Process: 227/2017-T

Date: January 5, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Decision 227/2017-T addresses a critical IRS taxation issue concerning employment termination compensation in the Portuguese banking sector, specifically the calculation of seniority (antiguidade) for tax exclusion purposes under Article 2(4)(b) of the IRS Code. The taxpayer worked continuously in banking from September 1992 to December 2013 across multiple institutions (D, E, F, and C banks), accumulating 22 years of total service. However, his final employer, Bank C, only employed him for 7.5 years from July 2006. Upon mutual termination of his employment contract in 2013, he received compensation of €219,657.50. The Tax Authority issued an additional IRS assessment of €73,779.85, arguing that the tax exclusion should only apply to the 7.5 years of seniority with Bank C as the entity owing the compensation. The taxpayer challenged this assessment through CAAD arbitration, arguing that the banking sector's Collective Labor Agreement (ACT) and his termination agreement recognized his full 22-year seniority for compensation purposes, and this should equally apply to tax exclusion calculations. The case raises fundamental questions about the interpretation of 'seniority' in Article 2(4)(b) of the IRS Code—whether it refers exclusively to service time with the final employer or encompasses total accumulated service in the sector when recognized by collective agreements and individual contracts. This arbitration highlights the tension between literal tax code interpretation and labor law principles, particularly regarding collective bargaining agreements in specialized sectors. The outcome has significant implications for banking sector employees with multi-employer career histories and establishes important precedent for calculating tax-exempt portions of severance compensation.

Full Decision

ARBITRAL DECISION

The Arbitrators, Counselor Fernanda Maçãs (Presiding Arbitrator), Dr. Mariana Vargas and Dr. Amândio Silva (Member Arbitrators), appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to constitute the Collective Arbitration Tribunal established on 2 June 2017, agree as follows:

REPORT

On 30 March 2017, A…, taxpayer with Tax Identification Number… and his wife, B…, with Tax Identification Number…, residents at Avenue…, no.…, …, …-…, in Lisbon (hereinafter referred to as Applicants and, individually, as Applicant), came, under the provisions of articles 2, no. 1, paragraph a) and 10, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT), to request the constitution of a Collective Arbitration Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, with a view to the declaration of illegality and consequent annulment of the tax assessment act for Personal Income Tax no. 2017…, of 13 January 2017, relating to income for the year 2013, in the amount of € 73,779.85, the economic value which they assign to the claim.

Furthermore, the Applicants request that the Respondent be condemned to restitution of the amount of the assessment wrongfully paid, plus compensatory interest in accordance with the law.

Summary of the Parties' Positions

Of the Applicants:

As grounds for the request to annul the additional Personal Income Tax assessment for the year 2013, the Applicants invoke the following factual and legal reasons:

The contested assessment resulted from a correction to the income declared for the year 2013, by adding the amount of € 122,657.27, relating to the portion of the indemnity paid by C… to the Applicant upon the termination of his employment contract.

The employment contract concluded between C… and the Applicant on 3 July 2006 provided for the seniority of the worker by counting his years of service in banking entities indicated in clause 17 of the Collective Labor Agreement (ACT) for the banking sector, from 2 September 1992, corrected by the addendum of 8 August 2006 to 7 September 1992.

The Applicant was successively integrated into the Permanent Personnel Establishment of D…, E…, F… and C…, banking entities with operations in Portugal, from September 1992 to 31 December 2013, with a seniority of 22 years.

Upon the termination of the employment contract with C…, by agreed termination between the parties on 25 June 2013, effective 31 December of the same year, an overall indemnity of € 219,657.50 was paid to the Applicant.

The Applicant submits that the AT, contrary to the jurisprudence of the Superior Courts and of CAAD, interprets the exclusion from taxation referred to in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, as regards workers in the banking sector, as referring only to the number of years or fraction of seniority or exercise of functions with the last entity owing the income.

An interpretation which violates the Collective Labor Agreement for the banking sector, as well as the principle of contractual freedom underlying the agreement concluded between the Applicant and the employer entity upon the termination of the employment contract.

The Collective Labor Agreement is a source of labour law, as results from articles 1 and 2 of the Labor Code.

Although C… made a reservation to the effect that "The counting of time for any purposes arising from the ACT shall count only the time of service rendered to the signatory institutions themselves of this reservation, possibly increased by time of service rendered to other institutions or companies, but, in this case, only if this results from individual agreement between those and the worker", the Applicant argues that this reservation does not apply to the exclusion of the concept of seniority in the case at hand.

That is, the Applicant's seniority between September 1992 and December 2013 was safeguarded, for purposes of the compensation regime, in the agreement terminating the employment contract, and cannot therefore be disregarded for tax purposes.

Accordingly, deeming the contested assessment illegal, due to a factual and legal error by the AT regarding the assumptions of taxation, the Applicants request its annulment.

Of the Respondent:

Notified in accordance with the terms and for the purposes provided in article 17 of the RJAT, the AT presented a reply and attached the administrative file, in which it defended the legality and maintenance of the assessment act subject to the present arbitration request, on the following grounds:

The Applicant worked at Bank C… between 03/07/2006 and 31/12/2013, with clause 7 of the employment contract stipulating that "The Bank guarantees to the Second Party the seniority arising from the provision of service to other Credit Institutions, from 02/09/1992, documentarily proven, only for (…) the purposes of the Pension Fund of C…, (…), being the amount of the retirement or invalidity pension calculated in accordance with the regime provided for in the ACTV of bankers", and the portion of the pension corresponding to the time of service rendered by the Second Party to the First Party shall be calculated in accordance with Clause 6 of the Pension Plan of C…", with previous time of service to other Credit Institutions not being relevant for purposes of seniority.

No. 2 of clause 15 of the agreement for termination of the Applicant's employment contract with Bank C… established that "Taking into account the applicable terms of Clause 17 of the ACT of the Banking Sector (…) and given the interpretation sustained in the judgments of the Central Administrative Court South (…) both parties recognize (…) [t]he seniority of the Employee by counting his time of service in banking entities indicated in the aforementioned clause of the ACT, dated 07/09/1992, for the purposes of the provision in paragraph b) of no. 4 of art. 2 of the tax on the income of Natural Persons, in the wording given to it by art. 108 of Law no. 64-B/2011, of 30 December".

In 2013, clause 2 of the ACT of the banking sector established its applicability throughout the national territory, within the scope of the banking sector, binding Credit Institutions and Financial Companies that subscribed to it, as well as all workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands, represented by the signatory FEBASE – Federation of the Financial Sector.

However, Bank C… subscribed to the ACT with the reservation that for the purposes arising from it, it would count only the time of service rendered to its own Institutions, possibly increased by the time of service rendered to other institutions or other entities or companies, provided that this results from individual agreement between those and the worker.

The AT understands that it results from the literal wording of no. 4 of article 2, that the negative delimitation of the incidence provided there is that which refers to seniority with the entity owing the compensation for termination of the employment contract, and that the seniority in previous employer entities should not be considered.

Accordingly, it was based on seniority of 7.5 years (time of service rendered by the Applicant to Bank C…) that the indemnity amount excluded from Personal Income Tax was calculated, this being the time of service rendered to the last employer entity, upon which the duty to pay the compensation fell, in the capacity of the employer entity, as defined by no. 10 of article 2 of the Personal Income Tax Code.

Even if it were understood that the concept of seniority could emerge from the individual employment contract, through the recognition by C… of the seniority arising from the provision of services to other credit institutions, for all purposes, including tax purposes, the individual employment contract did not recognize to the Applicant the right to seniority arising from the provision of services in other credit institutions, for purposes of economic compensation for contract termination.

Neither can it be said that in the agreement terminating the employment contract the parties recognized the seniority dating from 07/09/1992, since the principle of contractual freedom does not have the power to derogate tax law.

All the more so because the concept of seniority that includes the provision of services in other employer entities, as results from clause 15 of the termination agreement, cannot be considered an addendum to the individual employment contract, since it does not aim to establish conditions relating to the execution of the labor relationship, but rather to its termination.

By Arbitral Order dated 8 July 2017, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, and it was determined that the case proceed with written pleadings within a period of fifteen consecutive days, with 2 December 2017 being set as the final deadline for issuance of the arbitral decision, and the Applicants being warned that, by that date, they should proceed with payment of the subsequent arbitration fee. That deadline was extended, by order of 28 November 2017, to 2 February 2018.

In their pleadings, the Parties reiterated the positions assumed in the initial procedural documents.

DISMISSAL OF DEFECTS

The Collective Arbitration Tribunal is competent and was regularly constituted on 2 June 2017, in accordance with articles 2, no. 1, paragraph a), 5 and 6, all of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The case does not suffer from defects that would invalidate it.

No exceptions were raised that need to be considered.

III. REASONING

III.1 FACTUAL MATTERS

1.1. Facts Considered Proven

The Applicant A… was an employee of Bank C… between 3 July 2006 and 31 December 2013;

In clause 7 of the respective employment contract, it was stipulated that:

"The Bank guarantees to the Second Party the seniority arising from the provision of service to other credit institutions, from 02/09/1992, documentarily proven only for the following purposes:

For purposes of the Pension Fund of C…, The First Party shall take into account the time of service rendered to other credit institutions, being the amount of the retirement or presumed invalidity pension calculated in accordance with the regime provided for in the ACTV of bankers.

The portion of the pension corresponding to the time of service rendered by the Second Party to the First Party shall be calculated in accordance with Clause 6 of the Pension Plan of C….

Time of services rendered to other Credit Institutions prior to the signing of this contract shall also not be taken into account for calculating the number of seniorities."

On 25 June 2013, the now Applicant and the Bank signed an agreement terminating the employment contract which stipulates an indemnity of € 219,657.50, relating to a seniority of 22 years, including, for this purpose, the time of service previously rendered to other banking entities (doc 7 attached by the Applicants).

By Official Notice no.…, of 25 June 2016, the Applicant was notified to exercise the right to a hearing by the Tax and Customs Authority regarding the omission in Annex A of the Model 3 declaration of the amount of € 122,657.24, relating to the component of the indemnity subject to taxation, as it was considered that only the seniority relates to the time of service rendered at the Bank.

The now Applicant was notified of the additional Personal Income Tax assessment no. 2017/….

B. Facts Considered Not Proven

There are no material facts not proven that are relevant to the proper decision of the case.

Reasoning of the Factual Matters

With respect to factual matters, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish between proven and unproven matters (see art. 123, no. 2, of the Tax Procedure Code (CPPT) and article 607, no. 3 of the Civil Procedure Code (CPC), applicable by virtue of article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are selected and delineated based on their legal relevance, which is established having regard to the various plausible solutions to the question(s) of Law (see previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the RJAT).

Accordingly, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative file attached to the proceedings, the facts listed above were considered proven as relevant to the decision.

III.2 ON THE LAW

The Question to Be Decided

Pursuant to no. 4 of article 2 of the Personal Income Tax Code, "When, in any manner, the contracts underlying the situations referred to in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provision in paragraph d) of the same number, with regard to the benefits that continue to be owed even if the employment contract does not subsist, or when the cessation of the functions of public manager, administrator or manager of a legal person, as well as of representative of a permanent establishment of a non-resident entity occurs, the amounts earned in any capacity remain always subject to taxation:

(...)

In the part exceeding the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions with the entity owing the income, in other cases, unless within the following 24 months a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts shall be taxed in full."

The vexata quaestio is, therefore, the exact meaning of that rule, more specifically regarding the passage "number of years or fraction of seniority or exercise of functions with the same entity owing the income, in other cases".

A literal interpretation, in light of the general principles of interpretation to which article 11, no. 1, of the General Tax Law (LGT) refers, seems clearly to indicate – under penalty of the expression "in other cases" losing meaning – that the legislature considered two hypotheses for calculating the compensation excluded from taxation: (i) number of years or fraction of seniority or (ii) number of years or fraction of exercise of functions with the entity owing the income, with whichever is more favorable to the taxpayer applying.

We therefore assume that the legislature knew how to "express its thought in adequate terms" (article 9, no. 3, of the Civil Code), and let us analyze next the exact meaning or concept of "seniority" provided for in article 2, no. 4 of the CIRS.

For this, it is necessary to have regard to the general principles of interpretation of tax law but, in this case, in particular to the provision in no. 2 of article 11 of the LGT: (...) Whenever, in tax rules, terms proper to other branches of law are used, they must be interpreted in the same sense as that which they have there, unless something else follows directly from the law."

As is stated in the CAAD Decision relating to Proc. no. 616/2015-T, "... there is no doubt that "seniority" is a concept originating in Labor Law, and there is also no doubt that the tax legislator did not give this concept its own definition. Thus, this concept must be interpreted in the same sense as that which it has in labor law, insofar as the tax legislator did not define it for purposes of taxation under Personal Income Tax, it not following, we must insist, expressly from tax law any different meaning.

Now, although it is true that we cannot extract from the Labor Code a definition of the concept of seniority, we follow the understanding of the judgment of the Central Administrative Court South of 21-09-2010, delivered in proceedings no. 03748/10, that article 11, no. 2 of the LGT "orders reference to be made to the terms of other branches of law, and not only to the rules of other laws". The same judgment states that although the current Labor Code does not itself regulate the concept of worker seniority, it places, in the first place, collective regulation instruments, such as the sources of law from which, in the first line, the rules applicable to the employment contract emerge, also defining in its article 2 the forms these may take (collective contracts, collective agreements and company agreements).

Thus, as the Central Administrative Court South well understood in the judgment of 12-03-2013, delivered in the course of proceedings no. 591/12, it is today unanimous in labor law that there are three sources that can establish seniority: the Law, the Individual Employment Contract and the Instruments of Collective Labor Regulation.

Since a concept of seniority cannot be extracted from the Law, that is, from the Labor Code, we will have to analyze, in the specific case, the Individual Employment Contract concluded or the Collective Labor Agreement of the banking sector."

The ACT applicable to the banking sector determines that the worker's seniority, for all purposes provided for in the Agreement, shall be determined by counting all years of service rendered in Portugal in Credit Institutions with operations in Portuguese territory (article 17).

It also follows from article 2 of the ACT that the same only binds Credit Institutions and Financial Companies that subscribe to it and workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands.

However, the Respondent's employer entity made a reservation in the application of the ACT, that "In the counting of time of service for any purposes arising from the ACT, shall count only the time of service rendered to the signatory institutions themselves of this reservation, possibly increased by the time of service rendered to other institutions signatory to this reservation, possibly increased by time of service rendered to other institutions or companies, but, in this case, only if this results from individual agreement between those and the worker."

In this manner, having regard to the principle of affiliation provided for in article 496 of the Labor Code, article 17 of the ACT does not apply directly to the present labor relationship, as it was expressly reserved that the right provided here is recognized only by the employment contract concluded with the worker.

As proven, clause 7 of the Employment Contract establishes that the employer entity guaranteed to the Applicant the seniority arising from the provision of service to other credit institutions, from the date contained in the declaration of seniority issued by the previous employer but only for certain purposes:

"The Bank guarantees to the Second Party the seniority arising from the provision of service to other credit institutions, from 02/09/1992, documentarily proven only for the following purposes:

For purposes of the Pension Fund of C…, The First Party shall take into account the time of service rendered to other credit institutions, being the amount of the retirement or presumed invalidity pension calculated in accordance with the regime provided for in the ACTV of bankers.

The portion of the pension corresponding to the time of service rendered by the Second Party to the First Party shall be calculated in accordance with Clause 6 of the Pension Plan of C….

Time of services rendered to other Credit Institutions prior to the signing of this contract shall also not be taken into account for calculating the number of seniorities."

From the foregoing it follows that the concept of seniority including service at other employer entities is recognized neither in the applicable ACT nor in the employment contract.

Thus, being the concept of seniority, which includes all years of service rendered in Portugal in Credit Institutions with operations in Portuguese territory, did not bind the parties.

The Applicants argue that account should be taken of the seniority resulting from clause 10 of the Termination Agreement.

However, the termination agreement does not form part of the employment contract in such a way as to alter it. The termination agreement is not a source of labor law (article 1 of the Labor Code). The termination agreement is a contractual instrument with a purpose distinct from the employment contract. Indeed, unlike that instrument, it does not intend to establish the conditions, rights and duties of the parties to apply during a labor relationship. On the contrary, its objective is to regulate the conditions relating to its termination, with the freedom to, in general terms, establish more favorable conditions to bring about that termination.

Such an agreement cannot, in this manner, be considered a source of labor law, within the terms and for the purposes of article 1 of the Labor Code.

In conclusion, as the Applicant's seniority in previous employer entities results neither from the Individual Employment Contract nor from the ACT, the only seniority that should be considered for calculating the indemnity for termination of the employment contract shall be the Applicant's seniority with that employer entity.

As is stated in the Supreme Administrative Court judgment of 21 January 2017, relating to Proc. 0666/16, "...there is no need to call into question the interpretation of the provision in no. 4 of art. 2 of the CIRS, since, concretely, the seniority resulting from service in other employer entities was not even recognized to the Applicant: neither by virtue of the Individual Employment Contract nor, indeed, by virtue of the ACT of the banking sector."

Accordingly, the tax assessment act does not suffer from a defect of violation of law, and the Tax Administration proceeded with the correct application of article 2, no. 4, paragraph b), of the CIRS.

DECISION

Accordingly, it is decided:

a) To judge the arbitration request unfounded and, in consequence, to maintain the Personal Income Tax assessment act relating to the year 2013 with the amount payable of € 73,779.85 which corresponds to the collection note no. 2017…, contested in the proceedings, absolving the Tax and Customs Authority from the claim;

b) To judge the request for compensatory interest unfounded, absolving the Tax and Customs Authority from the claim;

c) To condemn the Applicants to payment of the procedural costs.

V. VALUE OF THE CASE

In accordance with the provision in article 306, no. 1 and 2 of the CPC, in article 97-A, no. 1, paragraph a), and no. 3 of the Tax Procedure and Process Code, applicable by virtue of paragraphs a), c) and e) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of € 73,779.85 is set for the case.

VI. COSTS

In accordance with the provision in articles 12, no. 2, and 22, no. 4, both of the RJAT, and in article 4, no. 4 of the Regulation of Costs of Tax Arbitration Proceedings, the value of the arbitration fee is set at € 1,224.00, in accordance with Table I of the aforementioned Regulation, to be borne by the Respondent, given the unfoundedness of the request for annulment of the tax assessment act subject to the proceedings.

Lisbon, 5 January 2018.

The Arbitrators,

Counselor Fernanda Maçãs
(Presiding Arbitrator)

Mariana Vargas
(Member Arbitrator)

Amândio Silva
(Member Arbitrator)

Document prepared by computer, in accordance with no. 5 of article 131 of the CPC, applicable by reference to paragraph e) of no. 1 of article 29 of Decree-Law 10/2011, of 20 January.

The drafting of this decision is governed by the 1990 orthographic agreement.

[1] In this sense, CAAD Decision relating to Proc. no. 230/2016-T.

Frequently Asked Questions

Automatically Created

How is seniority calculated for IRS tax exclusion on employment termination compensation in the Portuguese banking sector?
For IRS tax exclusion purposes on employment termination compensation in the Portuguese banking sector, seniority calculation is disputed between two interpretations. The Tax Authority interprets Article 2(4)(b) of the IRS Code as limiting seniority to years of service with the final employer entity owing the compensation. However, taxpayers argue that when the banking sector's Collective Labor Agreement (ACT) and individual employment or termination contracts recognize accumulated seniority across multiple banking employers, this recognized seniority should apply for tax exclusion calculations. CAAD jurisprudence has addressed this issue by examining whether contractual recognition of prior service time, particularly under sector-specific collective agreements, extends to tax treatment of severance compensation.
Does the IRS tax exclusion under Article 2(4)(b) of the IRS Code apply to total years of service across multiple banking employers?
The applicability of the IRS tax exclusion under Article 2(4)(b) to total years of service across multiple banking employers is the central dispute in Decision 227/2017-T. The Tax Authority's position is that the exclusion applies only to seniority with the entity owing the income (the final employer). However, the taxpayer's argument, supported by references to Superior Court and CAAD jurisprudence, contends that when the banking sector's ACT and the termination agreement explicitly recognize accumulated seniority from multiple employers for compensation calculation purposes, this same seniority measure should apply to determine the tax-exempt portion under Article 2(4)(b). The case examines whether individual agreements and collective labor agreements can establish seniority definitions that extend beyond the literal interpretation of tax code provisions regarding the 'entity owing the income.'
Can a taxpayer challenge an additional IRS tax assessment on severance pay through CAAD arbitration?
Yes, taxpayers can challenge additional IRS tax assessments on severance pay through CAAD (Centro de Arbitragem Administrativa) arbitration. Decision 227/2017-T demonstrates this procedural avenue under Articles 2(1)(a) and 10 of Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters). The taxpayers in this case successfully initiated arbitration proceedings to challenge IRS assessment 2017… relating to 2013 income, contesting the Tax Authority's calculation of the tax-exempt portion of employment termination compensation. CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, offering specialized expertise in administrative and tax matters. Taxpayers can request declaration of illegality and annulment of tax assessment acts, plus restitution of wrongfully paid amounts with compensatory interest.
What is the tax treatment of compensation paid upon mutual termination of an employment contract under Portuguese IRS rules?
Under Portuguese IRS rules, compensation paid upon mutual termination of an employment contract receives favorable tax treatment under Article 2(4)(b) of the IRS Code, which excludes from taxation certain amounts related to employment termination. The tax exclusion applies to compensation up to a limit calculated based on the worker's seniority and statutory formulas. However, as illustrated in Decision 227/2017-T, disputes arise regarding how to calculate the applicable seniority—whether it includes only service time with the final employer or accumulated service across multiple employers when recognized by collective labor agreements or individual contracts. The taxable portion of severance compensation is included in Category A income (employment income) subject to IRS, while the excluded portion depends on correctly determining the worker's relevant seniority for exclusion purposes.
Are compensatory interest (juros indemnizatórios) awarded when an IRS assessment on severance pay is annulled by CAAD?
Yes, compensatory interest (juros indemnizatórios) are typically awarded when an IRS assessment on severance pay is annulled by CAAD. In Decision 227/2017-T, the taxpayers explicitly requested that the Tax Authority be condemned to restitution of the wrongfully paid assessment amount plus compensatory interest 'in accordance with the law.' Portuguese tax law provides for compensatory interest to compensate taxpayers for the financial loss resulting from paying illegal or excessive tax assessments. These interest payments are calculated from the date of payment of the contested tax until the date of restitution, serving to make the taxpayer whole for the period during which the State held funds to which it was not entitled. The award of compensatory interest is a standard remedy in successful CAAD arbitrations challenging tax assessments.