax benefits", that "the right to tax benefits must be dated to the date of verification of the respective requirements".

In this context, we conclude that what is relevant for purposes of defining the taxation situation within this type of tax, including the negative elements that influence the constitution of the tax obligation and the expression of its amount – a category where the tax benefit in question is included – is the personal situation existing on the last day of that period, which in this case corresponds to 28 February.

According to this perspective, the right to see the tax benefits in question recognized will exist only when the complete course of the taxable event has been completed and the verification, within it, of the requirements provided by law as its constitutive elements.

This conclusion is required by Article 11 of the EBF (current Article 12), according to which we noted, the "right to tax benefits must be dated to the date of verification of the respective requirements" and which, according to what results from the legal provisions that institute them, that dating is made in relation to the obtaining of income by those who are in the conditions provided for therein.

In this manner, constituting tax benefits a negative delimitation of the constitutive force of taxable events, the reflection that the same reach will necessarily be that which results from the legal regime in force on the date in which, in accordance with the law that institutes them, the verification of its requirements must be dated. Thus, what is relevant is the law that is in force on the date of the last day of the period of time to which the tax relates.

Based on the foregoing, the applicable law in the period between 01-03-1998 and 28-02-2002 is that of the wording prior to Law No. 32-B/2002 – specifically the wording of Article 48-A contained in Law No. 72/98, of 3 November and, from 2001 onwards, of Article 17 of Decree-Law No. 198/2001, of 3 July – and in the period between 01-03-2002 and 28-02-2005, that of the wording of Law No. 32-B/2002.

But, the right to the benefit being constituted under the old law, being the regime of this Law less favorable, it can only apply to jobs whose net creation was realized after its entry into force, because by virtue of the provision of Article 10, No. 1, of the EBF (current Article 11, No. 1), "norms that alter conventional, conditional or temporary tax benefits are not applicable to taxpayers who already enjoy the right to that tax benefit, to the extent that they prejudice them, unless the law provides otherwise", and in the case in question, one is dealing with a temporary tax benefit and there is no norm that provides to the contrary.

Thus, to the fiscal years 2003 and 2004 the wording of Law No. 32-B/2002 applies, but only as to the tax benefit relating to jobs whose net creation occurred after the entry into force of this Law.

3.3. "Net Job Creation"

With the renumbering made by Law No. 198/2001, of 3 July, Article 48-A added to the Tax Benefits Statute by Law No. 72/98, of 3 November, became Article 17 of the EBF.

This question is immediately concerned with the interpretation of the expression "net job creation".

In accordance with the provisions of Articles 11, Nos. 1 and 2, of the LGT, "in determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed" and "whenever tax norms employ terms peculiar to other branches of law, the same must be interpreted in the same meaning as that which they have therein, unless something else flows directly from the law".

The concept of "net job creation" is not peculiar to any branch of law and therefore cannot be applied in tax matters, under No. 2 of that Article 11, by defining that concept given in another statute for non-tax purposes, by the mere fact that it is provided there.

Thus, the expression "net job creation for workers hired by indefinite-term contract with age not exceeding 30 years" must be interpreted, by virtue of the provision in No. 1 of that Article 11, in light of the general criteria for interpreting laws set forth in Article 9 of the Civil Code.

Among the interpretative elements to be taken into account in the interpretation are the consideration of the unity of the legal system and the circumstances in which the law was drawn up, referred to in No. 1 of that Article 9.

The principle of the unity of the legal system requires the legislative consecration of coherent solutions and the consideration of the circumstances in which the law was drawn up imposes that attention be paid to the legislative evolution that preceded the norm being interpreted.

The aforementioned Article 48-A of the EBF created incentive for job creation for young people, whereby there should be taken into account the legislative policy of incentives for that purpose that was being followed.

The Preamble of Decree-Law No. 34/96, of 18 April, clarifies the legislative evolution that was followed regarding incentives for "job creation for young people" (the expression used in the title of that Article 48-A).

That Preamble states the following:

"Decree-Law No. 445/80, of 4 October (employment policy framework law), establishes, as one of the fundamental orientations of active employment measures, that financial support only contemplates net job creation, resulting from the realization of an investment project generating new jobs.

Decree-Law No. 89/95, of 6 May, which instituted a specific regime of incentives for hiring of young people seeking first employment and long-term unemployed, came to alter, in non-conformity with that fundamental principle, all the practice followed concerning the granting of hiring incentives, based on the essential requirement of net employment creation.

That alteration resulted in a perversion of the objectives of employment policy. In fact, Decree-Law No. 89/95, by decoupling net job creation from the existence of an investment project and by not requiring the creation of new jobs, but only the hiring of workers, led, in many concrete situations, not to the effective reduction of unemployment, but only to the substitution, perhaps even fictitious, of workers removed before the submission of applications for financial support offered by the law.

Hence the inefficiency of the system, involving substantial financial waste and significant consequences in promoting precarious employment.

It is therefore essential to end the validity of the regime of those financial support, contained in Decree-Law No. 89/95.

Having, however, in account that young candidates for first employment and long-term unemployed are specific groups of society particularly affected by unemployment and with greater difficulties in insertion or reinsertion in active life due to reasons of age, inexperience or lack of qualifications, the institution is necessary, in efficient terms, of an active employment measure in favor of those groups, provided that hiring by companies is inserted in an investment project generating new jobs. The present statute has the objective of regulating financial support for hiring candidates for employment belonging to the referred groups, under the condition that, with it, one is really creating new jobs".

Implementing the legislative purpose announced in this Preamble, Article 7 of this Decree-Law No. 34/96 came to clarify:

Article 7

Net Job Creation

1 – Net job creation is considered to be the effective increase in the number of workers linked to the employer entity by indefinite-term contract, resulting in particular from a new investment project.

2 – The assessment of job creation is made having in account the global number of workers in the service of the employer entity, regardless of the nature of the contractual relationship, in the month of January of the preceding calendar year and in the month preceding that of the submission of the application.

By this No. 2 it is seen, thus, that the legislator of Decree-Law No. 34/96 understood that incentives were to be granted only when there was an increase in the global number of workers linked to the employer entity by indefinite-term contract, whatever their age, between the month of January of the preceding calendar year and the month preceding that of the submission of the application.

On the other hand, as is declared in the referred Preamble, it sought to remove the regime of "net employment creation" that was adopted in Decree-Law No. 89/95, in which incentives were granted when "the hiring of workers with indefinite-term contracts exceeded, in a percentage equal to or exceeding 10%, the number of workers in the same condition existing in the company's personnel chart in the last month of the immediately preceding year" (Article 17, No. 2, of that statute), regardless of whether or not the global number of workers of the company had increased in the same period.

Faced with this legislative evolution and the legislative judgment expressly formulated in the Preamble of Decree-Law No. 34/96 on the inadvisability of the solution adopted in Decree-Law No. 89/95, the concept of "net job creation" used in Article 48-A of the EBF is evidently similar to that used in that first statute and not to that used in the second.

In truth, from the outset, the literal content of the expression "net job creation for workers hired by indefinite-term contract with age not exceeding 30 years" used in Article 48-A is exactly the same as that which had been used in Decree-Law No. 34/96, and is different from that used in Decree-Law No. 89/95, which was "net employment creation". The use of the expression used in Decree-Law No. 34/96, rather than that used in Decree-Law No. 89/95 suggests that it was intended, in matters of tax incentives, to apply a regime similar to that adopted for financial incentives, designedly in a point in which it diverged deliberately from the regime of Decree-Law No. 89/95 which was, as is referred to in the cited preamble of that statute, to "not require the creation of new jobs, but only the hiring of workers".

On the other hand, it would be incongruous if, after the legislator had come to the conclusion that it was inappropriate the regime of tax incentives provided for in Decree-Law No. 89/95, by giving relevance to the hiring of workers with indefinite-term contracts regardless of the increase in the global number of workers in the company's service, it came to establish it in the matter of tax incentives when one is dealing with a matter with manifest affinity.

For this reason, pointing the literal content of Article 48-A in the direction that it was intended to adopt a regime identical to that provided for in Decree-Law No. 34/96 as to the concept of "net job creation" and being the adoption of a similar regime, as to the requirements for the granting of incentives, the only regime that ensures the evaluative coherence of the legal system, postulated by the principle of the unity of the legal system, it must be concluded that only when there is an increase in the global number of workers of the company in a fiscal year is there room for the application of the tax benefit provided for therein.

3.4. Adjustment of the Tax Benefit Regarding Part-time Workers

In both hierarchical appeal decisions the Tax and Customs Authority adopted the understanding that the application of the tax benefit provided for in Article 17 of the EBF to workers hired on a part-time basis must be adjusted proportionally.

The adjustments resulted in, in the year 2003, a difference of minus €10,319.66 between the increase that the Claimant seeks, which is €124,714.75, and that the Tax and Customs Authority applied, which is €114,395.09 (document no. 5, attached with the request for arbitral decision, whose content is reproduced).

In the year 2004, the Claimant seeks, as to this point, an increase of €187,924.52 and the Tax and Customs Authority argues that it should be €152,044.33, the difference being minus €35,880.19 (document no. 8 attached with the request for arbitral decision, whose content is reproduced).

The question that thus arises is whether, in cases of net job creation on a part-time basis, the maximum increase should be adjusted proportionally to the number of part-time working hours.

In this regard, the Tax and Customs Authority based in particular its hierarchical appeal decisions by stating "there is no legal impediment to their non-consideration in the calculation of the tax benefit related to job creation for young people provided that compliance with the other legal requirements is verified. However, also in these cases the limit value must be adjusted proportionally to the number of part-time working hours under penalty of being considered a tax benefit superior to what is provided in the law".

The Tax and Customs Authority interprets the law in this manner by considering that since the calculation of the limit is associated with the value of the national minimum wage guaranteed, one must consider as normal a period of 40 weekly working hours for purposes of Article 17 of the EBF, because the minimum wage is "legally determined for full-time/complete employment contracts, that is, employment contracts" with that duration.

No. 1 of Article 17 of the EBF establishes that "the charges corresponding to net job creation for workers hired by indefinite-term contract with age not exceeding 30 years are charged at a cost value of 150%". While No. 2 of Article 17 of the EBF determines that "(…) the maximum amount of the annual increase per job is 14 times the highest national minimum wage.

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