Process: 300/2018-T

Date: October 29, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 300/2018-T) addresses a fundamental dispute concerning the application of Article 28 of the Portuguese IRS Code regarding the organized accounting regime versus the simplified regime for category B professional income. The taxpayer commenced business activity in 1975 and formally opted for organized accounting in 1996, maintaining this regime continuously. However, the Tax Authority unilaterally reclassified the taxpayer to the simplified regime for 2016 without notification, arguing that because the taxpayer's 2014 income (€146,088.60) fell below the €200,000 threshold in Article 28(2) CIRS and no new declaration of option was filed by March 2015, automatic reclassification applied. The taxpayer discovered this change only when attempting to file the Model 3 declaration with Annex C, being forced to submit Annex B under the simplified regime instead. The central legal question concerns whether a taxpayer who previously opted for organized accounting must repeatedly reaffirm this choice, or whether the initial option remains valid absent an express declaration to switch regimes. The case also examines the distinction between classification in organized accounting by legal obligation (when income exceeds thresholds) versus voluntary option, and whether the permanence rules differ. This decision has significant implications for Portuguese tax practitioners regarding regime stability, the formalities required to maintain organized accounting status, and the procedural safeguards against unilateral administrative reclassification without taxpayer notification.

Full Decision

ARBITRAL DECISION

I - Report

A - Identification of the Parties

Claimant: A..., with Tax Identification Number..., domiciled at Street..., ..., ...-... Porto, hereinafter referred to as Claimant or Taxpayer.

Respondent: Tax and Customs Authority, hereinafter referred to as Respondent or TA.

The Claimant filed a request for the constitution of an Arbitral Tribunal in tax matters and a request for arbitral decision, pursuant to the provisions of paragraph a) of article 2(1) and paragraph a) of article 10(1), both of Decree-Law no. 10/2011 of 20 January (Legal Regime of Arbitration in Tax Matters), hereinafter briefly referred to as LRAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of the Administrative Arbitration Centre (CAAD), and in accordance with the provisions of paragraph c) of article 11(1) of Decree-Law no. 10/2011 of 20 January, as amended by article 228 of Law no. 66-B/2012 of 31 December, the Tax Authority was notified on 2018-05-28.

The Claimant did not proceed to appoint an arbitrator, whereupon, pursuant to the provisions of article 6(1) and paragraph b) of article 11(1) 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 appointed Arbitrator Rita Guerra Alves, accepted by her in accordance with legal provisions.

On 2018-08-14, the parties were duly notified of that appointment, and did not express any objection to the appointment of the arbitrator, in accordance with article 11(1), paragraphs a) and b), of the LRAT and articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal was regularly constituted on 2018-09-04, to hear and decide upon the subject matter of the present dispute, and was automatically notified on that same day by the Tax and Customs Authority, as evidenced in the respective minutes.

No witness evidence was submitted, therefore in the procedural sequence both parties accepted the waiver of the meeting referred to in article 18 of the LRAT.

The parties have legal standing and capacity, are legitimate and are represented (articles 4 and 10(2) of the same statute and article 1 of Ordinance no. 112-A/2011 of 22 March).

The proceedings are not affected by any defects that would invalidate them.

B - REQUEST

The Claimant petitions for a declaration of illegality of the tax act levying Personal Income Tax (IRS) no. 2017..., corresponding to the fiscal year 2016, in the amount of € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents).

C - CAUSE OF ACTION

To support its request for arbitral decision, the Claimant alleges, with a view to the declaration of illegality of the tax act levying Personal Income Tax (IRS), already described in point 1 of this decision, as follows:

The Claimant commenced business activity on 01.10.75, and on 26.12.96 submitted a declaration of changes, opting for the organized accounting regime, which it has maintained until now.

Intending to remain in this regime, it did not submit any further declaration reaffirming the option for the organized accounting regime.

However, when it intended to submit the Model 3 declaration relating to the year 2016, it was surprised by the impossibility of submitting Annex C, relating to organized accounting, as a result of an alleged reclassification made by the TA into the simplified regime, effective from 01.01.2015, of which it was never notified.

In this context, it was not possible for it to submit the Model 3 Declaration with Annex C, relating to organized accounting, and it was obliged to comply with the declarative obligation, given the computer system validations in place, to submit Annex B with taxation under the simplified regime.

The Claimant argues that, having not submitted any declaration of change of classification until the end of March 2016, the organized accounting regime in force should remain applicable in 2016 and in subsequent years, and that the taxation levied based on the calculation of category B income in accordance with the rules of the simplified regime is illegal.

The Claimant concludes by urging the annulment of the taxation levied with respect to Corporate Income Tax for the year 2016, which should result in the annulment of the taxation of the tax that is the subject of the present claim, with its legal consequences.

D - RESPONSE OF THE RESPONDENT

The Respondent, duly notified for this purpose, timely submitted its response, in which, in brief summary, alleged as follows:

With the amendment introduced by Law no. 109-B/2001 of 27 December, which had retroactive effect from 1 January 2001, for taxpayers classified in the organized accounting regime, whether by choice or by legal obligation, the period of permanence would be only one year, not applicable to extension for an equal period.

Therefore, taxpayers classified in the organized accounting regime by legal obligation are not subject to the minimum period of permanence in the accounting regime, since such taxation did not result from an express manifestation of will through choice of the organized accounting regime.

From 2001 until 2015, the Claimant was classified in the organized accounting regime by legal obligation, since the annual net amount of category B income exceeded the legal limit provided for in article 28(2) of the IRS Code.

That is, pursuant to article 28(6) of the IRS Code, the Claimant, upon exceeding the amounts indicated in article 28(2) of the same provision, was classified in the standard organized accounting regime, by legal obligation, and remained in the same regime until 2015.

In 2014, the Claimant declared as category B income the amount of € 146,088.60 and in 2015 declared income of € 137,600.32, amounts which were below the limit of article 28(2) IRS Code, therefore it met the requirements for classification in the simplified regime.

This would not be the case if the Claimant had exercised the option for taxation according to the organized accounting regime, which it did not do, therefore it was classified in the simplified regime.

In 2014, the Claimant had calculated annual net income of € 146,088.60, below the limit set out in article 28 of the IRS Code of € 200,000.00 and, not having exercised the option for taxation under the organized accounting regime for the year 2015, the Claimant was classified in the simplified regime, pursuant to article 28(5) IRS Code, as amended by Law no. 82-E/2014.

This would not be the case if the Claimant had exercised the option for taxation under the organized accounting regime by the end of March 2015.

Accordingly, the classification of the Claimant in the simplified regime resulted from verification of the legal requirements provided for in article 28(2) IRS Code.

The Respondent concludes by urging the dismissal of the claim, as unproven, and consequently the absolution of the Respondent from the claim.

E - FACTUAL FINDINGS

For the assessment of the questions raised, it is necessary to first present the factual matter relevant to its understanding and the decision to be rendered, based on the facts alleged and the documentary evidence produced in the proceedings.

With regard to the factual matters considered relevant, this Tribunal finds the following facts to be established:

The Claimant commenced business activity on 01.10.75, and on 26.12.96 submitted a declaration of changes, opting for the organized accounting regime.

The Claimant never submitted a declaration to the TA opting for the simplified regime.

In 2014, the Claimant declared as category B income the amount of € 146,088.60 and in 2015 declared income of € 137,600.32.

The TA unilaterally altered the organized accounting regime to the simplified regime for the Claimant for the year 2016.

F - FACTS NOT PROVED

Of the facts of interest for the decision of the case, contained in the challenge, subject to concrete analysis, those not contained in the factual matters described above have not been proved.

G - ISSUES TO BE DECIDED

Having regard to the positions of the parties, adopted in the arguments presented by each, it is necessary to assess and decide:

(i) The declaration of illegality of the tax act levying Personal Income Tax (IRS) no. 2017..., corresponding to the fiscal year 2016, in the amount of € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents);

(ii) The payment of compensatory interest;

(iii) The preliminary issue of the exception of incompetence of the arbitral tribunal.

H - THE ALLEGED DILATORY EXCEPTION: EXCEPTION OF INCOMPETENCE OF THE ARBITRAL TRIBUNAL

The Respondent raised the issue of the absolute incompetence of the Arbitral Tribunal ratione materiae, on the grounds that the request presented by the Claimant does not fall within the scope of competence of the Tax Arbitral Tribunals, provided for in article 2 of the LRAT, thus exceeding the subject matter of the request for arbitral decision the scope of competence of the Arbitral Tribunal.

The Respondent argues that this Arbitral Tribunal is materially incompetent to assess and decide upon the claim that is the subject of the dispute sub judice, pursuant to articles 2(1), paragraph a) and 4(1), both of the LRAT and articles 1 and 2, paragraph a) both of Ordinance no. 112-A/2011, which constitutes a dilatory exception preventing consideration of the merits of the case, pursuant to article 576(1) and (2) of the Civil Procedure Code ex vi article 2, paragraph e) of the Tax Procedure Code and article 29(1), paragraphs a) and e) of the LRAT, which prevents consideration of the claim and requires absolution of the TA pursuant to articles 576(2) and 577, paragraph a) of the Civil Procedure Code, ex vi article 29(1), paragraphs a) and e) of the LRAT.

Accordingly, and because the issue of determination of the competence of courts is a matter of priority and ex officio consideration, pursuant to article 13 of the Administrative Court Procedure Code (ACPC) and article 578 of the Civil Procedure Code (CPC) by subsidiary application of article 29 of the Legal Regime of Arbitration in Tax Matters (LRAT), it is necessary, given the foregoing, to assess this dilatory exception.

We shall begin with a careful reading of the initial petition and an evaluation of the documents attached to the proceedings, from which the following results:

The request for arbitral decision determining that the Claimant was classified in the organized accounting regime, and consequently that taxation should be carried out in that regime. It further argues that the act at issue cannot be qualified as an act of determining taxable matter giving rise to tax assessment for the purposes of paragraph b) of article 2(1) of the LRAT.

In fact, the Claimant expressly challenges the assessment act in respect of IRS for the year 2016, requesting, ultimately, its annulment with the consequent restitution of the tax paid.

The act challenged by the Claimant, and the direct subject matter of this arbitral action, is the assessment act in respect of IRS no. 2017..., and, subsidiarily, the declaration of illegality of the decision that rejected the administrative objection (RG) filed by the Claimant.

It is therefore necessary, given the foregoing, to assess the request for dilatory exception, and, if verified, whether the knowledge of the questions raised by the Claimant in its Initial Petition would be prejudiced.

In accordance with the current regime set out in article 124 of Law no. 3-B/2010 of 28 April (State Budget for 2010), the Government was authorized to legislate to establish arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, so that the tax arbitration process would constitute an alternative procedural means to the judicial challenge process and to an action for recognition of a right or legitimate interest in tax matters.

Article 4(1) of Decree-Law no. 10/2011 of 20 January, which created the Legal Regime of Arbitration in Tax Matters, in the version introduced by Law no. 64-B/2011 of 30 December, provides for the binding of the TA to arbitral jurisdiction dependent on regulation subsequently issued by Ordinance 112-A/2011 of 22 March, which provides in its article 1 for the binding of the Directorate-General of Taxes and the Directorate-General of Customs and Special Consumption Taxes to the jurisdiction of the Arbitral Tribunals operating under the Legal Regime of Arbitration in Tax Matters.

The competence of the Arbitral Tribunals operating at CAAD is, in the first place, limited to the matters indicated in article 2(1) of the LRAT. In a second respect, the competence of the Arbitral Tribunals is also limited by the terms in which the TA bound itself to that jurisdiction, pursuant to article 4 of the LRAT, which provides that "the binding of the tax administration to the jurisdiction of the tribunals constituted under this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered". This is embodied in Ordinance no. 112-A/2011 of 22 March.

In light of this second limitation on the competence of the Arbitral Tribunals operating at CAAD, the resolution of the competence question depends essentially on the terms of that binding, since, even if a situation falls within article 2 of the LRAT, if it is not covered by the binding provided for in the aforesaid ordinance, then the possibility of this Arbitral Tribunal deciding the dispute jurisdictionally is excluded.

It should be noted that the scope of the legislative authorization granted by article 124 of Law no. 3-B/2010 of 28 April was not exhausted, which provided that the arbitration process would constitute not only an alternative procedural means to the judicial challenge process, but also applicable to an action for recognition of a right or legitimate interest in tax matters (nos. 2 and 4, paragraphs a) and b) of the aforesaid article 124), since this last part was not subject to regulation.

Thus, we can identify another restriction to the scope of competence of the Arbitral Tribunals arising from the fact that the request for recognition of rights and legitimate interests in tax matters only falls within the circle of competence of the Arbitral Tribunals in cases where an underlying declaration of illegality of a tax assessment act or acts determining taxable matter or taxable profit exists.

On the matter of binding and its respective object, having regard to article 2 of Ordinance no. 112-A/2011 of 23 March, the Directorate-General of Taxes only accepted the jurisdiction of the Arbitral Tribunal provided that the necessary administrative objection provided for in articles 131 to 133 of the TCPC is first filed as a prior condition to judicial challenge in cases of self-assessment, withholding at source and quarterly payments, which may be considered justified in light of the subsidiary application of the norms of tax procedure and procedure operative under article 29 of the LRAT as well as the qualification of arbitration as an alternative procedural means to the judicial challenge process.

As is well known, the competence of the tribunal is determined by the request of the claimant and the cause of action on which it is based, expressed in the initial petition, since it does not depend on either the legitimacy of the parties or the success of the action, as is the uniform understanding in doctrine and case law (see, inter alia, Manuel de Andrade, Rudimentary Notions of Civil Procedure, 1979, p. 91; Miguel Teixeira de Sousa, Declaratory Competence of Common Courts, p. 36; and decisions of the STJ of 12/1/94, 2/7/96 and 3/2/97, in BMJ, respectively, nos. 433, p. 554, 459/444 and 364/591, of 5/2/2002, in CJ – STJ, year X, volume I, p. 68, of 18/3/2004, in case no. 04B873, of 13/5/2004, in case no. 04A1213 and of 10/4/2008, in case no. 08B845, these three last available at www.dgsi.pt; of the Court of Conflicts, of 20/10/2011, issued in case no. 13/11, available at the same site, and of this Court of 7/11/2000, CJ, year XXV, volume V, p. 184).

On the competence of the Arbitral Tribunals, Counselor Lopes de Sousa tells us: "Although in paragraph a) of article 2(1) of the LRAT only explicit reference is made to the competence of the Arbitral Tribunals to declare the illegality of assessment acts, acts determining the amount to be paid by the taxpayer, this competence also extends to second and third degree acts that assess the legality of those primary acts, in particular acts rejecting administrative objections and acts rejecting hierarchical appeals filed against decisions of such objections. In fact, this conclusion is unequivocally drawn from paragraph a) of article 10(1) of the LRAT, which makes express reference to article 102(2) of the TCPC (which deals with the rejection of administrative objection) and to 'the decision of the hierarchical appeal'." (Jorge Lopes de Sousa, in Commentary on the Legal Regime of Tax Arbitration, Guide to Tax Arbitration, Almedina, 2013, p. 121).

"Limiting the competence of the Arbitral Tribunals operating at CAAD, as regards assessment acts, self-assessment, withholding at source and quarterly payments, to the declaration of their illegality and its consequences, only the acts rejecting administrative objections or hierarchical appeals or requests for appeal of tax acts in cases where these second degree or third degree acts effectively considered the legality of assessment, self-assessment, withholding at source and quarterly payment acts, and not also when such acts refrained from that consideration, because it was understood there was some obstacle to doing so (such as, for example, failure to meet the time limit or lack of standing or incompetence)." (ibidem, p. 123).

As Counselor Lopes de Sousa observes, the possibility of assessing the legality of primary acts through assessment of the legality of second degree acts is confirmed in the provision of article 2 of the LRAT for assessment of claims relating to self-assessment, withholding at source and quarterly payment acts (regarding which the necessary administrative objection is required, in articles 131 to 133 of the TCPC), it being the case that in these cases, the direct subject matter of the challenging process is, in general, the second degree act assessing the legality of the assessment act, and that, if it confirms this, it must be annulled, in order to obtain the declaration of illegality of the assessment act.

This limitation is explained because "in the case where the second or third degree act addresses the legality of the assessment act, the rejection of the administrative objection that confirms the act incorporates its respective illegalities, which means that from the assessment of the illegality of the second or third degree act the illegality of the assessment act results. This effect does not occur in cases where the second or third degree act only addressed a preliminary question whose solution prevented the assessment of the legality of the primary act, since in this case, the eventual illegality of the second or third degree act merely has as a corollary that the legality of the primary act should be assessed, not implying its illegality" (idem, ibidem).

The rule is that the challenging of administrative tax acts should be carried out in the judicial tax process, through judicial challenge or special administrative action (paragraphs d) and p) of article 97(1) and (2) of the TCPC), depending on whether those acts do or do not involve assessment of the legality of administrative assessment acts. There are exceptions to this division of the fields of application of the judicial challenge process and special administrative action, such as, for example, the challenging of acts rejecting administrative objections (special rule article 102(2) of the TCPC).

However, for the Arbitral Tribunals operating at CAAD this exception will be irrelevant, since it results from paragraph a) of article 2(1) of the LRAT that, in relation to assessment, self-assessment, withholding at source and quarterly payment acts, only the declaration of their illegality is included in its competence and not the assessment of the legality of acts that do not involve that assessment.

Decisions rejecting administrative objections cannot be assessed in themselves, in particular those that did not consider the merits of the assessment act that is the subject of the objection, because what is aimed at through the challenging of the administrative objection decision is to assess the legality of the underlying assessment act, and not the administrative objection decision that did not consider the merits of the taxpayer's claim.

In fact, article 2 does not contain any express reference to such acts, contrary to what occurs with the legislative authorization on which the Government based itself to approve the LRAT, which refers to "requests for revision of tax acts" and "administrative acts involving assessment of the legality of assessment acts".

However, the formula "declaration of illegality of assessment acts, self-assessment, withholding at source and quarterly payment acts", used in paragraph a) of article 2(1) of the LRAT does not restrict, in a mere declaratory interpretation, the scope of arbitral jurisdiction to cases where a direct challenge is made to an act of one of those types. In fact, the illegality of assessment acts can be declared jurisdictionally as a consequence of the illegality of a second degree act that confirms an assessment act, incorporating its illegality.

The formula used in paragraph a) of article 2(1) of the LRAT does not exclude cases where the declaration of illegality results from the illegality of a second degree act; it will also encompass cases where the second degree act is that of rejection of a request for revision of the tax act, since no reason appears for restricting it.

In cases where the second or third degree act addresses the legality of the assessment act, the rejection of the administrative objection or hierarchical appeal that confirms that act incorporates its respective illegality, so that from the assessment of the illegality of the second or third degree act the illegality of the assessment act results.

The proper means to challenge acts that do not involve assessment of the legality of assessment acts and which are also not acts determining taxable matter or taxable income is not judicial challenge, but rather special administrative action, in accordance with paragraph p) of article 97(1) of the TCPC and article 46 and following of the ACPC.

In light of what is established in article 24 of the LRAT, concerning the effects of the arbitral decision favourable to the taxpayer, it is found that arbitral decisions have in practice a constitutive effect, since to the declaration of illegality of the acts are associated execution obligations identical to those provided for in judicial annulment decisions, including the performance of act due in substitution of that declared illegal and the reconstitution of the situation that would have existed if that act had not been performed (...), impose on the TA that it eliminate from the legal order that act, by annulling it.

No condemnatory decisions or others are provided that explicitly impose on the tax administration the adoption of conduct, with the exception of the condemnation of the payment of compensatory interest and tax indemnification.

As was written in the Arbitral case 17/2012-T, assessment, in the strict sense, is the final phase of the administrative tax assessment procedure, regulated in articles 59 to 64 of the TCPC, constituted by a series of acts aimed at achieving a final legal result, the amount of tax to be paid to the State coffers. Therefore, assessment in this sense is the phase that translates into the application of the tax rate to the taxable matter already determined, the preparatory acts not being autonomously challengeable, but being able to be put in question when challenging the definitive, final act, in compliance with the principle of unitary challenging expressed in article 54 of the TCPC.

Having regard to what was previously stated, it is concluded in accordance with article 2(1), paragraph a) of the LRAT that the Arbitral Tribunals have competence to declare the "(...) illegality of assessment acts, self-assessment, withholding at source and quarterly payment acts", which is why the Arbitral Tribunal has competence to assess the legality of the assessment act challenged.

As to the interlocutory act (cadastral classification) which occurred on a date prior to the assessment, and in accordance with the principle of unitary challenging established in article 54 of the TCPC, applicable ex vi article 29 of the LRAT, it results that any illegality committed on a date prior to the assessment may and should be invoked when challenging the assessment.

The interlocutory act is not subject to autonomous challenge, especially since it is not, in itself, injurious, as it is not capable of producing, by itself, immediate negative legal effects in the legal sphere of the challenger.

In the present case, the Claimant challenged the assessment act, which was based, inter alia, on the classification of the Claimant in the simplified regime of IRS. And it does so by precisely attacking the legality of that classification act. The petition of the Claimant is, therefore, in accordance with the principle of unitary challenging of the tax act, provided for in article 54 of the TCPC and applicable to this process by virtue of paragraph a) of article 29(1) of the LRAT.

This understanding is adopted, among others, in the judgment of the Supreme Administrative Court dated 13-11-2013, issued in case no. 0897/13, "(...) Article 54 of the TCPC establishes the so-called principle of unitary challenging, according to which it is only possible, in principle, to challenge the final act of the procedure, and not the interlocutory or procedural acts, since only the final act directly affects or injures the legal sphere of the taxpayer, establishing the position of the tax administration before it and defining its rights and obligations. And from it results, further, that in tax proceedings, unlike what currently occurs in administrative proceedings, the criterion for the challengeability of acts is that of their immediate and actual injuriousness (and not merely potential), or, in other words, depends on the production of immediate negative effects in the legal sphere of the taxpayer, by violation of its rights or legally protected interests. In this way, the interlocutory acts of the tax procedure, being merely instrumental or preparatory to the final decision, even if illegal, are not, in principle, immediately injurious to the interests of the taxpayer, since its tax situation is not defined or resolved by them. In fact, since the tax assessment procedure is constituted by a series of linked acts aimed at achieving a final legal result, that is, the assessment of the amount of tax that the taxpayer must pay to the State coffers, it is understandable that only the final act (assessment in the strict sense) is capable of affecting, in an objective and immediate manner, the legal sphere of the taxpayer, being that, therefore, the injurious and contentiously challengeable act.

To the same effect, it was decided in the context of arbitral jurisdiction in cases 266/2013-T, 253/2013-T, 114/2017-T and 295/2017-T.

In these terms, it is evident that the illegality of the classification can be challenged judicially in the context of a judicial challenge or arbitral action, in which an assessment of the legality of the assessment in respect of IRS was requested, which is why the Arbitral Tribunal is materially competent and is properly constituted, pursuant to articles 2(1), paragraph a), 5 and 6(1) of the LRAT.

Accordingly, the Respondent's request for an exception of absolute incompetence of the Arbitral Tribunal ratione materiae is without merit.

I - MATTERS OF LAW

Having regard to the positions of the parties assumed in their pleadings, the central issue to be resolved by this Arbitral Tribunal concerns the assessment of the legality of the Personal Income Tax (IRS) assessment act no. 2017..., corresponding to the fiscal year 2016, in the amount of € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents).

To that end, we shall begin by determining the applicable law, giving priority, in compliance with articles 13 and 106 of the IRC Code, to the analysis of the defects of the assessment act.

The claim of the Claimant, in summary, is subsumed in the declaration of illegality of the official alteration made by the TA to its regime for determining category B income, which was altered from the organized accounting regime to the simplified regime, without express choice by the Claimant.

The Respondent, succinctly, counter-argues, invoking that the Claimant was classified by legal obligation in the organized accounting regime and that, once the Claimant's income was determined in 2015 as below € 200,000.00, and not having exercised the option for the organized accounting regime, it was classified by the TA in the simplified regime.

Given the foregoing, it is incumbent on this Tribunal to analyze, based on matters of law and fact, whether the TA was permitted to officially alter the taxation regime, in respect of IRS, of the taxpayer, which was already classified by its choice in a prior year in the organized accounting regime.

At the date when the facts occurred, the version of Law no. 83-C/2013, article 28(2) of the IRS Code, to the extent relevant, had the following wording:

Article 28 - Forms of determination of business and professional income

1 - The determination of business and professional income, except in the case of attribution provided for in article 20, is made:

a) On the basis of the application of the rules arising from the simplified regime;

b) On the basis of accounting.

2 - Taxpayers who, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual net amount of category B income of (euro) 200,000 are covered by the simplified regime. (As amended by Law no. 83-C/2013 - 31/12)

3 - Taxpayers covered by the simplified regime may opt for the determination of income on the basis of accounting. (As amended by Decree-Law 211/2005-07/12)

4 - The option referred to in the preceding number shall be formulated by taxpayers: (As amended by Law 53-A/2006-29/12)

a) In the declaration of commencement of activity;

b) By the end of the month of March of the year in which they intend to alter the form of determination of income, by submitting a declaration of changes. (As amended by Law 53-A/2006-29/12)

5 - The minimum period of permanence in either of the regimes referred to in number 1 is three years, renewable for equal periods, except if the taxpayer notifies, in accordance with paragraph b) of the preceding number, the alteration of the regime to which it is subject. (As amended by Law 53-A/2006-29/12)

From the provisions of article 28 of the IRS Code, there is no distinction whether such period of permanence applies only in situations where the taxpayer manifests the will to be taxed according to the organized accounting regime, nor does it provide for any regime of expiry in situations where, such classification not having resulted from the will of the taxpayer, it ceases to meet the requirements that led to its classification in the same.

As can be gathered from the factual findings, the Claimant expressly opted in 1996 for the application of the organized accounting regime, and was subject to the organized accounting regime by choice manifested in 1996.

The Claimant was equally subject to the organized accounting regime by legal obligation, in accordance with article 28(2) of the IRS Code, in versions prior to Law no. 83-C/2013, because its category B income was always higher than the minimum value set out therein.

There are therefore two legal bases which permit the application of the organized accounting regime to the Claimant, and each of them is sufficient, by itself, to determine the application of that regime.

Thus, when a legal situation has two autonomous bases, each of them sufficient to, by itself, give it legal support, the fact that one of them ceases to exist does not prevent the maintenance of the situation on the basis of the other.

In these terms, it is clear that, having the taxpayer expressly opted for the organized accounting regime, it is this regime that should be applied to it until express indication to the contrary by the taxpayer, thus excluding the application of article 28(2).

Moreover, the law does not require the Taxpayer - who earns income of a value below that established in article 28(2) of the IRS Code - to manifest its will to remain in the organized accounting regime, as the TA claims.

There is abundant case law on this question which will be closely followed. We have in mind, in particular, the judgment of the Supreme Administrative Court of 11 May 2016, issued in case no. 01536/15, "having the taxpayers opted to be taxed on the basis of their accounting, the Tax Administration cannot come to classify them in the simplified taxation regime". As is stated in the same judgment, "the Tax Administration could not have substituted itself for the taxpayers in that choice, because the minimum period of permanence in the chosen regime was not exceeded, but, above all, because only the taxpayers can opt for a different regime, except when they are classified in the simplified regime and exceed the amount of income mentioned above for two successive periods – article 28(6) of the IRS Code".

Returning to the legislation, it should be said that Law no. 83-C/2013 of 31 December did not alter the regime of article 28, limiting itself, to the extent relevant here, to increasing the value of income from which the application of the organized accounting regime is mandatory, not imposing its cessation.

As is stated in that judgment, "if permanence in the simplified regime implies that taxpayers, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual net amount of category B income of (euro) 200,000, there is no specific requirement as to the value of the income earned for them to be able to opt for the determination of income on the basis of accounting".

On this matter we closely follow what has already been decided in the context of arbitral jurisdiction in cases 266/2013-T, 253/2013-T, 760/2015-T, 97/2017-T, 114/2017-T, 295/2017-T and 530/2017.

As to the interpretation to be given to article 28, we refer to the arbitral decision 295/2017-T:

"Moreover, it is the law itself that, in an explicit manner, in article 28(4) of the IRS Code, provides that the option of the taxpayer for the organized accounting regime must be made in two circumstances:

In the declaration of commencement of activity;

By the end of the month of March of the year in which they intend to alter the form of determination of income.

There is, therefore, no correspondence in the letter of the law for the interpretation defended by the TA, according to which, once the volume of sales provided for in article 28(2) of the IRS Code is exceeded, its taxation in accordance with the organized accounting regime is forfeited.

Being certain that, in the interpretation of norms one must presume that the legislator knew how to express its thinking and established the most appropriate solution, as results from article 9(2) of the Civil Code, ex vi article 1 of article 11 and article 2 of the General Tax Law.

Furthermore, article 28(2) containing no distinction regarding the maintenance in a given classification, the TA cannot make such a distinction, as results from the maxim 'ubi lex non distinguit, nec nos distinguere debemus', that is, where the law does not distinguish, the interpreter is not permitted to do so.

Having the legislator provided for no situation causing the cessation of the organized accounting regime during the three-year cycle, the interpreter must conclude, in accordance with the rules of interpretation, that its non-existence is the most appropriate.

And even if a gap were understood to exist, which is not conceded, it would not be subject to analogical integration, as this is expressly prohibited by article 11(4) of the General Tax Law.

Wherefore, the Claimant not having notified any alteration to its taxation regime, made a clear and unequivocal choice for the maintenance of the taxation regime to which it was classified, the TA not being able to proceed with its alteration, officially, when the Taxpayer does not earn income in an amount exceeding that provided for in article 28 of the IRS Code."

Equally to this effect, we follow what was decided in case no. 760/2015-T, of which we transcribe the legal foundations adduced therein, which are fully subscribed to:

"The organized accounting regime should be considered as the standard taxation regime, as results from the principle of taxation of real contributory capacity, ascertained in accordance with income actually earned [...].

Practical reasons imposed, however, the possibility of, for smaller amounts, considering only the sales volume (gross income), minus presumed expenses in percentage of such. This is to reduce compliance costs for taxpayers and inspection costs for the TA [...]. But the legislator understands that this simplification cannot occur for higher income amounts. That is why the law establishes that, even if the taxpayer opts for the simplified regime, that choice ceases to be valid if, in the preceding year [...], due to the value of the variance, the gross income of the taxpayer exceeds a determined amount (since, in that case, the flat-rate consideration of deductible expenses would make the variance from the principle of taxation at real income more evident).

These considerations serve to explain that if the official change of the regime from "simplified" to "organized accounting" is motivated by reasons of consistency of the system, the opposite is not true (it would be said, even, that it is the inverse of that consistency, grounded, rightly or wrongly, on the paradigm of "real amounts") [...]. This is without prejudice to the exercise of free choice by taxpayers, but free too from "official" reclassifications with which they would legitimately not reckon.

This observation helps us better understand the discipline of article 28 [...]. Having the taxpayer opted for the faculty of using the "simplified" regime, that option ceases to be valid if income assumes a magnitude that for the legislator would counsel against it. And, for that reason, the new classification is mandatory and can be officially processed by the TA.

If the variation is the opposite, whether preceded by voluntary choice of the taxpayer or by automatic inclusion, there is no imperative reason imposing the classification (once again) in the simplified regime. It is even advisable that that choice be left to the discretion of the taxpayer. This is to say that, in that case, the classification can remain unaltered. And it must remain unaltered since that is the way to better guarantee the protection of the security of the taxpayer [...].

Moreover, the interpretation proposed, being the most consistent with the principles of taxation of income and with the system of taxation thereof, has complete acceptance in the letter of the law [...]. For all the foregoing, the interpretation of the Claimant and not that of the [Respondent] must be upheld".

Thus, having regard to what was previously stated, it is clear that the taxpayer did not notify of the alteration of the organized accounting regime, and that the TA cannot officially alter the regime.

Moreover, it results from the understanding of the TA disclosed through Circular no. 2/2016 of 6 May, that "taxpayers who exercise the option for the determination of income on the basis of accounting under the conditions provided for in article 28(4) of the IRS Code remain in that regime until notification to the contrary, with no relevance given to variations in the annual net amount of category B income that may occur." [emphasis added]. Wherefore, even by the understanding set out in said circular, the TA should have decided differently in the present case.

Now, in the case sub judice, the Claimant was officially classified in the simplified regime effective from 2015, pursuant to article 28(2) of the IRS Code, because in the year 2014, category B income of € 191,860.00 was determined, that is, below the € 200,000.00.

By virtue of article 28(5) of the IRS Code, the organized accounting regime relating to the taxation of category B income in which the Claimant remained classified since 2001 (when commencing activity) remains in force until the taxpayer submits a declaration of changes.

Thus, the Claimant not having submitted any declaration of change of classification by the end of March 2016, the regime in force – organized accounting regime – would remain applicable.

In view of all the above, the interpretation which the Respondent makes of article 28(1), (2) and (4) of the IRS Code lacks legal support, which aims to impose on the taxpayer a burden, relating to an ancillary tax obligation, which the law does not provide, and which is even contrary to its literal sense, violating the principle of tax legality, established in article 103(2) and (3) of the Constitution and in article 8(1) and (2) of the General Tax Law.

There is no legal provision which permits the conclusion that the option for the organized accounting regime ceases to have relevance by reason of it becoming mandatory application of that regime.

As a consequence, this Tribunal grants the claim of the Claimant, and accordingly finds illegal the tax act levying Personal Income Tax, relating to fiscal year 2016, in the amount of € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents).

The Arbitral Tribunal, pursuant to articles 608(2), 663(2) and 679 of the Civil Procedure Code, by application of article 29 of the LRAMT, is not obliged to assess all arguments alleged by the Claimant or by the Respondent, when the decision is made moot by the solution already rendered, as is the case in the present proceedings, which is why the remaining issues submitted for consideration are accordingly rendered moot.

J - DECISION

Accordingly, having regard to all the foregoing, this Arbitral Tribunal decides:

To find the claim for declaration of illegality of the tax act for an additional assessment in respect of Personal Income Tax, relating to fiscal year 2016, in the amount of € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents) to be well-founded.

To condemn the Respondent to refund to the Claimant that amount unduly assessed.

The value of the proceedings is set at € 54,528.61 (fifty-four thousand five hundred twenty-eight euros and sixty-one cents), corresponding to the value of the assessment having regard to the economic value of the proceedings, ascertained by the value of the assessment of tax challenged, and accordingly the costs are set at the respective amount of € 2,142.00 (two thousand one hundred forty-two euros), to be borne by the Respondent in accordance with article 12(2) of the Tax Arbitration Regime, article 4 of the Tax Arbitration Procedure Code and Table I attached thereto – article 35(10), and articles 43(1), (4) and (5) of the General Tax Law, articles 5(1), paragraph a) of the Tax Procedure Code, 97-A(1), paragraph a) of the TCPC and 559 of the CPC).

Notify.

Lisbon, 29 October 2018

The Arbitrator

Rita Guerra Alves

Text produced on computer, in accordance with article 138(5) of the Civil Procedure Code (CPC), applicable by remission from article 29(1), paragraph e) of the Legal Regime of Arbitration in Tax Matters.

[1] Jorge Lopes de Sousa, in Commentary on the Legal Regime of Tax Arbitration, Guide to Tax Arbitration, Almedina, 2013.

[2] To this effect the Judgment of the STA, no. 0188/09, of 9 September 2009.

[3] This principle has some exceptions, acts of determination of taxable matter being capable of being autonomously challenged. See Alberto Xavier, Concept and Nature of the Tax Act, pp. 140 to 191.

Frequently Asked Questions

Automatically Created

What does Article 28 of the Portuguese IRS Code say about the option for organized accounting to determine taxable income?
Article 28 of the Portuguese IRS Code establishes the framework for determining category B professional and business income under either the simplified regime or organized accounting regime. Under Article 28(2), taxpayers whose annual income exceeds €200,000 are mandatorily classified in organized accounting. Those below this threshold are generally classified in the simplified regime unless they exercise the option for organized accounting. Article 28(5) allows taxpayers to opt for organized accounting by submitting a declaration of commencement or changes by the end of March of the year when the option takes effect. Article 28(6) specifies that when income exceeds the threshold, taxpayers are classified in organized accounting by legal obligation. The key distinction lies between mandatory classification due to income thresholds and voluntary option exercised through formal declaration. Law 109-B/2001 amended the permanence rules, reducing the minimum period from three years to one year, though the application of this rule differs for those classified by obligation versus those classified by option.
Can the CAAD Arbitral Tribunal rule on disputes regarding the choice between simplified regime and organized accounting for IRS purposes?
Yes, the CAAD (Centro de Arbitragem Administrativa) Arbitral Tribunal has jurisdiction to rule on disputes concerning the classification of taxpayers between the simplified regime and organized accounting for IRS purposes. This competence derives from Article 2(1)(a) of Decree-Law 10/2011 (LRAT - Legal Regime of Arbitration in Tax Matters), which grants arbitral tribunals jurisdiction over the legality of tax acts, including IRS assessments. The tribunal's jurisdiction extends to examining whether the Tax Authority correctly applied Article 28 of the IRS Code when classifying or reclassifying taxpayers between regimes. This includes analyzing whether proper procedures were followed, whether legal requirements for regime changes were met, and whether taxpayers' declarations of option were properly recognized. The tribunal can annul tax assessments based on incorrect regime classification and order recalculation under the correct regime. As demonstrated in this case, the tribunal examines both substantive issues (whether legal conditions for regime change existed) and procedural matters (whether notification requirements were met).
How does a taxpayer exercise the option for organized accounting under Portuguese IRS rules?
Under Portuguese IRS rules, a taxpayer exercises the option for organized accounting through submitting a formal declaration to the Tax Authority. According to Article 28(5) of the IRS Code, the option must be exercised by filing a declaration of commencement of activity (when starting business) or a declaration of changes (when already operating) by the end of March of the year when the option is to take effect. For taxpayers commencing activity, the option can be included in the initial declaration. For existing taxpayers switching from simplified to organized accounting, a specific declaration of changes must be submitted within the March deadline. The option, once validly exercised, traditionally created permanence for a minimum period. Before Law 109-B/2001, permanence was three years; afterward, it became one year, though the application differs between voluntary option and mandatory classification. Importantly, the organized accounting regime requires maintaining proper accounting records compliant with commercial accounting standards, and filing the Model 3 IRS declaration with Annex C (rather than Annex B used for simplified regime). The declaration must be submitted electronically through the Tax Authority's portal.
What are the consequences of an incorrect IRS tax assessment when a taxpayer has opted for organized accounting in Portugal?
When an IRS tax assessment is incorrect due to improper treatment of a taxpayer's organized accounting option, several significant consequences follow under Portuguese tax law. First, the tax assessment itself is illegal and subject to annulment through administrative or arbitral challenge, as the calculation basis is fundamentally wrong. Under organized accounting, actual net income (revenues minus deductible expenses) determines taxable income, whereas the simplified regime applies fixed coefficients to gross income, typically resulting in substantially different tax liabilities. Second, if the assessment is annulled, the Tax Authority must issue a new corrected assessment calculating income under organized accounting rules, which may result in refund of overpaid tax plus compensatory interest under Article 43 of the LGT (General Tax Law). Third, the taxpayer may face practical difficulties in compliance, as organized accounting requires specific annexes (Annex C) in the Model 3 declaration and maintaining accounting records that the simplified regime does not require. Fourth, incorrect classification can cascade to subsequent tax years if not timely corrected. Finally, as this case illustrates, taxpayers have recourse to CAAD arbitration under Decree-Law 10/2011 to challenge such assessments, seeking declaration of illegality and consequent annulment.
What is the procedure for challenging an IRS tax assessment through arbitration at CAAD in Portugal?
The procedure for challenging an IRS tax assessment through CAAD arbitration follows the framework established in Decree-Law 10/2011 (LRAT). First, the taxpayer must file a request for constitution of an arbitral tribunal within the statutory deadline (generally 90 days from notification of the tax act or rejection of an administrative complaint). The request must identify the parties, describe the contested act, present legal grounds, and include supporting documentation. Second, upon acceptance by the CAAD President, the Tax Authority is notified and given opportunity to respond (typically 30 days). Third, an arbitrator is appointed either by agreement of parties or, as in this case, by the CAAD Deontological Council when parties don't exercise appointment rights. Fourth, the arbitral tribunal is constituted once the arbitrator accepts appointment and parties don't object. Fifth, parties may submit witness evidence and request a hearing under Article 18 LRAT, though parties can waive this hearing by agreement. Sixth, the tribunal examines both procedural regularity and substantive legality of the tax assessment. Finally, the tribunal issues a binding arbitral decision that has the same effects as a court judgment, with very limited appeal possibilities. Costs follow the outcome, and the process typically concludes within 6-12 months, faster than judicial litigation.