Process: 252/2014-T

Date: February 2, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 252/2014-T addresses a critical IRS withholding tax dispute involving income paid to a non-resident employee in Portugal. The case concerns a French citizen who worked as General Director for a Portuguese company until May 2010, receiving €17,500 monthly with 35% withholding tax applicable to residents. After relocating abroad to work for another group company, the employee's tax status changed to non-resident. The Portuguese company continued making payments from June to December 2010, initially withholding tax at non-resident rates (June-September) and later without any withholding (October-December). The company subsequently claimed €14,000 in excess withholding, arguing the payments related to work performed abroad for the foreign entity, despite being physically paid by the Portuguese entity for internal group reasons. The Tax Authority rejected the refund claim, citing Article 2(10) and Article 18(1)(a) of the IRS Code, which establish that any entity paying remuneration is considered the employer, and that financial source determines Portuguese taxation. The Authority argued that because the Portuguese company made the payments, the income was obtained in Portugal and subject to withholding tax, regardless of where the work was performed. The company also claimed compensatory interest (juros indemnizatórios) under Article 43 of the General Tax Law. However, the Tax Authority contended that no compensatory interest was due because the misclassification error was attributable to the taxpayer, not the administration. The arbitral proceeding was initiated in March 2014, with the tribunal constituted in May 2014, following the procedures established by Decree-Law 10/2011. This case highlights fundamental questions about the taxation of cross-border employment income, the definition of employer for withholding purposes, and the distinction between payment source and work location in determining tax obligations for non-residents.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Process No. 252/2014 – T

Topic: IRS – withholding at source; income obtained in Portuguese territory by non-resident; indemnity interest

Report

1.1. A., Lda, a company with tax identification number …, with registered office in … (hereinafter referred to as "Claimant") filed, on 10.03.2014, a request for the establishment of a singular arbitral tribunal in tax matters, which was accepted, seeking the declaration of illegality of the withholding tax acts on Personal Income Tax (hereinafter "IRS") for the year 2010, relating to Mr B., as well as recognition of the right to indemnity interest.

1.2. In accordance with the provisions of subparagraph a) of no. 2 of Article 6 and subparagraph b) of no. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council of the Administrative Arbitration Centre appointed Nuno Pombo as arbitrator, and the parties, after being duly notified, did not object to this appointment.

1.3. By dispatch of 19.03.2014, the Tax and Customs Authority (hereinafter referred to as "Respondent") appointed Dr. … and Dr. … to intervene in the present arbitral proceeding, in the name and representation of the Respondent.

1.4. In accordance with the provisions of subparagraph c) of no. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 16.05.2014.

1.5. On 19.05.2014, the highest-ranking official of the Respondent's service was notified to, if it wished, within the period of 30 days, file a response and request the production of additional evidence.

1.6. On 18.06.2014 the Respondent filed its response.

B – Position of the Claimant

1.7. The Claimant, until May 2010, had as its General Director B (hereinafter the "Employee"), a French citizen and resident in Portugal, receiving monthly remuneration of € 17,500.00 (seventeen thousand five hundred euros).

1.8. Until May 2010, the Claimant paid the Employee his salaries, delivering to the State Treasury the withholding at source provided for persons subject to taxation resident in Portugal, at the rate of 35%.

1.9. From May 2010 onwards, the Employee ceased to perform the functions of General Director, having been transferred to another company belonging to the same economic group, abroad, which is why he ceased to live in Portugal, and should be considered, in the year 2010, as non-resident.

1.10. Given the change in the Employee's legal and tax situation, the Claimant, in accordance with the provisions of no. 4 of Article 98 of the IRS Code (hereinafter "CIRS"), corrected the withholding at source in excess.

1.11. For internal reasons of the economic group to which the Claimant belongs, it fell to it to pay the remuneration due to the Employee after May 2010. However, these payments were subsequently debited to C S.A., the entity for which the Employee went to work, which thus economically and financially supported these same remuneration, and it cannot be considered that they were owed by the Claimant or that the payment was imputable to it.

1.12. From June to September 2010, the Claimant, by oversight, continued to make withholding at source on income paid to the Employee, as if it were income from work earned by non-residents in Portuguese territory, which it manifestly was not.

1.13. The Claimant, once the oversight was detected, ceased to make any withholding at source, having delivered to the Employee, with reference to the last quarter of 2010, the gross monthly amount of € 17,500.00 (seventeen thousand five hundred euros).

1.14. Thus, the Claimant, during the year 2010, "made withholding at source on payments made to its employee B – General Director until May 2010", which it did on the basis of an "incorrect legal and tax classification of the beneficiary of the payments which resulted, in the year 2010, in excess withholding at source of € 14,000.00 (fourteen thousand euros), relating to the months of June to September 2010.

1.15. Once the illegality of the withholding made was detected, the Claimant initiated the legally appropriate administrative procedures (gracious claim and hierarchical appeal), seeking the annulment and consequent reimbursement of the excess withholding at source of €14,000.00 (fourteen thousand euros), a claim that was never accepted by the Respondent.

1.16. Once the error it had committed was detected, and assuming that it was of its exclusive responsibility, the Claimant delivered to the Employee the total amount of the withholding at source improperly made by it, which is why it has a direct interest in the success of the request.

1.17. In 2010, the Employee should be considered, for the purposes of taxation, as non-resident in Portuguese territory, and the sums that were physically delivered to him by the Claimant from June to December 2010 cannot constitute income from work obtained in Portugal by a tax non-resident.

1.18. The Claimant further submits that the dispatch denying the hierarchical appeal with which it reacted to the rejection of the gracious claim duly filed is illegal because the Claimant was unable to exercise its right to be heard before the pronouncement of the final decision.

1.19. Finally, the Claimant submits that it is owed indemnity interest, calculated from the date of the gracious claim decision.

C – Position of the Respondent

1.20. The Respondent, in its response, considers it "proven that the income paid to B is subject to taxation in Portugal (…) because it is income paid by the current Claimant, with registered office in Portugal, to a non-resident, the financial source being the determining connection criterion", which is in accordance with the model 30 declaration filed by the Claimant in accordance with no. 7 of Article 119 of the CIRS and with the issuance of invoices to C S.A., as the provision of services and not as mere reimbursement of expenses incurred.

1.21. The Respondent also understands that it has not been demonstrated that the Employee was taxed in France for the income physically paid by the Claimant nor that the work to which it relates was not performed in national territory, with the burden of proof of the facts constituting its right falling to the Claimant.

1.22. The Respondent recalls the provision of no. 10 of Article 2 of the CIRS, which provides that any entity that pays or makes available remuneration constituting income from dependent work is to be considered an employer, being equivalent to it any other entity that is with it in a relationship of control or group, regardless of its geographical location. Since remuneration was paid by the Claimant, it is the employer and, consequently, the Employee's income is considered obtained in Portugal, as the requirement contained in the last part of subparagraph a) of no. 1 of Article 18 of the CIRS is met.

1.23. As regards indemnity interest, the Respondent considers the requirements of no. 1 of Article 43 of the General Tax Law (hereinafter "LGT") are not met, since there is no error attributable to the tax and customs authority, given that the legal and tax classification of the Employee, which led to the withholding now in question, is of the exclusive responsibility of the Claimant.

1.24. The Respondent further submits that the testimonial evidence proposed by the Claimant is not suitable to prove the verification of the right that it claims, which must be purely documentary, in view even of the putative lack of impartiality of the witnesses listed, opposing the questioning of the Employee by videoconference.

1.25. Finally, as regards procedural costs, the Respondent considers that it was the Claimant that gave rise to the action, and should bear them, even if the Claimant's claim is upheld.

D – Conclusion of the Report

1.26. On 02.12.2014, at 14:00, the meeting referred to in Article 18 of the RJAT took place, with the Claimant waiving the questioning of the Employee. Thus, only witness D, the Claimant's official accounting technician, was heard.

1.27. At the meeting referred to in the preceding paragraph, the parties did not waive their right to present their arguments, and the arbitral tribunal then granted, to each one, Claimant and Respondent, and in that order, a period to present their written arguments, which both did.

1.28. On 12.12.2014 the Claimant presented its arguments, which recapitulate the arguments raised in the request for arbitral pronouncement.

1.29. On 12.01.2015 the Respondent presented its arguments, which corroborate in essence what was already alleged in the Response duly filed, but admitting, however, that "if the Claimant's claim is judged to be successful, it would be entitled to indemnity interest only under subparagraph c) of no. 3 of Article 43 of the LGT, owed for the delay in assessing its legal and tax situation, calculated from one year after the presentation of its gracious claim of 27/02/2012, that is, calculated from 27/02/2013, and provided that it is concluded that this delay is attributable to the services".

1.30. The arbitral tribunal is substantively competent, in accordance with the provisions of Article 2, no. 1, subparagraph a) of the RJAT.

1.31. The parties have legal personality and capacity and the Respondent has standing in accordance with Article 4 and no. 2 of Article 10 of the RJAT, and Article 1 of Ordinance No. 112-A/2011, of 22 March, with the standing of the Claimant having been challenged, as will be discussed below.

1.32. The joinder of claims made in the present request for arbitral pronouncement, in observance of the principle of procedural economy, is justified since Article 3 of the RJAT, by expressly admitting the possibility of "joinder of claims even if relating to different acts", accommodates, without hermeneutical abuse, the examination of a claim (in this case, recognition of the right to indemnity interest), which follows, in necessary terms, from the judgment that the arbitral tribunal reaches regarding the validity of the withholding at source in question.

1.33. The proceeding is not subject to any nullity.

1.34. The Respondent raised the exception of lack of standing of the Claimant, a matter that the arbitral tribunal will have to examine if it concludes that the income earned by the Employee and physically paid by the Claimant relating to the months of June to September 2010 are not subject to taxation in Portugal.

1.35. Thus, the examination of the merits of the case will proceed, and if necessary, the exception of lack of standing invoked by the Respondent will be examined.

Factual Matters

2.1. Proven Facts

The arbitral tribunal considers the following facts proven, having regard to the documents in the case file, as well as the pleadings presented and the testimony of the witness examined:

2.1.1. Mr B, of French nationality, performed, in the period between January and May 2010, the functions of General Director of the Claimant, receiving remuneration of € 17,500.00 (seventeen thousand five hundred euros).

2.1.2. While performing the functions of General Director of the Claimant, Mr B resided in Portugal with his family.

2.1.3. In 2010, while Mr B performed the functions of General Director of the Claimant, that is, from January to May, the Claimant paid him the salaries, effecting the respective withholding at source in accordance with the terms applicable to persons subject to taxation resident in Portugal, at the rate of 35%.

2.1.4. At the end of May 2010, Mr B left the country, as did his family.

2.1.5. With effect from the beginning of June 2010, Mr B ceased to perform the functions of General Director of the Claimant, having begun to perform the functions of Supply Chain Director of the company governed by French law C, SA.

2.1.6. Also with effect from the beginning of June 2010, the functions of General Director of the Claimant began to be performed by Mr E.

2.1.7. During the year 2010, Mr B did not remain in Portuguese territory for more than 183 days, consecutive or interpolated.

2.1.8. On 31.12.2010, Mr B did not have in Portuguese territory a dwelling in conditions that would suggest the intention to maintain and occupy it as his habitual residence.

2.1.9. The Claimant, in accordance with the provisions of no. 4 of Article 98 of the CIRS, corrected the withholding at source referred to in 2.1.3, because it understood that they had been made in excess, since Mr B came to be considered, for all of 2010, as non-resident in Portuguese territory.

2.1.10. The remuneration of Mr B for the months of June to December 2010 was delivered to him by the Claimant.

2.1.11. Regarding the sums relating to the months of June to September 2010, the Claimant delivered them to Mr B net of withholding at source on income paid to the Employee, as if it were income from work earned by non-residents in Portuguese territory.

2.1.12. Regarding the sums relating to the months of October to December 2010, the Claimant delivered them to Mr B without making any withholding at source.

2.1.13. The Claimant entirely debited to C the sums delivered by it to Mr B, relating to his remuneration for the months of June to December 2010.

2.1.14. C actually reimbursed the Claimant for the sums referred to in 2.1.13.

2.1.15. The Claimant delivered to Mr B what it had retained and paid to the State as IRS relating to the sums it had paid to him and which related to his remuneration for June to September 2010.

2.2. Unproven Facts

There are no material facts for the examination of the merits of the case that should be considered unproven.

Matters of Law

3.1. Questions to be Decided

It follows from what has been stated above that, in substantive terms, the questions to be examined are, in essence:

a) Whether the sums delivered by the Claimant to the Employee, with reference to the months of June to September 2010, should be considered as income obtained in Portuguese territory by a non-resident and, as such, subject to withholding at source in accordance with the terms and for the purposes of what was then provided in subparagraph a) of no. 4 of Article 71 of the CIRS;

b) Should the arbitral tribunal conclude that the income earned by the Employee and physically paid by the Claimant relating to the months of June to September 2010 are not subject to taxation in Portugal, to clarify whether the Claimant has standing to request the reimbursement of the sums retained by it and paid to the State; and, finally,

c) To clarify whether, should the claim for declaration of illegality and consequent annulment of the withholding at source tax acts in question be upheld, the Claimant, within the scope of the present arbitral proceeding, may obtain the condemnation of the Respondent to the payment of indemnity interest and, if so, from when.

3.2. Income Obtained in Portuguese Territory – Financial Source as a Connection Criterion

a) Statement of the Problem

It results from the case file, and there is no dispute between the parties on this, that Mr B should be considered as non-resident in Portuguese territory in the year 2010, and certainly in accordance with no. 2 of Article 15 of the CIRS, "in the case of non-residents, the IRS applies only to income obtained in Portuguese territory."

Therefore, the disputed question, as stated, and the first one that matters to resolve, is whether, from June to September 2010, by virtue of the Claimant having delivered to him the sums corresponding to his salary for that period, the Employee earned income in Portuguese territory subject to withholding at source in accordance with the terms and for the purposes of what was then provided in subparagraph a) of no. 4 of Article 71 of the CIRS.

The Respondent understands that "the income paid to B is subject to taxation in Portugal, in accordance with the provisions of no. 1 of Article 13, no. 2 of Article 15, subparagraph a) of no. 1 of Article 18 and subparagraph a) of no. 4 of Article 71 of the CIRS because it is income paid by the current Claimant, with registered office in Portugal, to a non-resident, the financial source being the determining connection criterion".

b) Subparagraph a) of no. 1 of Article 18 of the CIRS – Payer Entity and Entity Owing Income

Subparagraph a) of no. 1 of Article 18 of the CIRS provides that the following should be considered obtained in Portuguese territory: "income from dependent work arising from activities carried out in it, or when such income is owed by entities that have therein residence, registered office, effective management or permanent establishment to which the payment should be imputed." Since no activities carried out in Portugal are at issue (despite the unfounded point 22 of the Respondent's Response, which presents a conclusion that seems foreign to the cognitive process expended in the immediately preceding points), it is necessary to ascertain whether the income earned by Mr B with reference to the months of June to September 2010 should be considered as having been "owed by entities that have therein [Portuguese territory] registered office, effective management or permanent establishment to which the payment should be imputed."

There is no doubt that that income was paid, in the sense of delivered, by an entity with registered office in Portuguese territory, namely, the Claimant. However, this undisputed assertion does not imply the necessary conclusion of identity between the payer and the debtor, since that would mean ignoring a general principle applicable to the performance of obligations, namely that such performance may, as a rule, be carried out by a third party. This is what is extracted, with crystal clarity, from what is read in no. 1 of Article 767 of the Civil Code, in cases where we are not, as we are not, in one of the situations referred to in no. 2 of the same article. Thus, the fact that it was the Claimant that paid the income that Mr B was owed does not amount to considering it the debtor of that income.

c) Burden of Proof

Subject to better judgment, the arbitral tribunal considers that the burden of proving that the sums paid to the Employee relating to the second half of 2010 were not owed by it falls on the Claimant. This is because, in accordance with the provisions of no. 1 of Article 74 of the LGT, "the burden of proof of the facts constituting the rights of the tax authority or of persons subject to taxation falls on whoever invokes them."

Now, the truth is that the Claimant, as it confesses, labored under an error, making withholding at source and delivering to the State the amounts retained, in the conviction that it was paying the Employee, a non-resident, income that should be considered as obtained in Portuguese territory. And for this oversight, truth be told, the Respondent contributed in no way. Therefore, it is the Claimant that must prove that, after all, that income was not obtained in Portuguese territory insofar as it was not shown to be owed by it.

d) Conclusion

The arbitral tribunal has proven that Mr B, at least from June 2010 onwards, ceased to perform the functions he performed at the Claimant, and consequently ceased to live in our country. However, for alleged internal reasons of the group of companies in which the Claimant and its sole shareholder are integrated, the Claimant continued to deliver the Employee's remuneration to him, subsequently reimbursing itself for these expenses by debiting these costs to the entity that was the actual beneficiary of the labor activity carried out by the Employee.

Contrary to what the Respondent states in points 26 and 27 of its Response, the arbitral tribunal has shown to be proven not only that the costs supported by the Claimant with the Employee after May 2010 were passed on to C, but that they were actually paid by it. The debit of the Claimant and the respective payment by C are decisive factors for these income to be considered as not obtained in Portuguese territory[1]. In truth, the Claimant proves to be the paying entity, but it is not, as is shown, either the entity directly benefiting from the work carried out by the Employee nor even the company that economically supports the labor costs associated with it. Moreover, from the proven facts it results that, from June 2010 onwards, it is not up to the Claimant to exercise any control or direction over the activities developed by the Employee. The Claimant merely proceeds to pay his salaries, and is subsequently reimbursed for these payments by the entity to which the Employee actually provides his activity.

Nor are the arguments used by the Respondent admissible to prevent this conclusion, namely the one referring to the model 30 declaration, delivered in accordance with no. 7 of Article 119 of the CIRS, which mentions "those amounts as income from dependent work paid and tax withheld from non-residents" [point 13 ii) of its Response]. This model 30 declaration is not proof that this income is owed by the Claimant. It is rather the documentary expression of the error in which the Claimant labored and which led it to improperly make withholding at source on sums that were not subject to it.

Nor does the argument based on the issuance of invoices under subparagraph a) of no. 6 of Article 6 of the VAT Code seem admissible. More than evidencing the provision of services, these documents show the Claimant's intention to be reimbursed, without any margin, of the costs it incurred on account of the recipient of the invoices. It is true that the Claimant has not brought to the file any document constituting an agreement concluded between the Claimant and C, S.A providing that it pay the Employee's salary, with the latter reimbursing it. But this agreement does not require any special form and it is clear that it exists. If the debit (or the issuance of invoices to C, SA) does not impose it, the payment of these invoices by it leaves it wide open. It suffices to look at its description to remove any doubt. What the Claimant seeks is merely to obtain reimbursement of the sums it spent with the Employee as salary from the one who should economically support this same remuneration.

Nor does it appear that the provision of no. 10 of Article 2 of the CIRS contradicts the stated conclusion. Article 2 of the CIRS typifies the income that should be taxed under IRS, as category A income, qualifying as income from dependent work all remuneration paid or made available to its recipient by virtue of an individual employment contract, this having the characteristics recognized by unanimous doctrine.

The law typifies, in a very broad manner, the scope of this category, having therein the purpose of an exhaustive inclusion, in the incidence of the tax, of all income in some way arising from dependent work. In this sense, category A income is everything the worker receives as compensation for his work, in money or in kind, and whether this remuneration (now, in its tax aspect) is paid by the employer (the one with whom the worker maintains a labor relationship) or by any other entity that is with it in a relationship of control or group (in the wording that matters for us to consider).

Now, subject to better understanding, one cannot make of this provision the reading that the Respondent seems to make of it, in sustaining that it was the Claimant that paid the remuneration to the Employee, therefore, it is the employer. And being it the employer it does not see the Respondent "how the payment of the remuneration in question cannot be considered imputable to the current Claimant". This logical chain, taken in all its consequences, leads to conclusions that we consider abusive. No. 10 of Article 2 of the CIRS refers to employer (precisely the one that pays or makes available to the worker remuneration that should be considered as income from dependent work) to it [employer] equating any other entity that is with it in a relationship of control or group, regardless of its geographical location. However, this equation does not dispense with a patrimonial attribution, in the proper sense, in favor of the worker. That is, not all entities that are in a relationship of control or group with the entity with which a worker has a labor relationship and from whom he perceives a remuneration are equated to employer entities of a given worker. This provision precisely intends to broaden the field of incidence of category A, so as to encompass in it all patrimonial attributions that are provided to the worker by entities with whom he has no labor relationship. This extension, which is understood and accepted, is based on the presumption that the perception of any patrimonial advantage by the worker, even if supported by an entity that is not his employer but that is with it in a relationship of control or group, is due to the existing labor relationship.

Now, as was seen above, even though the Claimant delivers money to the Employee, it is not the Claimant that "pays" his remuneration. Who actually pays it is C, S.A, and in this case the subjective extension of the concept of employer cannot operate, even knowing that C S.A is the sole shareholder of the Claimant. For the Claimant, in truth, makes no patrimonial attribution to the Employee. It has no cost with him. What it spends is subsequently reimbursed, and the respective expense is offset by the perception of the corresponding revenue, so the effect of these operations is neutral.

The arbitral tribunal therefore understands that the sums that were paid to the Employee by the Claimant (relating to the months of June to September 2010) cannot be considered as income from dependent work obtained by a non-resident in Portuguese territory, because the activities in question are not carried out therein nor is the respective income shown to be owed by an entity that has therein residence, registered office, effective management or permanent establishment to which the payment should be imputed, and the Claimant cannot, for these purposes, be considered the employer of the Employee.

3.3. Lack of Standing

Since the arbitral tribunal has concluded that the income earned by the Employee and physically paid by the Claimant relating to the months of June to September 2010 are not subject to taxation in Portugal, it is necessary to respond to the question of whether the Claimant has standing to request the reimbursement of the sums retained by it and paid to the State.

No. 1 of Article 132 of the Tax Code of Procedure and Process (CPPT) states that "withholding at source is susceptible to challenge by the substitute in case of error in the delivery to the State of tax superior to that withheld." Now, the Respondent understands that this is not the situation at hand, since there was no delivery to the State of tax superior to that withheld, which is why the Claimant does not have standing to demand the reimbursement requested, inasmuch as the harm it invokes is due to the fact that it delivered to Mr B the equivalent of what it had withheld from him, this delivery not being the responsibility of the Respondent, so it does not bind it [see point 13 v) and vi) of its Response].

The question of the lack of standing of the tax substitute is, as the Claimant rightly says, a false question. The tax substitute must be recognized procedural and procedurally standing to claim and then challenge the withholding at source that it deems illegal, since it is a subject of the legal tax relationship that is constituted (Article 18, no. 3 of the LGT), and both Article 9, nos. 1 and 4 of the CPPT and Article 26 of the Code of Civil Procedure (hereinafter, CPC) grant it this standing. Moreover, it is clear that the tax substitute has an interest worthy of legal protection. In this case, because it reimbursed the Employee for the sums that it improperly withheld from him, withdrawing them from its patrimony, but this interest would always exist even if the reimbursement had not taken place. For the substituted party may demand responsibility from the tax substitute in virtue of withholding at source illegally carried out.

Thus, the Claimant has standing to make the present request for arbitral pronouncement as it does.

3.4. Indemnity Interest

Subparagraph b) of no. 1 of Article 24 of the RJAT provides that "the arbitral decision on the merits of the claim to which no appeal or challenge may be taken binds the tax authority from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the person subject to taxation and until the end of the period provided for voluntary execution of the sentences of tax judicial tribunals, restore the situation that would have existed had the tax act subject to the arbitral decision not been performed, adopting the acts and operations necessary for the purpose."

It is not overlooked that the legislative authorization granted to the Government by Article 124 of Law No. 3-B/2010, of 28 April, on the basis of which the RJAT was approved, determines that the tax arbitral process constitutes an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters. Even though subparagraphs a) and b) of no. 1 of Article 2 of the RJAT base the competence of arbitral tribunals on "declarations of illegality," it seems reasonable to understand that their competences include the powers that in judicial challenge proceedings are attributed to tax tribunals, and certainly in judicial challenge proceedings, in addition to the annulment of tax acts, claims for indemnification may be examined, in particular those relating to indemnity interest.

In effect, the principle of cognizability of indemnification claims, in gracious claims or in judicial proceedings, is justified whenever the damage that one seeks to have repaired results from a fact attributable to the tax and customs authority. Manifestations of this principle are found in no. 1 of Article 43 of the LGT and in Article 61 of the CPPT.

As the Claimant recalls, its right to the perception of indemnity interest depends on the verification of the following requirements: a) error attributable to the services; b) that from said error results the payment of tax in an amount superior to that legally due; c) that the error of the services be analyzed in gracious claims or judicial challenge.

As is evident, there is no error attributable to the services when the Claimant improperly makes withholding at source and also improperly delivers to the State the sums illegally withheld. But, in truth, that is not what the Claimant alleges. The error of the services is not in the withholding and the delivery of the withheld amount to the public treasury. The error attributable to the services lies in the Respondent's refusal to repair what clearly required remedy. From the examination of the administrative process it is verified that the Respondent, already in the gracious claim phase, could and should have granted the Claimant's request, as the Claimant had brought to it the necessary and sufficient elements for the indispensable repair of the situation. The Respondent erred when it understood that it should not reimburse the Claimant for the sums that the latter had illegally withheld and delivered to the State, an error that deserves to be censured in accordance with the law, in particular in the light of what Articles 43 and 100 of the LGT provide. Consequently, the Claimant has the right to indemnity interest.

A different problem consists of knowing from which period this interest should be counted. The Claimant understands it should be from the date of the gracious claim decision, whereas the Respondent maintains that the period should begin to run one year after the presentation of the gracious claim. The parties are thus in agreement that it would not make sense, in the present case, to consider for these purposes the period between the delivery to the State of the sums improperly withheld and the gracious claim decision.

It is important not to lose sight of the fact that the Respondent contributed in no way to the Claimant being deprived of the sums that it improperly delivered to the State, and it is equally important not to forget that the right to the perception of indemnity interest corresponds, in essence, to the realization of a generic right to indemnification.

In the case submitted to our examination, it is necessary to recognize that only by the reaction of a third party, as occurred with the gracious claim, could the Respondent become aware of the Claimant's oversight, that is, the illegality of the withholding at source effected by it. Therefore, conceiving that the period prior to the gracious claim request could be relevant is inadmissible. However, with an undue, wrong, and to that extent, harmful decision to the Claimant's patrimony, the Respondent constitutes itself in the duty to repair the harm it created. The problem now is whether the date of the gracious claim decision or some other moment that is not dependent on the Respondent's action should be relevant. For it cannot but impress the admission of the possibility that the Respondent could be harmed as a function of its diligence. When someone files a gracious claim against a tax act, they expect the tax and customs authority to assess their claim with the greatest possible dispatch, the legislator offering mechanisms aimed at safeguarding the rights and expectations of the claimant in cases where, instead of the desired diligence, he is confronted with the inertia of the decision-maker. Now, in the generality of cases, this inertia does not harm the claimant. Or rather, in the generality of cases, the law provides for the removal of the harm that the claimant suffers with the inertia of the administration. We say in the generality of cases, because the rule is precisely that indemnity interest begins to be calculated from the date on which the taxpayer is dispossessed of the sums that should ultimately be considered his.

As we have seen, the present case has different characteristics. In it the date of delivery to the State of the sums improperly withheld can never be relevant. And can the temporal moment relevant be that of the administration's decision? If it were, it could always be said that, regardless of the outcome of the claim, the administration would have no interest in dispatching it before the end of the period it had for that purpose. It will not make sense, in the view of this arbitral tribunal, to punish the administration for deciding, even if erroneously, before the end of the period in which it could have done so. Therefore, the moment chosen for the purposes of the commencement of the counting of interest cannot be linked to the conduct of the administration. It must be a moment independent of that conduct.

As has been demonstrated, the Respondent contributed in no way to the situation harmful to the Claimant's patrimony. But once alerted, by procedurally appropriate means, to the existence of an illegality, it should proceed "to the immediate and full reconstitution of the situation that would have existed had the illegality not been committed" (Article 100 of the LGT). However, in cases where the illegality is not attributable to the administration, it is of the most elementary reasonableness to admit an adequate period for the administration, after becoming aware of the illegality, to proceed to the full reconstitution of the situation that would have existed had it not existed.

The legislator understood that one year is an adequate period for the administration to return to the taxpayer what was paid to it in excess. This was the time period adopted by subparagraph c) of no. 3 of Article 43 of the LGT. The legislator understood that from the moment the taxpayer's claim becomes known, it is reasonable for the administration to take a year to assess his request, dispatch it, and, in the case that the taxpayer is in the right, return to him what it received in excess. Therefore, the arbitral tribunal understands that indemnity interest begins to be counted only one year after the date of the gracious claim request.

3.5. Prejudiced Question

The examination of the question of the illegality of the rejection of the gracious claim for failure to observe the right to be heard of the Claimant shows itself to be prejudiced and procedurally futile.

Decision

In accordance with and on the grounds set out above, the arbitral tribunal decides:

a) To uphold the request for arbitral pronouncement with the consequent annulment of the withholding at source tax acts on IRS for the year 2010 relating to Mr B, in the amount of €14,000.00, now claimed, with all legal consequences;

b) To find that the Claimant has standing to request the reimbursement of the withholding at source referred to in the preceding subparagraph;

c) To uphold the request for recognition of the right to indemnity interest, condemning the Respondent to pay it to the Claimant, to be calculated from one year after the presentation of the gracious claim until its complete reimbursement.

Value of the Proceeding

In accordance with the provisions of no. 2 of Article 315 of the CPC, in subparagraph a) of no. 1 of Article 97-A of the CPPT and also of no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at € 14,000.00 (fourteen thousand euros).

Costs

For the purposes of the provision of no. 2 of Article 12 and no. 4 of Article 22 of the RJAT and of no. 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 918.00 (nine hundred eighteen euros), in accordance with Table I annexed to said Regulation, to be borne in full by the Respondent, as the arbitral tribunal considers that, although it was not responsible for the withholding at source improperly made, it was the one that gave rise to the present arbitral proceeding, by not having recognized, as and when it should have, the illegality of this same withholding.

Lisbon, 2 February 2015

The Arbitrator

(Nuno Pombo)

[1] This is also, as it seems to us, the doctrine upheld by the arbitral decision rendered in Process No. 108/2012-T.

Frequently Asked Questions

Automatically Created

What are the IRS withholding tax obligations for income paid to non-residents in Portugal?
Under Portuguese tax law, income paid to non-residents is subject to IRS withholding tax when it is considered obtained in Portuguese territory. Article 18 of the IRS Code defines income obtained in Portugal by non-residents, including employment income paid by Portuguese entities. The withholding entity must apply specific rates depending on the income type. For employment income, Article 2(10) CIRS establishes that any entity paying remuneration is considered an employer, including entities in control or group relationships. This creates a withholding obligation even when the work may be performed outside Portugal, as the financial source criterion can determine Portuguese taxation. Non-compliance with withholding obligations can result in penalties and interest charges.
How does a change from resident to non-resident status affect IRS withholding tax rates in Portugal?
When an employee changes from resident to non-resident status during a tax year in Portugal, the IRS withholding tax treatment changes significantly. Residents are subject to progressive withholding rates (which can reach 35% or higher for higher income brackets), while non-residents face different withholding rates depending on whether the income is considered obtained in Portugal. Article 98(4) of the IRS Code allows for correction of excess withholding when the taxpayer's status changes. The employer must reassess the withholding rate from the date the residence status changes. However, disputes often arise regarding whether income paid after the change remains subject to Portuguese taxation, particularly when the payment source is Portuguese but work is performed abroad. Proper documentation of residence status change and work location is essential.
Can a company claim compensatory interest (juros indemnizatórios) for overpaid withholding tax to Portuguese tax authorities?
Yes, a company can claim compensatory interest (juros indemnizatórios) for overpaid withholding tax, but only under specific conditions set forth in Article 43 of the General Tax Law (LGT). The key requirement is that the error leading to overpayment must be attributable to the tax administration, not to the taxpayer. If the company incorrectly applied withholding rates due to its own misclassification or oversight, Portuguese tax authorities will typically deny compensatory interest claims, as occurred in Process 252/2014-T. The interest runs from the date of the gracious claim decision if granted. Taxpayers must demonstrate that the tax authority caused the error through incorrect guidance, administrative mistakes, or unreasonable delay in processing refunds. Self-correction of taxpayer errors generally does not qualify for compensatory interest.
What is the CAAD arbitration procedure for disputing IRS withholding tax on non-resident income?
The CAAD (Centro de Arbitragem Administrativa) arbitration procedure for disputing IRS withholding tax on non-resident income follows the framework established by Decree-Law 10/2011. The process begins with filing a formal request for arbitral tribunal establishment, which must be accepted by CAAD. The Deontological Council appoints an arbitrator (parties may object within the specified period). Once appointed, the Tax Authority receives notification and has 30 days to file a response and request additional evidence. The arbitral tribunal is formally constituted after these preliminary steps. Parties may propose witness testimony and documentary evidence. The procedure offers a faster alternative to judicial courts for resolving tax disputes, with decisions typically rendered within months rather than years. The arbitral decision has the same effect as a court judgment.
How does Portuguese tax law treat employment income earned by a non-resident who relocated abroad during the tax year?
Portuguese tax law treats employment income earned by a non-resident who relocated abroad during the tax year based on the source-of-payment principle combined with work location analysis. Under Article 18(1)(a) CIRS, income is considered obtained in Portugal when paid by a Portuguese entity, even if work is performed abroad. Article 2(10) CIRS defines 'employer' broadly to include any entity paying remuneration, including group companies regardless of geographical location. This creates potential double taxation scenarios. However, tax treaties may provide relief by allocating taxing rights based on work location rather than payment source. The taxpayer must prove that work was performed abroad and that the foreign entity was the actual employer. Documentary evidence showing the employment relationship, work location, invoicing arrangements, and foreign tax payment is crucial. Mere physical payment by a Portuguese entity for internal group administrative reasons may not be sufficient to avoid Portuguese withholding obligations.