Process: 277/2017-T

Date: November 29, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 277/2017-T) addresses a fundamental question in Portuguese IRS taxation: how to calculate 'seniority' (antiguidade) when determining the tax-exempt portion of severance compensation following employment termination. The claimant, a banking sector employee, received €171,011.60 in severance compensation from Bank B… in 2013 following a mutual termination agreement during corporate restructuring. The dispute centered on whether seniority should include only the 15.35 years of service with the paying employer (Bank B…), as the Tax Authority contended, or the total 16.84 years of banking sector service including prior employment at Bank C… (1996-1997), as the claimant argued. Under Article 2(4) of the IRS Code, a portion of termination compensation corresponding to years of service is exempt from taxation. The claimant relied on Clause 17 of the Banking Sector Collective Labour Agreement (CLA), which defines seniority as all service rendered in Portuguese credit institutions, and Article 11(2) of the General Tax Law (LGT), which requires recourse to labor law when tax law lacks specific definitions. The Tax Authority argued for a restrictive interpretation, limiting seniority to service with the compensation-paying entity only. This difference of 1.49 years significantly impacted the taxable amount: the claimant calculated the taxable excess at €87,397.33, while the Tax Authority assessed €94,975.19. The case exemplifies the intersection of labor law and tax law in Portugal, particularly regarding collective bargaining agreements' role in defining tax-relevant concepts, and demonstrates taxpayers' ability to challenge IRS assessments through CAAD arbitration when fundamental calculation disagreements arise.

Full Decision

ARBITRAL DECISION

I – Report

  1. On 19.04.2017, the Claimant, A…, tax identification number …, resident at Rua…, nº…, …, requested the CAAD to constitute an arbitral tribunal, under the terms of Article 10 of Decree-Law no. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as "LRAT"), in which the Tax and Customs Authority is the Respondent, with a view to declaring the illegality of the tax assessment act referred to in the statement of calculation of Personal Income Tax (IRS) no. 2017…, in the amount of € 11,330.35 and the statement of settlement of accounts number 2017…, in the amount of € 7,981.64, for the year 2013.

The Claimant further petitions for the condemnation of the Respondent to restitute the tax allegedly paid, plus compensatory interest.

  1. The request to constitute the arbitral tribunal was accepted by the Honorable President of CAAD and notified to the Tax and Customs Authority.

Pursuant to the terms and effects of section 1 of Article 6 of the LRAT, by decision of the President of the Deontological Council, duly communicated to the parties within legally applicable periods, the signatory was designated as arbitrator, and communicated to the Deontological Council and to the Centre for Administrative Arbitration his acceptance of the appointment within the regularly applicable period.

The Arbitral Tribunal was constituted on 30-06-2017.

  1. Verifying that there existed no situation provided for in Article 18, section 1 of the LRAT that would render necessary the arbitral meeting provided therein, the holding thereof was dispensed with, on the grounds of the prohibition of useless acts.

The parties, notified to this effect, presented no allegations.

  1. The grounds presented by the Claimant in support of his claim were, in summary, the following:

  • In the year 2013, by virtue of a restructuring, Bank B… found itself in the necessity to reduce staff and, consequently, to pay severance compensation to the various employees with whom it agreed to the revocation of their employment contracts.

  • It happens that the Claimant, being one of the employees providing service at Bank B…, received from it, through such revocation, a severance compensation in the amount of € 171,011.60 (See clause 2) and not € 172,611.60, as the Tax Inspection refers to in the report it prepared.

  • In the calculation of the severance compensation payable to the Claimant, the Claimant's seniority in the banking sector was considered to be 15.35 years, when in fact, the present Claimant, as will be better demonstrated and proven below, had a seniority of 16.84 years, that is to say, a seniority slightly higher than the 15.35 years invoked by the Tax Inspection and, given such factual reality, the amount of compensation subject to IRS in the year 2013 is, as will be specified below, € 87,397.33, and not the amount of € 94,975.19.

  • In practical terms this means that only the amount corresponding to 15.34 years (€ 77,636.41) was not subject to IRS and not the amount corresponding to the entire period of service rendered in the banking sector.

  • The entity paying the compensation, the bank "B…" was, as it still is, the signatory to the Collective Labour Agreement of the Banking Sector (hereinafter referred to as "CLA of the Banking Sector"), an instrument for collective regulation of labor, whose last amendment was published in the Official Tax Bulletin, 1st series, no. 20, of 29 May 2011.

  • In addition to B…, the other banking institutions where the Claimant provided work, specifically at Bank C… in the period between 01-03-1996 and 31-08-1997, as referred to above.

  • Now, it is stated in section 1 of clause 2 of the CLA of the Banking Sector that "This Collective Labour Agreement binds the Credit Institutions, Financial Companies and other public or private entities that subscribe to it (…) as well as all workers in their service represented by the signatory Trade Unions."

  • Thus, both the entity paying the compensation "B…", because it adhered to the CLA of the Banking Sector, and the Claimant himself, for having been affiliated to trade unions that are signatories to that agreement, are covered by that instrument of collective regulation of labor.

  • Namely, by the content of clause 17 of the CLA of the Banking Sector, which considers as the worker's seniority all years of work provided in credit institutions based in Portugal.

  • Seniority which is considered for all purposes provided in the CLA of the Banking Sector, which clearly includes the awarding of compensation for revocation of the employment contract.

  • From section 4 of Article 2 of the IRS Code, it does not follow that the seniority to be considered is solely the seniority with the entity paying the compensation for cessation of the employment contract.

  • The seniority to be considered, in the present case, is that which corresponds to the totality of the time of service rendered by the Claimant in credit institutions in Portugal, by force of the application of the CLA of the Banking Sector and the individual labor contracts that always considered it expressly.

  • In truth, the concept of seniority is not defined in the Tax Law, which implies recourse to Labor Laws for the determination of said concept, as provided in section 2 of Article 11 of the General Tax Law (LGT).

  • Therefore, the Claimant's seniority corresponds to all time of service rendered in the banking sector, that is to say, 16.84 years, necessarily binding the Tax Authority.

  • The Tax Authority and, specifically, the Lisbon Tax Services made a restrictive interpretation of the norm (Article 2, section 4 of the IRS Code), thus limiting the rights of the Claimant as well as her legitimate expectations of seeing all time of service rendered in the Banking Sector considered for the purpose of awarding severance compensation following revocation of the employment contract and, consequently, the right of the compensation awarded not being taxed as income in category A.

  • The excess subject to IRS would not be and is not the amount declared, as was done, in the amount of € 81,527.46, but the amount of € 87,397.33, as it is the excess of the severance compensation the Claimant received.

  • It can thus be concluded, with complete certainty, subject to better and reasoned opinion, that the disputed assessment should be annulled, insofar as it was calculated with a view to an excess subject to taxation of € 94,975.19, when that excess is now, after correcting the value of the severance compensation from € 172,611.60 to € 171,011.60, only and exclusively € 87,397.33, whereby partial annulment of the tax acts should be decreed and the restitution of the tax overpaid should be ordered, plus compensatory interest.

  1. The ATA – Tax and Customs Administration, called upon to make representations, contested the Claimant's claim, defending itself by way of objection, in summary, with the following grounds:

  • At issue is the taxation of the severance compensation paid by B… to the R., in the amount of € 172,611.60, following a termination of the employment contract, an amount which the Claimant himself admitted in point two of the right of audit, to have received as compensation.

  • The disputed question relates to whether the counting of the R.'s seniority, for the purposes of IRS taxation, in the case of compensation for termination of the employment contract, should be made taking into account the time of service previously rendered by the R. in another banking institution (Bank C…), or, on the contrary, only considering the time of work rendered with the entity with which he terminated the employment contract, which gave rise to the right to compensation, that is, Bank B….

  • Given the provision in section 4 of Article 2 of the IRS Code, the R.'s time of service is 15.34 years, as the seniority to be counted, for the purposes of section 4 of Article 2 of the IRS Code, is the seniority with the entity owing the compensation for cessation of the employment contract, and the seniority in a previous employer is not to be considered in the application of said legal provision, even if the worker and the new employer have agreed to consider it in any future "severance compensation", by employment contract or arising from instruments of collective regulation of labor.

  • Therefore, it was on the basis of seniority of 15.34 years that the amount of severance compensation excluded from IRS taxation was calculated, as this is the time of service rendered with the last employer, on whom falls the duty to pay the compensation.

  • The concept of seniority – seniority per se, without any qualifier – in the labor context does not entail a special scientific density that significantly separates it from the sense of ordinary language: translating, as in other legal contexts, a legally relevant interval, with various effects, between a determined initial term and a determined final term.

  • Although collective regulation instruments add various qualifiers to labor seniority, the truth is that the Labor Code does not define what "seniority" is nor does it present a univocal qualification of it, although it is abundantly confirmed that the prevalence of the notion of "seniority in the company" exists, including in matters of cessation of the employment contract.

  • Underlying the legal regime of Article 2, section 4 of the IRS Code is a notoriously clear anti-abuse purpose, characteristic of special clauses for the prevention of tax evasion – a purpose which has special reason for being, as agreements that disposed of labor seniority, recognizing merely artificial seniorities and imposing such recognition for the purposes of negatively delimiting tax incidence, would in no case be acceptable.

  • The recourse to the rule of Article 11, section 2 of the LGT presupposes – in view of the expression "unless otherwise directly derives from the law" – the non-existence in the legal rule (subsection b) of section 4 of Article 2 of the IRS Code) of any proper sense of seniority.

  • The question relates to the fact of knowing whether that subsection b) of section 4 of Article 2 of the IRS Code, while holding a proper sense of the concept of "seniority in the company" which is verified to exist, can be permeable to other qualifications of seniority agreed in legal instruments of a negotiable nature, bilateral or collective, that impose on the entity owing the monetary benefit referred to in that rule a seniority greater than that corresponding to the duration of the contractual relationship granted by such entity, taking into account that "the qualification of the legal transaction made by the parties (…) does not bind the tax administration" according to section 4 of Article 36 of the LGT – a rule that encompasses, naturally and a fortiori, the qualifications of the parties affecting the object of the transaction –, the question will have to obtain its solution in the full legal interpretation of the entire regulatory provision implied by the expression "number of years or fraction of seniority or period of performance of functions with the entity owing [the compensation]," contained in subsection b) of section 4 of Article 2 of the IRS Code.

  • Once the mandatory legal limits regarding compensation or severance for cessation of the employment contract are respected, it is naturally not in question the full legitimacy of negotiable legal instruments binding the entity owing the compensation to monetary compensation/severance superior to the amount corresponding to the negative delimitation of tax incidence provided in subsection b) of section 4 of Article 2 of the IRS Code.

  • What is at issue is whether such negotiable legal instruments can impose the breadth of taxation itself, as if it were voluntary taxation.

  • The spirit of the law demands an interpretation in literal terms of the expression "number of years or fraction of seniority or period of performance of functions with the entity owing [the compensation]" referenced to the "entity owing the compensation," not permitting that in the "seniority with the entity owing the compensation" be considered, beyond the seniority inherent to the actual duration of the contractual relationship granted by that entity, increases arising from negotiable legal instruments.

  • The literal element of legal interpretation allows one to confirm, in a perspective of syntactic correctness, that the seniority provided in subsection b) of section 4 of Article 2 of the IRS Code is the seniority with the "entity owing the compensation," corresponding to "seniority in the company" which, by force of the historical-systematic element inherent to the rule of the present section 10 of the same article, corresponds to the "employer/management entity," with the breadth arising from this rule, as well as from situations of succession in the position of this entity, especially by effect of the equation inherent to Article 285 of the 2009 Labor Code.

  • On the other hand, the following is read in clause 2 of the CLA for the Banking Sector (2012):

"This Collective Labour Agreement is applicable throughout the national territory, within the scope of the banking sector, and binds the Credit Institutions and Financial Companies that subscribe to it (hereafter generically referred to as Credit Institutions or Institutions), as well as all workers in their service affiliated with the Trade Unions of the Centre, North and South and Islands Banking Unions, represented by the signatory FEBASE – Federation of the Financial Sector and hereafter referred to as Trade Unions, covering 26 employers and estimated at 54,300 workers covered.(…)"

  • Therefore, for the aforementioned CLA to be applicable, it is necessary that the worker in question be affiliated to one of the aforementioned trade unions and that the credit institution be a subscriber to the aforementioned Agreement.

  • It happens that, in the present case, the R. did not prove, nor even alleged, his affiliation to any of the mentioned trade unions, which, by itself, is a reason excluding the invocation of clause 17 of the CLA.

  • In view of the above, the additional assessment act at issue in this proceeding does not suffer from any defect that calls into question its legality and validity.

  • For which reason there is no basis for the payment of any compensatory interest.

  • The allegations of the Claimant cannot, in any way, proceed, as they make a notoriously erroneous interpretation and application of the legal norms subsumable to the case sub judice.

  1. The tribunal is materially competent and is regularly constituted in accordance with the terms of the LRAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

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

  1. It is necessary to resolve the following issues:

a) Illegality of the tax assessment act at issue in the proceeding.

b) Right to restitution of the tax.

c) Right to compensatory interest.

II – Relevant Facts

  1. The following facts are considered proven:

8.1. The Claimant was an employee at the banking institution "B…" between 01-03-1998 and 30-05-2013.

8.2. During the period between 01-03-1996 and 31-08-1997, the Claimant was an employee at Bank C….

8.3. On 7.05.2013 the Claimant and "B…" concluded an agreement for the revocation of the employment contract, as a result of which the worker received the sum of € 172,611.6.

8.4. According to the IRS declaration presented by the taxpayer, the portion of the severance compensation exempt under Article 4, section 2, subsection a) of the IRS Code was based on seniority of 18 full years in the banking sector.

8.5. The additional assessment "sub judice" was based on seniority of 15.34 years.

8.6. The assessment at issue in the proceeding was founded on the Tax Inspection Report in which the following is noted, in particular: [inspection report details]

8.7. The Claimant paid the tax now disputed on 01-03-2017.

There do not exist, with relevance to the decision of the case, any unproven facts.

  1. The Tribunal's conviction regarding the decision on the factual matters of items 8.1), 8.2), 8.4), 8.5), 8.6) and 8.7) of the evidence was based on the documents in the proceeding file, as well as on the pleadings presented, it being noted that there exists no disagreement between the parties regarding this factual matter.

With respect to the matter of item 8.3) of the evidence, the Tribunal's conviction results, fundamentally, from the fact that the Claimant expressly stated in the exercise of the right of audit in the context of the tax inspection procedure that he had received the amount of € 172,611.6, reinforced by the fact that, already on 26.02.2016, this severance compensation amount was referred to by the Respondent in a notification dated 26.02.2016, addressed to the taxpayer, contained in the administrative file, stating that this resulted from data collected from Bank B…, there being no record in the administrative file of any challenge by the Claimant regarding this amount.

On the other hand, to prove the amount he alleges, the Claimant only attached a copy of the agreement for the termination of the employment contract by which the employer committed itself to pay severance compensation of € 171,011.60, but did not advance any justification for having previously expressly stated that he had received € 172,611.6 in severance compensation, nor did he propose to produce any other proof of the amount he now came to invoke, further adding that the fact that severance compensation of € 171,011.60 was established does not prevent the contracting parties from, within the scope of their contractual freedom, altering such amount.

III – Applicable Law

  1. The legal problem at issue in the present proceeding relates essentially to the content of the concept of "seniority" contained in Article 2, section 4, subsection b) of the IRS Code.

Specifically, to know whether the counting of the R.'s seniority, for the purposes of IRS taxation, in the case of compensation for termination of the employment contract, should be made, also taking into account the time of service previously rendered by the R. at another banking institution (Bank C…), or, on the contrary, only considering the time of work rendered with the entity with which he terminated the employment contract which gave rise to the right to compensation, that is, Bank B….

The rule at issue in this proceeding is contained in section 4, subsection b) of Article 2 of the IRS Code, the tenor of which is as follows:

"4 – When, in any manner, the contracts underlying the situations referred to in subsections a), b) and c) of section 1 cease, but without prejudice to the provision in subsection d) of the same section, as to benefits that continue to be owed even though 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 received, in any capacity, are always subject to taxation:

a) (…)

b) In the part exceeding the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, received in the last 12 months, multiplied by the number of years or fraction of seniority or period of performance of functions with the entity owing the compensation, in other cases, except when in 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 their entirety."

As can be read in the judgment of the Southern Administrative Court of 12-03-2013, handed down in case 5971/12:

"From the exegesis of Article 2, section 4 of the IRS Code, it must be concluded that in cases of receipt of severance for termination of the employment contract or other contracts that give rise to taxable income in category A of IRS, the law establishes a non-subjection to tax (negative delimitation of the objective incidence of IRS in category A) albeit with a maximum limit. The limit of non-subjection is the value corresponding to one and a half times the average value of regular remuneration with the character of compensation subject to tax, received in the last twelve months, multiplied by the number of years or fraction of seniority or period of performance of functions with the entity owing the compensation (cfr. judgment of the Southern Administrative Court, 21/9/2010, case 3748/10; Rui Duarte Morais, On IRS, 2nd edition, Almedina, 2010, p. 56).

As the tax legislator has not defined, for this purpose, the concept of worker seniority, we must resort to the content of that concept as it exists in labor law, it being known that it is current doctrine (now enshrined in Article 11 of the LGT) that whenever fiscal norms employ terms specific to other branches of law, they must be interpreted in the same sense as they have therein, unless otherwise derives directly from the law.

Labor law provides for a broad concept of seniority by allowing that the time of service and category already achieved in other employers be taken into account, so that it be admitted without prejudice to the seniority acquired there, as this is not prohibited either by law (cfr. e.g., Articles 129, section 1, subsection j) and 396 of the Labor Code) nor by the principles of good faith, being a practice recognized in certain Instruments for Collective Regulation of Labor and in the customs of the labor profession and of enterprises.

Therefore, the disputed question rests on the problem of knowing which seniority should be taken into account in the case where seniority prior to admission to the company has been established between the employer and the worker, and it is necessary, first and foremost, to clarify that, as appears to be unanimous in labor law, there are three sources that could establish such seniority, namely (having as background the principle of contractual freedom – cfr. Article 405 of the Civil Code):

1 – The Law;
2 – The Individual Employment Contract;
3 – Instruments for Collective Regulation of Labor.

Not resulting from the rule under examination (cfr. Article 2, section 4 of the IRS Code) that the concept of seniority refers restrictively to time of service with the entity owing the compensation for cessation of the employment contract, and nothing justifying a restrictive interpretation of the rule of incidence, the broader notion of seniority arising from labor law must be accepted for calculating the amount subject to taxation in the context of IRS."

This understanding, which is also adopted here for the reasons set out in the judgment, is in line with settled case law.

Thus, it is concluded that the Respondent lacks merit regarding this issue.

  1. The Respondent also alleges that:

"(…) for the aforementioned CLA to be applicable, it is necessary that the worker in question be affiliated to one of the aforementioned trade unions and that the credit institution be a subscriber to the aforementioned Agreement"

And that,

"(…) in the present case, the R. did not prove, nor even alleged, his affiliation to any of the mentioned trade unions, which, by itself, is a reason excluding the invocation of clause 17 of the CLA."

However, the Respondent also lacks merit here, for, as can be read in the judgment of the Supreme Administrative Court of 02-03-2011, case 049/10, whose doctrine is also supported:

"in litigation concerning mere legality, as is the case in the proceeding for judicial challenge, the court must confine itself to the formulation of the judgment on the legality of the contested act as it occurred, assessing its respective legality in light of the contextual foundation integral to the act itself. Because the taxpayer must defend himself only from the assumptions stated in the contextual foundation of the tax act and from which the harmful effects were distracted, the court is prevented from valuing assessment of facts and law that do not figure in that foundation, that is, that were not invoked to lead to the contested tax act, for if this were not so the individual would find himself surprised in court with the invocation of another reality and this would represent a contraction of his right of judicial review in light of the impossibility of using the means conferred by law to examine the tax acts and which are more favorable than the means conferred by law to challenge judicial decisions."

Now, in the case at hand, in the Tax Inspection Report which supports the tax act, the Tax Authority only bases its position on the interpretation it makes of the rule that emerges from subsection b) of section 4 of Article 2 of the IRS Code, not alleging that the Claimant was not covered by the CLA.

On the contrary, from the substantiating discourse of the Tax Authority it clearly emerges that the Respondent understood that the Claimant was covered by the CLA, given that it is the Tax Authority itself that states in the Tax Inspection Report the following:

"the matter was redirected to the respective competent entity, the central tax administration body – IRS Directorate, for further consideration and decision" (…) "related to its application to workers in the banking sector covered by the respective CLA, a directive of 21.03.2016 from the Director General having been issued, the following understanding was sanctioned:

"The amounts received by workers in the banking sector, by way of compensation for termination of the employment contract, covered by the CLA (…)."

Given the foundation of the act, the Claimant did not, manifestly, have to allege and prove that he was covered by the CLA.

Accordingly, the tax act is illegal for violating Article 4, section 2, subsection b) of the IRS Code, as to the concept of seniority, in the terms set out above.

From the above, the following conclusions emerge:

a) The seniority to be considered is 16.82 years and not 18 years as resulted from the taxpayer's income declaration.

b) The contested tax act is illegal for being based on seniority of 15.35 years and not on that of 16.84 years.

c) The taxable matter to be added in relation to the first assessment should be based, given the proven facts, on severance compensation received of € 172,611.6 and not € 171,011.60.

  1. The Claimant further sought to condemn the Respondent to restitute to the Claimant the tax paid in excess regarding the assessment sub judice, plus compensatory interest.

In the case at hand, it is manifest that, following the illegality of the tax assessment acts, the Claimant's claim for restitution is warranted by force of Articles 24, section 1, subsection b) of the LRAT and 100 of the LGT, as this is essential to restore the situation that would exist had the illegality in question not been committed.

As concerns compensatory interest, this claim must be assessed in light of Article 43 of the General Tax Law.

Section 1 of that article provides that "Compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount superior to that legally owed."

We adopt the understanding of Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa who maintain that "The error attributable to the services that made the assessment is demonstrated when they proceed with a gracious complaint or judicial challenge of that same assessment and the error is not attributable to the taxpayer" (General Tax Law, Encounters with Writing, 4th Edition, 2012, p. 342).

In the case "sub judice," as the error giving rise to the assessment is not attributable to the Claimant, the Respondent's condemnation regarding compensatory interest cannot fail to be warranted.

JUDGMENT

The arbitral claim is held to be partially warranted, declaring the illegality of the contested tax act, with the Respondent to assess the tax obligation based on seniority of 16.84 years and to restitute to the Claimant the tax paid in excess, plus compensatory interest.

Value of the action: € 7,981.64 (seven thousand nine hundred eighty-one euros and sixty-four cents) in accordance with Article 306, section 2 of the Code of Civil Procedure and Article 97-A, section 1, subsection a) of the Code of Administrative Court Procedure and Article 3, section 2 of the Regulation of Costs in Arbitration Proceedings.

Costs, in the amount of € 612.00 (six hundred twelve euros), by the Claimant in the proportion of twenty-one percent and by the Respondent in the amount of seventy-nine percent, in accordance with section 4 of Article 22 of the LRAT.

Notify.

Lisbon, CAAD, 29.11.2017

The Arbitrator

Marcolino Pisão Pedreiro

Frequently Asked Questions

Automatically Created

How is seniority (antiguidade) calculated for IRS tax exemption on employment termination compensation in Portugal?
Seniority (antiguidade) for IRS tax exemption purposes is calculated based on years of service, but Portuguese case law shows disputes over whether this means only service with the employer paying compensation or total sector service under collective labor agreements. Article 2(4) of the IRS Code provides the exemption framework, but doesn't explicitly define seniority. According to Article 11(2) of the General Tax Law, when tax legislation lacks specific definitions, labor law concepts apply. In banking sector cases, Collective Labour Agreements often define seniority as total service across all sector institutions in Portugal, which can conflict with tax authority interpretations limiting it to service with the specific employer.
What portion of a severance payment is exempt from IRS taxation under Portuguese tax law?
Under Article 2(4) of the Portuguese IRS Code, severance compensation is partially exempt from IRS taxation. The tax-exempt portion corresponds to the compensation attributable to the employee's years of service (antiguidade). Any amount exceeding this calculation is taxed as Category A income. The formula effectively exempts compensation proportional to tenure, with the excess amount subject to progressive IRS rates. For example, if total compensation is €171,011 and the exempt portion based on seniority calculations is €83,614, the remaining €87,397 would be subject to IRS taxation. The exact calculation depends critically on how many years of seniority are recognized.
Can a taxpayer challenge the Tax Authority's calculation of years of service for compensation tax purposes?
Yes, taxpayers can challenge the Tax Authority's calculation of years of service through CAAD (Centro de Arbitragem Administrativa) arbitration, as demonstrated in Process 277/2017-T. Challenges typically arise when collective labor agreements define seniority differently than tax authorities interpret the IRS Code. Taxpayers must file arbitration requests under Decree-Law 10/2011 (RJAT), presenting evidence such as employment contracts, collective bargaining agreements, and payroll records proving total service time. Common disputes involve whether seniority includes service with previous employers in the same economic sector, particularly when sector-wide CLAs explicitly recognize accumulated service for labor law purposes.
How does CAAD arbitration work for disputes over IRS taxation of bank employee redundancy payments?
CAAD arbitration for IRS taxation disputes on redundancy payments follows the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). The process begins when a taxpayer files a request to constitute an arbitral tribunal, identifying the contested tax assessment. The CAAD President designates an arbitrator, who constitutes the tribunal within legal deadlines. Both parties submit written arguments—the taxpayer's initial request and the Tax Authority's response. The arbitrator analyzes applicable law (IRS Code, General Tax Law, relevant labor law provisions) and issues a binding arbitral decision. For bank employee severance disputes, key issues often involve interpreting Article 2(4) IRS Code regarding seniority calculations and whether Banking Sector Collective Labour Agreements bind tax treatment.
What is the tax treatment of compensation received from a mutual termination agreement (revogação do contrato de trabalho) in Portugal?
Compensation from mutual termination agreements (revogação do contrato de trabalho) in Portugal receives partially favorable tax treatment under IRS rules. The portion corresponding to the employee's seniority (antiguidade) is exempt from IRS taxation per Article 2(4) of the IRS Code. However, any excess above this seniority-based calculation is taxed as Category A employment income, subject to progressive IRS rates and potentially significant tax liability. The paying employer must withhold IRS tax on the taxable portion. Critical factors include: correct calculation of years of service, proper application of collective labor agreements, and accurate determination of which portion exceeds the exempt threshold. Disputes often require CAAD arbitration to resolve calculation methodology disagreements.