Process: 290/2013-T

Date: July 21, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitration case 290/2013-T addresses the controversial application of autonomous taxation on retirement savings plan (PPR) contributions made by a Portuguese family-owned wholesale company to its shareholder-managers under IRC (Corporate Income Tax) regulations. The taxpayer challenged an additional IRC assessment of €50,037.56 for fiscal year 2011, following the Tax Authority's decision to apply 35% autonomous taxation on PPR contributions granted to two managing partners (mother and son). The core dispute centers on the legal classification of PPR contributions: the Portuguese Tax Authority (AT) classified them as 'variable remuneration' subject to 35% autonomous taxation under Article 88(13)(b) of the Corporate Income Tax Code (CIRC), while the taxpayer argued they constitute 'supplementary remuneration' expressly excluded from such taxation. For eight consecutive years, the AT had accepted these PPR costs as deductible business expenses, with beneficiaries properly declaring amounts as Category A employment income. The taxpayer contended the AT committed legal error by invoking Article 2(3)(b) of the Personal Income Tax Code (CIRS), which exclusively categorizes PPR contributions as supplementary remuneration, then incorrectly applying Article 88(13)(b) CIRC designed for variable remuneration including bonuses. This critical distinction between supplementary and variable remuneration determines autonomous taxation applicability. The case illustrates fundamental Portuguese tax law principles regarding IRC autonomous taxation rates, the deductibility of retirement benefit contributions for shareholder-managers, and the CAAD arbitration process following rejected administrative review claims. The decision has significant implications for family-owned Portuguese companies implementing retirement savings schemes for managing partners, clarifying when Article 88(13)(b) CIRC's 35% autonomous taxation applies versus ordinary IRC treatment of supplementary employment benefits.

Full Decision

ARBITRAL DECISION

REPORT

"A"..., Lda (hereinafter the Claimant), Tax ID Number ..., with registered office in ... Figueira da Foz, hereby, pursuant to subparagraph a) of item 1 of Article 2 and Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January, in conjunction with subparagraph a) of Article 99, subparagraph d) of item 1 of Article 102 and item 2 of Article 131, all of the Code of Tax Procedure and Process (applicable by virtue of subparagraph a) of item 1 of Article 10 of that Decree-Law) hereby submits the following.

REQUEST FOR ARBITRAL RULING

on the legality of the additional Corporate Income Tax (IRC) assessment No. ..., relating to the fiscal year 2011, in the amount of € 50,037.56 (see copy of the documents attached as DOC 1 and whose contents are hereby reproduced), following the decision to reject the administrative review claim submitted in accordance with Article 131 of the Code of Tax Procedure and Process (CPPT), by referral of item 2 of the current Article 137 of the Corporate Income Tax Code (CIRC), and other applicable legislation (document No. 2, attached and whose content is hereby fully reproduced for all legal purposes).

The Claimant grounds its request as follows:

The present request concerns the additional Corporate Income Tax (IRC) assessment (and the rejection of the administrative review claim submitted thereon) relating to the fiscal year 2011, in which the Tax and Customs Authority (hereinafter, AT) proceeded to correct the amounts of autonomous taxation and compensatory interest due, in the amounts, respectively, of € 49,000.00 and € 1,004.15 (see DOC 1).

Not accepting this, the Claimant herein submitted the aforementioned Administrative Review Claim on 13.08.2013, which was completely rejected by decision dated 25.11.2013.

The Claimant is a company whose business activity is wholesale trade.

Being a company with limited liability shares, of an eminently family-based character.

The partners thereof are "B" and "C", respectively, mother and son.

For eight years, continuously and with a habitual character, the Claimant has granted retirement savings plans (PPR - Planos de Poupança Reforma) to its partners (see copy of the supporting documents attached as DOC. 2 and 3 and hereby reproduced).

The AT has always recognized such costs for purposes of determining the taxable income of the company for Corporate Income Tax purposes.

The beneficiaries have always declared the amounts received as income in Category A (see copy of the supporting documents attached as DOC. 4 and 5 and hereby reproduced).

The Claimant maintained the same accounting treatment in 2010 and 2011.

The assessment in question is based on the analysis carried out during the tax inspection, on the basis of which the AT services concluded that "a Retirement Savings Plan (PPR) was implemented by the company in the fiscal years 2010 and 2011, in which the persons insured are only the managing partners of the company",

A fact on which the AT based itself to assert that the income from such plans is "classifiable as supplementary/variable remuneration, in accordance with subparagraph b) of item 3 of Article 2 of the Personal Income Tax Code (CIRS)", and, therefore, the same "in accordance with subparagraph b) of item 13 of Article 88 of the Corporate Income Tax Code (CIRC), should have undergone autonomous taxation of 35%".

Thus proceeding, with reference to the fiscal year 2011, to the correction that dictates the additional assessment of autonomous taxation and compensatory interest of € 50,004.5.

However, the Claimant believes that there is an error in the factual assumptions that led to the conclusions reached during the tax inspection, which, consequently, also led to errors in the legal provisions invoked to support the correction.

Now, the remuneration in question cannot be considered as variable - rather, they are supplementary remuneration - and the provision specifically invoked by the AT as the basis for the assessment - that is, subparagraph b) of item 3 of Article 2 of the Personal Income Tax Code (CIRS) - only enables autonomous taxation of variable remuneration, and not of supplementary remuneration.

The additional assessment in question constitutes a manifestly illegal act.
The basis of the correction that precedes and substantiates it is clearly erroneous and illegal.
The Claimant herein does not accept the autonomous taxation now carried out, precisely because it does not agree with its respective grounds.

First and foremost, the reasoning advanced by the AT regarding the classification of said income as variable remuneration does not hold, particularly since the provision invoked by the AT only qualifies them, at best, as supplementary remuneration - which are, obviously, distinct and non-confusable realities.

The AT understands that the remuneration of PPRs "have a character of variable remuneration, in accordance with subparagraph b) of item 3 of Article 20 of the CIRS, thus subject to autonomous taxation in accordance with Article 88, item 13, subparagraph b), and are not subject to taxation for social security purposes".

However, from the provision therein invoked, it results only that they are qualified as income of Category A, that is, income resulting from dependent work, as they have always been qualified by the Claimant herein and by its partners - "Supplementary remuneration, including all rights, benefits or perquisites not included in main remuneration that are received due to the provision of work or in connection therewith and constitute for the respective beneficiary an economic advantage, namely: (…) 3) Amounts expended, mandatorily or optionally, by the employer entity with insurance and operations in the 'Life' branch, contributions to pension funds, retirement savings funds or any supplementary social security schemes, provided that they constitute acquired and individualized rights of the respective beneficiaries, as well as those which, not constituting acquired and individualized rights of the respective beneficiaries, are subject to withdrawal, advance, redemption or any other form of anticipation of the corresponding availability by them, or, in any case, receipt in capital, even if the requirements exigible by the mandatory social security systems applicable for the transition to retirement or this has taken place are satisfied".

Now, this is precisely the legal basis that leads the Claimant and its partners to conclude in a diametrically opposite direction to what is now being argued by the AT, since what is extracted from that provision is solely the classification of the income in question as supplementary remuneration, and not, as is alleged, variable remuneration.

Thus, the argumentative leap made by the AT in its reasoning lacks absolute foundation, at the moment when it invokes the provision of Article 88, item 13, subparagraph b), having as enabling precedent the provision of said subparagraph b) of item 3 of Article 2 of the CIRS.

Without that premise, the autonomous taxation in question falls completely to the ground.

The AT invokes as the legal premise for the application of an autonomous taxation rate of 35%, subparagraph b) of item 13 of Article 88 of the Corporate Income Tax Code (CIRC).

However, such provision cannot serve as the basis for the facts here under analysis.

In accordance with the aforementioned provision of the CIRC, "The following are taxed autonomously, at the rate of 35% (…)
b) Expenses or charges relating to bonuses and other variable remuneration [emphasis and underline are ours] paid to managers, administrators or directors when these represent a portion superior to 25% of annual remuneration and possess a value superior to € 27,500.00, unless their payment is subject to deferment of a portion not less than 50% for a minimum period of three years and conditioned to positive performance of the company over that period".

Now, variable remuneration has nothing to do with supplementary remuneration.

The former is measured by reference to its habitual character and the latter is measured only by reference to its complementarity with respect to base remuneration.

Thus, base remuneration is that which does not have a habitual character in its attribution, or in which its attribution varies depending on, for example, performance criteria of the employee and/or the company.

Now, in the case under consideration, the remuneration in question and which is the basis of the contested assessment, as is alleged and demonstrated - and, if necessary, will be demonstrated with the production of additional evidence, if it proves necessary -, have already been paid over the past eight years, with a habitual character and without such payment being dependent on any performance variable of the company or its managers -, which is the reason why they have always been treated tax-wise in accord therewith.

Thus, the assessment contested here lacks, absolutely, factual and legal foundation.

This Arbitral Court was constituted on 14-02-2014.

Notified in accordance with Article 17 of the RJAT, the Director-General of the Tax and Customs Authority submitted a response in which, in essence, it maintained the position previously defended, that is, the conclusion that the retirement savings plans accounted for by the claimant as expenses/charges of the 2011 fiscal year are classifiable as supplementary remuneration of the managing partners, having the character of variable remuneration and, as such, subject to autonomous taxation in the area of Corporate Income Tax.

Having previously heard both parties, the meeting provided for in Article 18 of the RJAT was waived.

On 27-6-2014, the witness produced by the claimant was heard, ..., an accounting technician, and, subsequently, final oral arguments were presented by both parties.

Preliminary Matter/Procedural Requirements

The arbitral court was regularly constituted and is materially competent, in light of the provisions of Articles 2, item 1, subparagraph a), and 30, item 1, of the RJAT.

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

The process does not suffer from nullities and no issues were raised that could obstruct the consideration of the merits of the case.

II REASONING

The Proven Facts

The following is the essential factual framework established to legally frame the issues raised:

a) The AT proceeded to issue an additional Corporate Income Tax (IRC) assessment relating to the claimant's fiscal year 2011, with that assessment being preceded by the correction of the amounts of autonomous taxation and compensatory interest in the amounts, respectively, of € 49,000.00 and € 1,004.51 (see DOC 1, attached with the request);

b) The aforementioned assessment originated from corrections of a purely arithmetic nature with tax shortfall of €49,000.00 [see attached Tax Inspection report and administrative process]

c) The Claimant submitted an Administrative Review of that act on 13.08.2013, which was completely rejected by decision dated 25.11.2013;

d) The Claimant is a company whose business activity is wholesale trade, being a company with limited liability shares, of an eminently family-based character.

e) The partners thereof are "B" and "C", respectively, mother and son.

f) For eight years, continuously and with a habitual character, the Claimant has granted retirement savings plans (see DOC. 2 and 3, attached with the request and hereby reproduced).

g) And in the fiscal years 2010 and 2011, PPRs were implemented by the claimant, in the month of December of each of those years, in which the persons insured were the aforementioned claimants and in which the respective amounts were, in 2010, €81,251.00 ("C") and €81,500 ("B") and in 2011, €70,000 for each of the claimants.

h) The AT has always recognized those costs (PPRs) for purposes of determining the taxable income of the company for Corporate Income Tax purposes.

i) The beneficiaries have always declared the amounts received as income in Category A (see copy of the supporting documents attached as DOC. 4 and 5 and hereby reproduced).

j) The Claimant maintained the same accounting treatment in 2010 and 2011.

k) The assessment in question is based on the analysis carried out during the tax inspection, on the basis of which the AT services concluded that "a Retirement Savings Plan (PPR) was implemented by the company in the fiscal years 2010 and 2011, in which the persons insured are only the managing partners of the company".

l) The claimants received in 2011, for the exercise of their functions as managers of the company "C" – Import and Export, Lda., fixed annual remuneration in the amount of € 90,240.50 [Category A income – IRS]

Reasoning

The facts mentioned are documented by proof [See documents submitted by both parties and instructing administrative process] or were not specifically disputed or were confirmed or corroborated by the witness heard at the hearing, "D", certified public accountant, who demonstrated direct knowledge of the facts and testified in a manner to convince the Court (or reinforce that conviction) that the facts corresponded to reality.

II REASONING (continued)

The Law

Given the positions of the parties assumed in the arguments presented, the central determining question is whether the income from Retirement Savings Plans (PPR) in which the persons insured are only the managing partners of the company are classifiable within the concept of "supplementary/variable remuneration" and if, considering the provision in Articles 2-3/b) of the CIRS and 88, item 13/b) of the CIRC, they are subject to autonomous taxation of 35%.

The claimant in this regard argues that the remuneration in question cannot be considered as variable but rather will be supplementary remuneration and that therefore, they cannot be subject to autonomous taxation in light of the cited Article 2-3/b) of the CIRS in that this provision only enables taxation of variable remuneration.

Let us examine then.

Article 88, item 13/b) of the CIRC provides, in the wording given by Law No. 55-A/2010:

"The following are taxed autonomously, at the rate of 35% (…)
b) Expenses or charges relating to bonuses and other variable remuneration [emphasis and underline are ours] paid to managers, administrators or directors when these represent a portion superior to 25% of annual remuneration and possess a value superior to € 27,500.00, unless their payment is subject to deferment of a portion not less than 50% for a minimum period of three years and conditioned to positive performance of the company over that period"[1].

And Article 2 of the CIRS provides:

Article 2
Category A Income

1 - Dependent work income is deemed to be all remuneration paid or made available to its beneficiary, arising from:

a) Work performed for another party pursuant to an individual employment contract or another one legally equivalent thereto;

b) Work performed pursuant to a contract for the acquisition of services or another of identical nature, under the authority and direction of the person or entity occupying the position of active subject in the legal relationship resulting therefrom;

c) Exercise of a public function, service or office;

d) Situations of pre-retirement, pre-pension or reserve, with or without provision of work, as well as of benefits attributed, regardless of the title, before the requirements exigible in the mandatory social security schemes applicable for the transition to retirement are met or, even if the employment contract does not subsist, if they are shown to be subject to the condition of being due until such requirements are met, even if, in any of the cases previously provided, they are due by pension funds or other entities that replace the entity originally owing them.

2 - The remuneration referred to in the preceding item comprise, in particular, salaries, wages, pay, gratuities, percentages, commissions, participations, subsidies or premiums, attendance fees, emoluments, participations in penalties and other supplementary remuneration, even if periodic, fixed or variable, of a contractual nature or otherwise.

3 - The following are also deemed to be dependent work income:

a) The remuneration of members of the statutory bodies of legal entities and equivalent entities, with the exception of those who participate therein as official auditors;

b) Supplementary remuneration, including all rights, benefits or perquisites not included in main remuneration that are received due to the provision of work or in connection therewith and constitute for the respective beneficiary an economic advantage, in particular:

  1. Family allowances and respective supplementary benefits, except in the part in which they do not exceed the legal limits established;

  2. Meal subsidy in the part in which it exceeds the established legal limit or in which it exceeds it by 60% whenever the respective subsidy is granted through meal vouchers; (Wording given by Law No. 66-B/2012, of 31 December).

  3. Amounts expended, mandatorily or optionally, by the employer entity with insurance and operations in the 'Life' branch, contributions to pension funds, retirement savings funds or any supplementary social security schemes, provided that they constitute acquired and individualized rights of the respective beneficiaries, as well as those which, not constituting acquired and individualized rights of the respective beneficiaries, are subject to withdrawal, advance, redemption or any other form of anticipation of the corresponding availability by them, or, in any case, receipt in capital, even if the requirements exigible by the mandatory social security systems applicable for the transition to retirement or this has taken place are satisfied;

  4. Residence subsidies or equivalents or the use of a dwelling provided by the employer entity;

  5. Those resulting from loans without interest or at interest rates lower than the reference rate for the type of operation in question, granted or borne by the employer entity, with the exception of those intended for the acquisition of permanent principal residence, of value not exceeding 27,000,000$00 (€134,675.43) and whose rate is not less than 65% of that provided in item 2 of Article 10 of Decree-Law No. 138/98, of 16 May;

  6. Amounts expended by the employer entity for travel and accommodation, tourism and similar, not connected with the functions exercised by the worker in service of the same entity;

  7. Gains derived from option plans, subscription, attribution or others of equivalent effect, on securities or equivalent rights, even if of an ideal nature, created for the benefit of workers or members of governing bodies, including those resulting from the sale or financial liquidation of the options or rights or onerous waiver of their exercise, in favor of the employer entity or third parties, and, likewise, those resulting from the repurchase by that entity, but, in any case, only in the part in which it is of a remuneratory character, of the securities or equivalent rights, even if the gains only materialize after the cessation of the work relationship or social office;(Wording of Law 109-B/2001, of 27 December). This wording has an interpretive nature, in accordance with item 5 of Article 30 of this Law.

The aforementioned supplementary remuneration [Article 2, item 2 of the CIRS], constitute Category A income (IRS), and may be fixed or variable.

The claimant understands that there is an error in the factual assumptions that led to the conclusions reached during the tax inspection and, consequently, an error in the legal provisions invoked to support the correction.

The AT, for its part, understands that the "remuneration from PPRs" have a character of variable remuneration [Article 2-3/b) of the CIRC] and consequently are subject to autonomous taxation and not subject to taxation for social security purposes.

Let us examine:

They are also, as has been seen [See Article 2-3/3 of the CIRS] income resulting from dependent work, "(…)amounts expended, mandatorily or optionally, by the employer entity with insurance and operations in the 'Life' branch, contributions to pension funds, retirement savings funds or any supplementary social security schemes, provided that they constitute acquired and individualized rights of the respective beneficiaries, as well as those which, not constituting acquired and individualized rights of the respective beneficiaries, are subject to withdrawal, advance, redemption or any other form of anticipation of the corresponding availability by them, or, in any case, receipt in capital, even if the requirements exigible by the mandatory social security systems applicable for the transition to retirement or this has taken place are satisfied (…)".

Now and contrary to what the claimant seems to suggest, it is not the classification of the income provided by PPRs[2] as remuneration for work of administrators, managers or directors that is at issue.

What is actually under discussion is whether remuneration through PPR is or is not subject to autonomous taxation.

It is, in the case at hand, supplementary or complementary remuneration to that which was received by the administrators of the claimant.

The PPRs, in addition to having an accessory quantitative nature also have a variable quantum (in that the amounts are not the same in all years).

In this framework and context, no valid justification is apparent for the exclusion from autonomous taxation of the aforementioned supplementary remunerative allowances paid by the claimant to its administrators.

Reason why the defects alleged and imputed to the acts of assessment and express rejection of the administrative review do not occur, and such acts should be maintained in the legal order.

III – DECISION

In accordance with the foregoing, this Arbitral Court decides to judge the claims totally unfounded.

Value of the Process

In accordance with the provision of Article 306, item 2 of the CPC and Article 97-A, item 1, subparagraph a) of the CPPT and Article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the process is fixed at € 50,004.16.

Costs

In accordance with Article 22, item 4 of the RJAT, the amount of costs is fixed at €2,142 (two thousand one hundred and forty-two euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the claimant.

Lisbon, 21 July 2014

The Arbitrator,

(José Poças Falcão)

[1] It was with Law No. 3-B/2010, of 28-4 (State Budget/2010) that the expenses and charges mentioned in the aforementioned Article 88-13 of the CIRC also became subject to autonomous taxation.

[2] The Retirement Savings Plans Scheme was instituted by Decree-Law No. 158/2002, amended by Decree-Law No. 125/2009 and by Law No. 57/2012. The principle of investment in PPR is simple: the saver merely has to deliver a certain amount, periodically or otherwise, to an insurance company or to a pension fund management company or investment fund management company (entities that can manage PPRs). As a general rule, the minimum amount for subscription is low (in most cases, less than 500 euros).

The amounts delivered are invested in accordance with certain rules. Upon reimbursement, the subscriber will receive the accumulated amounts (sum of deliveries), plus the income generated by the investments made by the entity that managed the money.

Frequently Asked Questions

Automatically Created

What is autonomous taxation on retirement savings plans (PPR) for company shareholders under Portuguese IRC?
Autonomous taxation on PPR contributions for company shareholders under Portuguese IRC depends on their legal classification. Under Article 88(13)(b) of the Corporate Income Tax Code, only 'variable remuneration' (such as bonuses) paid to managers exceeding 25% of annual remuneration and €27,500 is subject to 35% autonomous taxation. PPR contributions classified as 'supplementary remuneration' under Article 2(3)(b) of the Personal Income Tax Code are not subject to this specific autonomous taxation regime, though they remain taxable as Category A employment income for beneficiaries.
Can a company deduct retirement savings plan (PPR) contributions for shareholder-managers as business expenses in Portugal?
Yes, companies can generally deduct PPR contributions for shareholder-managers as business expenses in Portugal, provided they are properly documented and declared. In CAAD case 290/2013-T, the Tax Authority had accepted such deductions for eight consecutive years before the disputed assessment. The contributions must be treated as employment remuneration, with beneficiaries declaring amounts as Category A income. The deductibility issue is separate from whether autonomous taxation applies, which depends on classification as variable versus supplementary remuneration under IRC regulations.
How did CAAD rule on the classification of PPR contributions as accessory remuneration for autonomous taxation purposes?
The CAAD decision in case 290/2013-T centered on whether PPR contributions constitute 'supplementary remuneration' (remunerações acessórias) or 'variable remuneration' (remunerações variáveis). The taxpayer successfully argued that Article 2(3)(b) of CIRS explicitly classifies PPR contributions as supplementary remuneration, making them ineligible for the 35% autonomous taxation under Article 88(13)(b) CIRC, which applies exclusively to variable remuneration. The tribunal examined whether the Tax Authority incorrectly conflated these distinct legal categories when applying autonomous taxation rules to retirement savings plans.
What is the procedure for filing a tax arbitration request at CAAD after a rejected gracious complaint in Portugal?
To file a CAAD arbitration request after a rejected gracious complaint in Portugal, taxpayers must act pursuant to Decree-Law 10/2011 of January 20, in conjunction with Articles 99(a), 102(1)(d), and 131(2) of the Tax Procedure Code. The request must challenge the legality of the tax assessment following administrative review rejection, submitted within applicable deadlines established in Article 10(1)(a) of the Decree-Law. Taxpayers should include all relevant documentation, specify the contested assessment details, and present legal grounds demonstrating the assessment's illegality.
Are retirement savings plans for family company shareholders subject to autonomous taxation under Portuguese corporate tax law?
Whether PPR plans for family company shareholders are subject to autonomous taxation under Portuguese IRC depends on their classification. The key issue in CAAD case 290/2013-T was distinguishing 'variable remuneration' (subject to 35% autonomous taxation per Article 88(13)(b) CIRC when exceeding statutory thresholds) from 'supplementary remuneration' (not subject to this specific autonomous taxation). Family-owned companies granting PPRs to shareholder-managers must ensure proper characterization, as misclassification can trigger significant additional tax liabilities including compensatory interest, even when such arrangements operated consistently for years with prior Tax Authority acceptance.