IRS Exemption Under Article 39 EBF for Portuguese Teachers Abroad – CAAD Ruling 31/2015-T

ARBITRAL DECISION

A..., taxpayer no. ... and B..., taxpayer no. …, both residing in …, notified on 17-11-2014, of the tax assessment act for Personal Income Tax (IRS) no. 2014 ..., in the total amount of € 30.848,59, from which resulted a refund of € 1.771,43 (Doc. no. 1),

HEREBY, pursuant to the terms and for the purposes of the provisions of subsection a) of no. 1 of Article 2 of Decree-Law no. 10/2011, of 20 January (RJAT – Legal Regime for Tax Arbitration) and subsection a) no. 2 of Ordinance no. 112-A/2011, of 22 March, request the constitution of an Arbitral Tribunal, pursuant to and with the grounds of fact and law that they invoke.

I – OF THE REQUEST

I.1. Of the background and object of the request

It constitutes, according to the Applicants, the object of the present request for constitution of an arbitral tribunal the act of assessment for Personal Income Tax no. 2014 ..., relating to the fiscal year 2013 (cf. cit. Doc. 1)

I.2 – Of timeliness

Having the Applicants been notified on 17/11/2014 and the filing deadline for the Arbitral Appeal being 90 days, this expires on 15/02/2015, wherefore the request presented on 19-01-2015, as they affirm, is timely.

I.3 – Of the grounds of fact

What is at issue, according to the Applicants, is the existence and effects of a cultural cooperation agreement signed on 12/07/1982 between Portugal and Luxembourg, in the fields of education, science, culture, arts and sports, as well as in other fields of common interest (Doc. no. 2).

The Applicants emphasize what is provided in Article 9 of the said cooperation agreement concerning the commitment of the Contracting Parties (Portugal and Luxembourg) to regular exchange of teachers (…) and mention of contacts and cooperation between educational institutions and bodies (…).

The Applicants state that following that agreement, the Luxembourg Ministry of Education created in primary education (1st to 5th grade), courses in Portuguese language that form part of the Luxembourg school schedule (Docs. nos. 3 and 4).

The Applicants further describe various aspects of the operation of the courses, namely programs, schedules and subjects.

The Applicants contend that the cooperation programs concluded between the two countries subscribing to the agreement provide for the realization of this type of courses (Doc. no. 5), as is shown referred to in Article 2 of the cooperation program for the period 2008/2011, which remained in force in 2013, by virtue of the provision in Article 26 of the mentioned program (Doc. no. 6).

And it was following the agreement that has been referred to, that was concluded between the Ministry of Education/Cabinet for European Affairs and International Relations and the Applicants an administrative contract for teaching services, to exercise teaching functions in the Consular Area of Luxembourg, during the school year 2006/2007 (cf. docs. 6 and 7).

They further state that this contract, initially fixed to be in force between 01/09/2006 and 31/08/2007, was subsequently renewed successively until 31/08/2009 (cf. docs. 8, 9, 10 and 11).

Subsequently, the said administrative contracts for teaching services "were automatically converted into a secondment valid for one year", successively renewed until the fiscal year 2013 (cf. Docs. nos. 12 to 18), by virtue of the legal provisions cited by the Applicants.

The Applicants state that on 15/04/2014, they submitted their periodic income declaration for the fiscal year 2013, having entered, with code 406, in Schedule 4 of Annex H, the income received under, in their understanding, the said cooperation agreement (cf. doc. no. 19).

The Applicants were, however, notified on 24/07/2014 by the Local Financial Services of ..., for purposes of prior hearing, of the intention to make corrections to the values entered in Schedule 4 of field 401, of the declaration for the year 2013, relating to both taxpayers, which showed values "0" and would be corrected to € 48.754,50 for each taxable person – Applicants A and B (cf. doc. 20).

The grounds for the corrections, as per Letter no. ..., of 2014/07/22, of the said Financial Service, were that "the withholdings for dependent work are higher than those known. Verification of the exempt income declared; The total withholdings declared are higher than those known" (cf. doc. 20).

The Applicants exercised on 30/07/2014, (timely, given the 15-day period allowed for response) the right of prior hearing, submitting various documents which, in their understanding, attest that the declared income is exempt from taxation (cf. doc. 21).

The Applicants emphasize that the Head of the Financial Service of ... did not heed their justifications, understanding that "no new elements were presented that would attest to the exemption of the income under Article 39 of the Tax Benefits Statute", notifying them through Letter no. ..., of 7/10/2014 of that conclusion and that…

"The Institute C... was also heard, the entity paying the income, reiterating that the functions that Your Excellencies exercise in Secondment under the Legal Regime for Portuguese Teaching Abroad, does not have correlation with the cooperation agreements mentioned in Article 39 of the Tax Benefits Statute" (Doc. no. 22).

The Tax Authority (AT) granted the Applicants the possibility of presenting a substitute declaration within 15 days, concerning the fiscal year 2013, eliminating the values entered in field 406 of schedule 4 of Annex H and entering them in field 401 of schedule 4 of Annex A.

As the Applicants understood they should not proceed in this manner, the Tax Authority altered the declaration in question ex officio and issued the act of assessment for Personal Income Tax no. 2014 ... which led to the present Appeal.

I.4 – Of the grounds of law

The controversial question therefore consists in knowing whether the income received by the Applicants in 2013, by the exercise, in secondment, of teaching functions in Luxembourg, could benefit from the conditions to enjoy the exemption provided for in no. 1 of Article 39 of the Tax Benefits Statute (EBF).

And they cite Article 39 of the EBF, whose no. 1 is also transcribed, as it is the only one that interests the analysis of the object of the request:

"Article 39 - Cooperation agreements and relations

1 – Persons transferred abroad pursuant to cooperation agreements are exempt from Personal Income Tax, with respect to income received within the scope of the respective agreement.

2 - …

…

5 - …"

It was on the basis of the transcribed provision that the Applicants proceeded in the manner they did, when completing their income declaration for the year 2013, therein invoking the exemption from Personal Income Tax that they understand is owed to them.

And in reinforcement of their understanding, they refer to the understanding expressed in Circular Letter no. 20 107, of 30/08/2005, which is to the effect that it is "an automatic benefit, in that it results directly and immediately from the law, not depending on any subsequent act of recognition".

The Applicants cite in defense of their thesis Nuno Sá Gomes, in General Theory of Tax Benefits, Tax Science and Technique Notebook (165), Lisbon 1991, pages 132 to 133, which makes considerations about the nature of tax benefits and in particular about those that are automatic, which operate "ope legis", also stating that this type of benefits "…are not granted by the tax administration, but established directly by law, their subjective right to the corresponding benefit being born from the historical verification of the respective prerequisites".

And the Applicants understand that the tax benefit in question "is an automatic benefit and its application will depend only on the verification of the requirements contained therein".

Thus, the Applicants emphasize that "for the application of the benefit in analysis it is sufficient that the prerequisites listed in no. 1 of Article 39 of the EBF are met, that is, that the taxpayer is transferred abroad pursuant to a cooperation agreement". And they further emphasize that "These are the only prerequisites upon which the application of the tax benefit in question depends".

Now, the Applicants understand that it was demonstrated that they are transferred in Luxembourg, exercising the activity of teachers in the respective Consular Area, pursuant to the cooperation agreement concluded between Portugal and Luxembourg, which aims to promote exchange at various levels, namely at the level of education through the teaching of courses in integrated regime (cf. cit. Docs. 2 to 16).

Therefore, the Applicants understand that "it is all too evident that the income received by the Applicants, in their capacity as teachers pursuant to the said cooperation agreement, are exempt from taxation, under no. 1 of Article 39 of the EBF".

I.4.1. Violation of the Principle of Legality

The Applicants understand that the Tax Authority taxed the income in question through the contested act of assessment for Personal Income Tax, "violated not only the provision of no. 1 of Article 39 of the EBF, but also one of the elementary principles of Tax Law, the Principle of Legality enshrined in Article 103 of the Constitution of the Portuguese Republic (CRP)".

And the Applicants transcribe the said constitutional provision, as well as cite what Gomes Canotilho and Vital Moreira state about this same provision, in Constitution of the Portuguese Republic Annotated – Articles 1 to 107 - Volume I, 4th Revised Edition, Coimbra Editora, 2007, pages 1090 and 1091.

Now, the Applicants emphasize, "since, in the case under analysis, the tax law does not make the exemption from tax dependent on any other requirements beyond those contained in Article 39, no. 1 of the EBF and the principle of tax legality prevents the Tax Authority from establishing additional requirements to the functioning of a tax benefit, the illegality of the assessment act here in question is undeniable".

And that, therefore, the annulment of the contested assessment act should be ordered.

II – OF THE RESPONSE OF THE RESPONDENT – THE TAX AND CUSTOMS AUTHORITY.

II.1 – Defense by exception – Preliminary jurisdictional question – Dilatory exception of incompetence

1. The Respondent contends that in light of the jurisdiction of arbitral tribunals set forth in subsection a) of no. 1 of Article 2 of the RJAT and the binding of the Tax Authority to the jurisdiction of arbitral tribunals, under Article 4 of the RJAT, not included within the scope of the material jurisdiction of the Arbitral Tribunal is the appraisal of matters relating to the recognition of exemptions and tax benefits.

2. And this because, according to the Respondent, it follows precisely from the request and the cause of action deduced, that the pretension of the Applicants consists in the recognition of the exemption provided for in Article 39, no. 1 of the Tax Benefits Statute (EBF).

3. Whence results, in the understanding of the Respondent, in light of the "legal provisions invoked above, namely the provisions of Articles 2 of the RJAT, that the arbitral tribunal is incompetent ratione materiae to appraise and decide the request of the Applicant or to know of the matter relating to it.

4. And it specifies by noting that, in truth, "the tax acts relating to the recognition of tax exemptions constitute distinguishable acts of the tax procedure, susceptible to reaction by the part obligated through its own means, and the tax assessment resulting therefrom cannot be challenged through judicial review or, in the case that here interests, through a request for arbitral pronouncement, as, for example, is stated in the case law expressed in the decision of the Supreme Administrative Court no. 0188/09, of 09/09/2009".

5. And on this matter, the Respondent invokes what was decided in Arbitral Process no. 17/2012-T, of 14 May 2012:

"In truth, the lack of binding of the Tax and Customs Authority to the arbitral tribunal translates itself into the immediate impossibility of the subjective efficacy of a judgment which, if it were rendered by this tribunal in the matters excluded, would produce no effects whatsoever on the party that would have to execute it, thus constituting a lack of jurisdiction, which is delimited according to the subject matter and, therefore, constitutes the material incompetence of this tribunal".

1. Thus, the Respondent understands that "it is, therefore, unequivocal, that the lack of jurisdiction of the tribunal to settle the dispute effectively constitutes the dilatory exception of incompetence and not any other, making, mindful of the arbitral nature, an integrated reading of no. 1 of Article 2 of the RJAT, with no. 1 of its Article 4 and, also, with the mentioned Article 2 of the Binding Ordinance transcribed above".

2. And in reinforcement of its thesis, the Respondent also refers to the decision rendered in Arbitral Process no. 310/2014-T, of 26 November 2014, in which it was concluded for the merit of the exception of absolute incompetence of the Arbitral Tribunal ratione materiae:

"Now, as has been constant case law of this Tribunal, the Respondent is not bound to the Jurisdiction of the CAAD regarding the matters petitioned by the Applicant (…)"

1. Thus, considering that the Tax Authority is not bound to arbitral jurisdiction regarding acts of recognition of exemption from IMT[1] in tax matters, it shall be concluded, states the Respondent, for the incompetence of the present arbitral tribunal to decide the present dispute, which constitutes a "dilatory exception of knowledge ex officio that determines the dismissal of the instance under Articles 576 and subsection a) of Article 577 of the Civil Code of Procedure (CPC) applicable ex vi Article 29, no. 1, subsection e) of the RJAT, which is hereby requested".

2. Wherefore, consequently, concludes the Respondent, the Tribunal should abstain from knowing or pronouncing itself on questions relating to the recognition of tax benefits in question in the present proceedings.

Without foregoing, it presents, however, its:

II.2 – Defense by challenge

II.2.1. Of the request

1. The Respondent recalls that the Applicants come to challenge the act of assessment for Personal Income Tax (IRS) no. 2014 ... notified on 17 November 2014, relating to the fiscal year 2013, in the amount of € 30.848,59.

2. The Respondent emphasizes that the controversial question in the present proceedings consists in knowing whether the income received in the exercise of the profession of teacher in Luxembourg, during the year 2013, meets the conditions to be able to enjoy the exemption contemplated in no. 1 of Article 39 of the Tax Benefits Statute (EBF) – (Cf. Article 26 of the PI).

3. And they refer to what is mentioned in Article 41 of the PI: "Now, since, in the case under analysis, the tax law does not make the exemption from tax dependent on any other requirements beyond those contained in Article 39, no. 1 of the EBF and the principle of tax legality prevents the Tax Authority from establishing additional requirements to the functioning of a tax benefit, the illegality of the assessment act here in question is undeniable".

4. And because the Applicants press for the annulment of the contested assessment act, the Tax Authority presses, in its turn, for the legality of the assessment, as it considers that the same constitutes a correct interpretation and application of the law to the facts.

II.2.2. Of the facts

1. The Respondent refers, then, regarding the factual matter that interests for the proper decision of the cause, to the pleadings of the parties and to the documents attached and to the Procedural File attached with the present response, for purposes of proof, of which it highlights the following.

2. That the Applicants exercised in the fiscal year 2013 teaching functions in the Consular area of Luxembourg, in secondment in accordance with Decree-Law no. 234/2012, of 30 October, by virtue of which such secondment was renewed.

3. The Respondent further states that in that year 2013, the Applicants received income, in their capacity as teachers, in the amount of € 97.509,99, paid by the C... - I.P..

4. They further state that the Applicants submitted their periodic income declaration on 15/04/2014, in which they entered in schedule 4 annex H the income received under the Cooperation Agreement.

5. That subsequently, on 22/07/2014, Letter no. ... was sent, to notify the Applicants in order to exercise their right of prior hearing, regarding the project for corrections to the periodic income declaration (2013), a right which they exercised on 30/07/2014, having submitted various documents.

6. By the Head of the Financial Service of ... the Applicants were notified through Letter no. ..., of 07/02/2014, which dismissed the arguments of the Applicants and proceeded to notify them to submit a substitute declaration relating to the said year 2013, so that the values entered in field 406 of schedule 4, would be transferred to field 401 of schedule 4 of annex A (by typographical error annex H was indicated).

7. The same Financial Service requested from Institute C... by letter of 25/09/2014, information regarding the Employment Contract of the Portuguese teaching professors abroad A… and B... (the Applicants in the proceedings), having been responded that:

"are exercising functions in secondment under the Legal Regime for Portuguese Teaching Abroad (Decree-Law no. 165/2006, of 11 August, as amended by Decree-Law no. 234/2012, of 30 October), with no correlation existing with the cooperation agreements mentioned in Article 39 of the Tax Benefits Statute".

1. The Respondent further states that the Representation of the Public Treasury of the Financial Department of … had requested information in identical terms, in the year 2013, as similar situations were being processed with reference to fiscal years prior, having the response been detailed, but in the same direction as that now provided to the Financial Service, (cf. doc. 1 that it attaches).

2. The Respondent finally states that the Applicants were notified on 17 November 2014, of the act of assessment for Personal Income Tax (IRS), no. 2014 ..., relating to the fiscal year 2013, in the amount of € 30.848,59.

II.2.3. Of the law

1. The Respondent emphasizes that, in sum, the Applicants sustain the application of Article 39 of the EBF to the factual situation of the proceedings, as they consider that they meet the prerequisites for such, given that they are transferred abroad pursuant to cooperation agreements.

2. And that the Applicants consider that their income is exempt from taxation, and that the Tax Authority makes it dependent on other prerequisites, beyond those contained in that Article, in violation of Article 39 of the EBF, as well as the principle of legality, namely no. 2 of Article 103 of the CRP – but the Respondent understands that they are not right, as the application of the legal norms in question shows itself to be correct.

3. They further allege the Applicants, in sustenance of their thesis, that they are transferred abroad pursuant to cooperation agreements concluded in 1982 between the State of Luxembourg and the State of Portugal.

4. The Respondent refers, however, that the allegation of the Applicants is insufficient to fulfill the prerequisites for the attribution of the tax benefit contained in Article 39 of the EBF, because, forthwith, the Agreement referred to was simply a Cultural Agreement that does not fit the concept of Cooperation Agreement, whose concept is enshrined in the Law.

5. And the Respondent specifies that, contrary to what is sustained by the Applicants, not all cooperation agreements are susceptible to being framed within the concept of cooperation agreement enshrined in Law no. 13/2004, of 14 April.

6. And that these Tax Benefits, as established in Article 2, no. 1 of the EBF, are "measures of an exceptional character instituted for the protection of relevant public tax interests that are superior to taxation itself that prevent, when referring to persons transferred abroad, pursuant to cooperation agreements".

7. The Respondent further specifies that the Benefits in question "are aimed at persons who, directly or indirectly, serve the Portuguese State in the fulfillment of the obligations of international law that result for the latter from the conclusion of treaties, bilateral or multilateral, that take the form of international cooperation agreements".

8. And that it is the said legal diploma that establishes the legal framework of the "Portuguese cooperation agent" and defines the principles and norms integral to its status, as provided by Article 2, in the following terms:

"1. For the purposes of this law, the Portuguese cooperation agent is considered to be the citizen who, pursuant to a contract, participates in the execution of a cooperation action financed by the Portuguese State, promoted or executed by an entity of Portuguese public law or by an entity of private law with non-profit purposes in countries".

1. And that, in turn, in Article 3 of the same legal diploma are found the definitions of what are, namely, "Cooperation action" and "Humanitarian aid", whose subsections c), d) and e) transcribe:

"(…)

c) "Cooperation action" the action or project in favor of the development of countries receiving public development aid or beneficiaries of humanitarian aid;

d) "Humanitarian aid" the action with a short-term character, intended to intervene in exceptional situations resulting, namely, from disasters, whether natural or man-made;

e) "Volunteer" the citizen covered by the regime provided for in Law no. 71/98, of 3 November, who exercises the activity within the scope of cooperation actions".

1. The Respondent further refers to the "genesis underlying the creation of this tax benefit, it is imperative to conclude that the fulfillment of the concept of cooperation agreement will have to be done under the terms defined by Law, where not every agreement, including cultural ones, concluded between States fits".

2. And it also refers to Circular Letter no. 20107/2005, of 30 August, under the title of "Cooperation agreements and relations", to which the Tax Authority is bound to apply, and which discloses the understanding sanctioned by a decision of 12 May 2005, rendered by the legal substitute of the Director-General of Taxes, which it transcribes.

3. In light of the content of the said doctrine of the Tax Authority, the Respondent understands that "in light of this set of legal norms and provisions, applicable to the situation of the proceedings, we can conclude that it is necessary, thus, that the income received abroad be received in the exercise of an activity that concretizes the fulfillment of obligations of international law, assumed by the Portuguese State emerging from cooperation agreements as identified in Law no. 13/2004".

4. Further stating that "such measures are aimed at encouraging the participation of its citizens in cooperation actions which, directly or indirectly, the Portuguese State develops, measures that establish a tax benefit through which it seeks to achieve that end in the assumption of the relevance of such actions within the framework of the defense of Portugal's strategic interests".

5. Whence it concludes that it has been demonstrated that the concept of cooperation agreement is not a mere discretionary concept, but that it is established in the Law, to which the Tax Authority is bound, by virtue of the principle of Legality, (Articles 8 and 55 of the LGT and 103 of the CRP), and that no other could be the interpretation nor the application of the legislation in question to the factual situation of the proceedings.

6. The Respondent further states that, "in sum, having analyzed the factual contours of the situation in question in the present proceedings, the cultural agreements under which the applicants initially began to teach Portuguese in Luxembourg, and even now, exercising functions in secondment, their income could never be considered exempt from taxation under Article 39, no. 1 of the EBF".

7. Further stating that "this understanding has already been sustained in recent case law, to cite two decisions of the Oporto Administrative Court, in Proc. 01732/06.5BEBRG of the 2nd Section – Tax Contentious, rendered on 28-02-2013: and in Proc. 01104/07.4BEBRG of the 2nd Section – Tax Contentious, rendered on 14-06-2012".

8. And for better illustration and goodness of the thesis that the Respondent sustains, it transcribes the following extract from the decision of the Oporto Administrative Court, in Proc. 01732/06.5BEBRG, of 28-02-2013:

"1 – The norm of Article 37, no. 1 of the EBF applicable (currently, corresponding to Article 39, no. 1 of the same legal diploma) when referring to 'persons transferred abroad pursuant to cooperation agreements', is aimed at persons who, directly or indirectly, serve the Portuguese State in the fulfillment of the obligations of international law that result for the latter from the conclusion of treaties, bilateral or multilateral, that take the form of international cooperation agreements.

II – Law no. 13/2004, of 14 April, in its Article 3, subsection c), establishes that for the purposes of its application the expression 'cooperation action', to whose Article 2, no. 1, it refers, is the 'action or project in favor of the development of countries receiving public development aid or beneficiaries of humanitarian aid' (moreover, in the wake of what was already provided in Articles 2, no. 1, and 3 of Decree-Law no. 363/85, of 10 September), whereby the activity of teaching developed by a Portuguese language teacher in France in a secondment regime, pursuant to Decree-Law no. 13/98, of 24 January, does not fall within the scope of cooperation for development or humanitarian aid".

1. Whence the Respondent concludes that the income received by the Applicants in the fiscal year 2013 cannot be considered as covered by the tax benefit contained in Article 39 of the EBF, as they do not fulfill the legal prerequisites, namely by not having been received within the scope of a cooperation agreement, established pursuant to Law no. 13/2014, this same having been confirmed by the entity that contracted those teachers.

2. And that, therefore, states the Respondent, there is no illegality whatsoever of the assessment act nor legal basis that sustains the pretension of the Applicants, whereby their pretension is without merit, as well as the request for refund of the amounts paid by the Applicants and the request for interest payments.

III – ALLEGATIONS

III.1 – Of the Applicants

III.1.1 – Of the allegations

1. The Applicants maintain the arguments of fact and law adduced in their initial petition.

2. They then describe all the facts that have occurred, from the agreement concluded, passing through the submission of their income declaration for 2013, its correction by the Tax Authority and the act of assessment for Personal Income Tax in question, already fully described in the initial petition.

3. They emphasize that, in their understanding, they have succeeded, through documentary proof, in proving all the facts alleged in their IP, as well as demonstrating the legal thesis that they sustain, to the effect of demonstrating the illegality of the assessment.

III.1.2 – Of the exception of incompetence of the Arbitral Tribunal to appraise the request for arbitral pronouncement

1. On this matter, the Applicants emphasize, in the first place, that the Tribunal, when holding the Meeting of Article 18 of the RJAT, decided, in conformity with the requirement of the said norm, to hear the parties, in successive allegations, to ensure the principle of adversarial proceeding, to subsequently decide this question of the exception of incompetence, before the appraisal of the object of the request.

2. And this because the Respondent invoked in its Response to the IP a dilatory exception of incompetence of the Tribunal, founded on the provision of subsection a) of no. 1 of Article 2 of the RJAT.

3. The authors further emphasizing that the Respondent also invoked, within the scope of the material jurisdiction of the Arbitral Tribunal, the appraisal of matters relating to the recognition of exemptions and tax benefits is not included (cf. Article 3 of the Response of the Tax Authority).

4. The Applicants further state that the Tax Authority, in defense of its thesis, invoked the Case Law of 3 decisions, one being from the Supreme Administrative Court and two from the Arbitral Tribunal (cf. docs. 1, 2 and 3).

5. The Applicants emphasize, however, that both with respect to the decision of the Supreme Administrative Court and the arbitral decisions, all refer to assessment acts resulting from the application of indirect methods, whereby the understanding of these could not have any application in the present proceedings.

6. And they specify that in the case of the decision of the Supreme Administrative Court, Proc. 0188/08, of 09/09/2009, at issue is the application of indirect methods pertaining to manifestations of assets (cf. doc. 1) and the Arbitral Decisions concern the jurisdiction of the Tribunal in the appraisal of the legality of additional assessment acts for VAT, issued on the basis of the application of indirect methods (cf. docs. 2 and 3).

7. The Applicants allege that in the case at hand, the contested assessment act not resulting from the application of indirect methods, nor existing any distinguishable act susceptible to autonomous challenge, given that it is a matter of the application of an automatic tax benefit, upon verification of the respective prerequisites – the argument invoked by the Tax Authority has no foundation.

8. The Applicants further allege that, beyond that, neither from the RJAT nor from Ordinance no. 112-A/2011, of 22 March, does it result that excluded from the jurisdiction of the Tribunal are the pretensions relating to the declaration of illegality of assessment acts on the basis of the application of tax benefits.

9. And the Applicants cite both Article 2 of the RJAT and no. 1 of its Article 4, as well as the Ordinance previously referred to, as proof of what they allege.

10. And they emphasize that in the present proceedings, the Applicants question the legality of the act of assessment for Personal Income Tax, relating to the fiscal year 2013, as they understand that the exemption provided for in no. 1 of Article 39 of the EBF is applicable to them.

11. And because it is not a question, contrary to what the Tax Authority states, "the recognition of the request for exemption from IMT[2] that gave rise to the assessment act impugned and that constitutes the cause of action in the present proceedings", it does not result that excluded from the appraisal of the Arbitral Tribunal are the pretensions relating to the legality of assessment acts, on the basis of the applicability of tax benefits.

12. And this is so much the case, that there are several decisions rendered by the Arbitral Tribunal, in which the legality of assessment acts was appraised, on the basis of the application of tax benefits.

13. And the Applicants cite, as proof, the Arbitral Decisions rendered in Procs. 197/2012 (cf. doc. 4), 197/2013-T and 74/2014-T (cf. docs. 5 and 6), in which in all cases was questioned the legality of the assessment, on the basis of the applicability, respectively, of the IMI tax benefit provided in Article 49 of the EBF and, in the last two proceedings, of the IRC tax benefit for job creation, provided in Article 19 of the EBF.

14. Thus, the Applicants allege that it is all too evident that this Arbitral Tribunal has jurisdiction to appraise the legality of an act of assessment for Personal Income Tax, on the basis of the application of the tax benefit provided in no. 1 of Article 39 of the EBF.

15. Wherefore the Arbitral Tribunal should be considered competent for appraisal of the object of the proceedings and, consequently, judge without merit the dilatory exception of incompetence deduced by the Tax Authority.

III.1.3 – Of the verification of the prerequisites provided for in Article 39 of the EBF

1. The Applicants offer the documentary proof that attests to the veracity of all the facts alleged in their IP, whose veracity was not contested by the Tax Authority, whereby they are considered as proven.

2. Whence, what the Applicants intend is to have proven and decided the question of whether the income received, in their capacity as teachers, in the fiscal year 2013, meet the prerequisites to benefit from the exemption provided for in Article 39, no. 1 of the EBF.

3. They emphasize what the Tax Authority states in the notification relating to the corrections made to the income declaration for Personal Income Tax for 2013, when they state that: "The Institute C..., the entity paying the income, was also heard, reiterating that the functions that Your Excellencies exercise in secondment under the Legal Regime for Portuguese Teaching Abroad, does not have correlation with the cooperation agreements mentioned in Article 39 of the Tax Benefits Statute (…)".

4. The Applicants understand, however, the contrary, as the income received in 2013 falls within the scope of the cultural cooperation agreement concluded between Portugal and Luxembourg.

5. To such end, they refer to doc. no. 2 attached to the IP, by which it is ascertained that "on 12/07/1982 a cultural cooperation agreement was concluded between Portugal and Luxembourg in the fields of education, science, culture, arts and sports, as well as in other fields of common interest, which had as objective to promote exchange at various levels between Portugal and Luxembourg, namely in the field of education".

6. They further allege that following that agreement the Luxembourg Ministry of Education created in primary education, created integrated courses in Portuguese language, defined school programs defined in the Primary Education Study Plan of Luxembourg, coordinated the integrated courses attributed to the "steering group" constituted by representatives of the Ministry of Education of Luxembourg and by heads of the teaching services of embassies and by teachers (cf. doc. 4 attached to the IP).

7. Whence, the Applicants understand that the basic principles of the said integrated courses are contained in the cultural cooperation agreement between Portugal and Luxembourg, as indeed, proves doc. no. 5 Attached to the IP.

8. And they refer, in defense of their thesis, to Article 2 of the cooperation program for the period 2008/2011, which remained in force for 2013 by virtue of the provision in Article 26, in which it is stated that:

"1. The parties agree on the need to explore new avenues for integrated courses, on the one hand, and for the learning of Portuguese as a Foreign Language, on the other, creating, for this purpose, a Working Group that presents proposals on the offer of teaching in Portuguese Language in primary education, and in Portuguese Language in Luxembourg secondary education(…), (cf. doc. no. 5 attached to the IP).

1. The Applicants emphasize that it was following the mentioned cultural cooperation agreement, as well as the creation of integrated courses in Portuguese language, that was concluded between the Ministry of Education/Cabinet for European Affairs and International Relations and the Applicants, an administrative contract for teaching services, to exercise teaching functions in the Consular Area of Luxembourg during the school year 2006/2007, renewed successively until 31/08/2009 (Docs. nos. 6 to 11 of the IP).

2. Subsequently they were converted into a secondment, which was also being renewed successively, remaining in force in the fiscal year 2013 (Docs. nos. 12 to 14 of the IP).

3. And that it was by virtue of the teaching functions exercised within the scope of the cooperation agreement that in the year 2013 they received, in their capacity as teachers, the overall amount of € 97.509,00 (cf. docs. 17 and 18 of the IP).

4. Having fixed the factual question, the Applicants allege, in matters of law, that is, moreover, the question to be decided in the proceedings, that in the year 2013 they meet the conditions to be able to enjoy the exemption contemplated in no. 1 of Article 39 of the EBF, contrary to what the Tax Authority defends, alleging that the benefit in question, although of automatic granting, depends on the fulfillment of the prerequisites contained in Circular Letter no. 20107/2005, of 30 August and Law no. 13/2004, of 14 April, specifically of its Articles 2 and 3.

5. The Applicants emphasize that the Tax Authority attached to the Procedural File the information prepared by C... – Institute ..., IP (hereinafter Institute C...) and sent to the Head of the Financial Service of ...s, regarding the contracts of the Applicants, but did not attach the Tax Authority the Letter that was sent to the Institute, so as to know, in concrete, what was asked.

6. And that the Tax Authority also attaches the opinion of Institute C... regarding the framing of the contract of the Applicant, prepared by A..., which goes to the effect that the Applicants cannot benefit from the exemption provided for in Article 39, no. 1 of the EBF, for the reason that the conditions defined in Articles 8 and 9 of Law no. 13/2004, of 14 April, are not verified, namely for the reason that Luxembourg does not appear on the list of countries receiving public development aid, (cf. Annex 2 to the said opinion).

7. The Applicants allege that the said opinion was requested only for Applicant A... and with reference to the years 2007, 2008 and 2009, which are not here at issue in the present proceedings.

8. The Applicants reaffirm that neither the Tax Authority nor Institute C... has reason, as Article 39, no. 1 of the EBF does not make the application of the exemption provided therein dependent on the fulfillment of the prerequisites provided for in Law no. 13/2004, of 14 April, to which the opinion of Institute C... refers.

9. And the Applicants again cite the norm of no. 1 of Article 39 of the EBF, from which, in their understanding, results that the income received by taxpayers transferred abroad, pursuant to cooperation agreements, in the performance of their functions, are exempt from Personal Income Tax.

10. And they reinforce their thesis by the fact that it is an automatic benefit, as the Tax Authority itself recognized in its Circular Letter no. 20 107, of 30/08/2005, "in that it results directly and immediately from the law, operates by the verification of its prerequisites and does not depend on any act of recognition".

11. And the Applicants again refer to the understanding of Nuno Sá Gomes, as they did in their IP, emphasizing that the only prerequisites required are found listed in the cited no. 1 of Article 39 of the EBF and not in other norms, namely those of Law no. 13/2004, of 14 April, which approved the Regime of the Cooperation Agent – which in their understanding makes no sense whatsoever.

12. They further allege that "having in account that this tax benefit was created by Decree-Law no. 216/89, of 01 July and that the current text results from Decree-Law no. 198/2001, of 3 July, in which only commas were changed, it is evident that the legislator when establishing this tax benefit did not intend to make its attribution dependent on the fulfillment of prerequisites that were only approved, years later, by Law no. 13/2004, of 14 April".

13. And even that, contrary to what the Tax Authority seeks to make believed, the said Law no. 13/2004, of 14 April does not densify and concretize the concepts of cooperation agent and cooperation agreements provided for in Article 39, no. 1 of the EBF.

14. They further allege that "it should further be noted that Article 39, no. 1 of the EBF and Law no. 13/2004, of 14 April have different scopes of application".

15. And the Applicants emphasize that, "indeed, while Article 39, no. 1 of the EBF establishes a tax benefit for all persons who are transferred pursuant to cooperation agreements, regardless of the country in which that action is developed, Law no. 13/2004, of 14 April, only applies to cooperation agents, being considered as such the persons who develop their activity in the countries listed on the CAD list (?) (cf. Annex 2 of the opinion of Institute C...)".

16. Whence they conclude that "if the legislator intended that the tax benefit in question applied only to cooperation agents, it would have stated it expressly".

17. And that "the legislator, in Article 39 of the EBF, contrary to what happens in other legal provisions of the EBF, for example in Articles 23, 24, 27, 44 and 52, does not refer to any separate legislation for purposes of application/delimitation of the tax benefit in question…and these are differences that we cannot and should not, according to the rules of good exegesis, ignore".

18. And they reinforce that "the grammatical element cannot simply be ignored, as in the determination of the meaning and scope of the norm, to which Article 11, no. 1 of the General Tax Law refers, the interpreter must observe the rules and general principles established in the Civil Code, which precisely command the presumption 'that the legislator established the most accurate solutions and knew how to express his thought in adequate terms'" (cf. Article 9, no. 3 of the Civil Code).

19. And because it is so, the Applicants allege that "where the legislator used different terminology (using in one case the expression persons transferred pursuant to cooperation agreements and in another cooperation agent) and used different legislative technique (using, in one case, references to separate legislation and, in the other, not – as happens with Article 39, no. 1 of the EBF) it is to be presumed that the legislator wanted to make that distinction and, therefore, where the legislator said different wanted to give different meanings and consequences".

20. Concluding the Applicants that "if the legislator, in Article 39, no. 1 of the EBF, did not provide for any requirement or prerequisite, of prior or subsequent verification, to make it possible for such benefit to be granted, any attempt to apply, to the case at hand, the norms contained in the Cooperation Agent Regime, as the Tax Authority seeks to do, cannot proceed".

21. And they again emphasize that "the norm of exemption in question, at no moment, determines that, for purposes of the granting of the benefit of the exemption from taxation in the field of Personal Income Tax, the interested party must be covered by the legal regime of cooperation, provided, namely, in Law no. 13/2004, of 14/04".

22. And the Applicants also do not agree with the opinion of Institute C..., when it states that within the scope of action of Applicant A... as a teacher of Portuguese teaching in Luxembourg, pursuant to a secondment contract in 2013, "does not fit within the scope of a cooperation agreement established with Portugal, since Luxembourg has not established cooperation relations for development with Portugal, (…) by virtue of the high levels of development that it has demonstrated".

23. The Applicant alleges that, "if it is so, how is it justified that Portugal maintains a cooperation agreement for development with Sweden? (Doc. no. 7, which is attached).

24. For all of the above, the Applicants allege that "it becomes necessary to conclude that the application of the tax benefit in analysis depends only on the fulfillment of the prerequisites listed in the cited no. 1 of Article 39 of the EBF, i.e., that the taxpayer is transferred abroad pursuant to a cooperation agreement – which, in the case at hand, was unequivocally demonstrated in the proceedings".

25. And that it was also proven in the proceedings that the Applicants were in the year 2013 transferred in Luxembourg exercising the activity of teachers in the Consular Area, pursuant to a contract concluded between the Applicants and the Ministry of Education, following the cooperation agreement concluded between Portugal and Luxembourg, which aims to promote exchange at various levels, namely in education.

26. Whereby they were covered by the requirements of Article 39 of the EBF, fulfilling the legally required prerequisites.

27. Whence they conclude that the assessment act now contested, which removes the exemption from the Applicants, violates no. 1 of Article 39 of the EBF, but also the principle of legality enshrined in Article 103 of the CRP, whose administrative doctrine contained in Circular Letter no. 20107, of 30/08/2005, of the Directorate for Personal Income Tax Services cannot override the legislator, under penalty of violation of the constitutional principle of separation of powers contained in Article 111 of the CRP, as well as the principle of tax legality.

28. Terms in which they understand that the impugned act should be annulled and that the exception invoked by the Tax Authority should be judged without merit, with all legal consequences.

III.2. – Allegations of the Respondent – The Tax and Customs Authority

The Respondent, while fully relying on the grounds of fact and law contained in its Response, adds the following, in support of the position it defends:

III.2.1 - Object of the request for arbitral pronouncement

1. It recalls that what is at issue in the present proceedings is the question of whether "the income received by the Applicants, in the exercise of the profession of teacher in Luxembourg, during the year 2013, meet the conditions to be able to enjoy the exemption contemplated in no. 1 of Article 39 of the Tax Benefits Statute (EBF)".

III.2.2 – Of the absolute material incompetence of the arbitral tribunal

1. The Respondent alleges that "subsection a) of no. 1 of Article 2 of the RJAT determines that the jurisdiction of arbitral tribunals comprises the appraisal of the declaration of illegality of tax assessment acts, of self-assessment acts, of withholding at source acts and of payment by account acts"

2. It further alleges that pursuant to Article 4 of the RJAT "The binding of the tax administration to the jurisdiction of tribunals constituted under the terms of this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, namely, the type and maximum amount of the disputes covered".

3. And ascertains the Respondent that not included within the scope of the material jurisdiction of the Arbitral Tribunal is the appraisal of matter relating to the recognition of exemptions and tax benefits.

4. Whence, the Respondent alleges, in light of the matter at issue in the present proceedings "it is important to deduce the exception of the absolute material incompetence of the Tribunal to know of the request which comes deduced".

5. And that so results, according to the Respondent, "from the legal provisions previously invoked, namely Article 2 of the RJAT, the arbitral tribunal is incompetent ratione materiae to render a decision relating to the recognition of the exemptions referred to in no. 1 of Article 39 of the EBF".

6. And that for the purpose of the recognition of the exemption in question, "the Applicants could make use of a special administrative action", given that "the jurisdiction of the Arbitral Tribunals is that which is contained in the Law and the extensional interpretation is not admissible so as to encompass matters for which the Tax Authority has not bound itself".

III.2.3 - The Respondent, however, without foregoing, further alleges that:

1. As per the documents attached to the proceedings, the Applicants were transferred abroad pursuant to a Cultural Agreement concluded between the State of Luxembourg and the State of Portugal, concluded in 1982.

2. And continues the Respondent to explain that that Agreement consisted simply of a Cultural Agreement, that does not fit the concept of Cooperation Agreement, whose concept is enshrined in the Law.

3. The Respondent further alleges that, contrary to what is sustained by the Applicants, "not all cooperation agreements are susceptible to being framed within the concept of cooperation agreement enshrined in Law no. 13/2004, of 14 April".

4. And that it is this legal diploma that establishes the legal framework of the "Portuguese cooperation agent" and defines the principles and norms integral to its status, which it characterizes in its Article 2 as cooperation agent in the following terms:

"1 – For the purposes of this law, the Portuguese cooperation agent is considered to be the citizen who, pursuant to a contract, participates in the execution of a cooperation action financed by the Portuguese State, promoted or executed by an entity of Portuguese public law or by an entity of private law with non-profit purposes in beneficiary countries".

1. The Respondent also refers to Circular Letter no. 20107/2005, of 30 August, under the title "Cooperation agreements and relations" to which the Tax Authority is bound to apply, and which discloses the understanding sanctioned by a decision of 12 May 2005, rendered by the legal substitute of the Director-General of Taxes, states the following regarding the concepts provided for in Article 37 of the EBF, which it transcribes and which is expressed here, as to no. 1 (which interests the proceedings) of what was then Article 37 of the EBF:

"1. Article 37, no. 1, of the Tax Benefits Statute

This automatic benefit encompasses the income received by Portuguese citizens or with tax residence in Portuguese territory who, pursuant to a written contract, participate in the execution of a cooperation action that complies with one of the following requirements:

• Is financed by the Portuguese State, promoted or executed by an entity of Portuguese public law or by an entity of private law with non-profit purposes in beneficiary countries;

• Is financed by a State of the European Union, by an international organization or by a specialized agency or by another promoter or executor entity that supports the action with its own funds, provided that there is express recognition of the status of cooperation agent by order of the Minister of Foreign Affairs, preceded by an opinion from the Portuguese Institute for Development Support (IPAD);

In other situations in which a Portuguese citizen is granted the status of cooperation agent, by order of the Minister of Foreign Affairs, preceded by an opinion from the IPAD.

1. …

….

1. …"

2. The Respondent alleges that the Applicants concluded an administrative teaching contract, it not having been proven that the conclusion of those contracts was provided for in their integration in a cultural agreement concluded between Portugal and Luxembourg.

3. The Respondent further refers to the decision of the Oporto Administrative Court 01732/06.5BEBRG, from which it transcribes the following extract:

"Now, regarding these concrete issues this TCAN was already called upon to pronounce itself, in appeals in which the same Appellant is the only one differing in the reference year, whereby, under the terms allowed by civil procedural law, it adheres without reservation to the basis of the decision of 24.05.2012, process no. 528/06.9BEBRG, and of the decision of 14.06.2012, process no. 1104/07.4 BEBRG (challenge of the Personal Income Tax assessments of the years 2003 and 2002, respectively, being that here the challenged assessment relates to the Personal Income Tax of the year 2004).

Thus, regarding the alleged applicability to the case of the provision of Article 37 of the EBF, it was written in the decision of 24.05.2012, process no. 528/05.9BERBRG, the following:

"In accordance with the provision of the norm of Article 37, no. 1 of the Tax Benefits Statute (EBF), in the text in force in 2003 (corresponding to the current text of no. 1 of Article 39 of the EBF) were exempt from Personal Income Tax 'persons transferred abroad pursuant to cooperation agreements, with respect to income received within the scope of the respective agreement'.

In this manner, everything will be a matter of knowing whether the income received by the Appellant during the year 2003 as a 'residence subsidy' fits within that norm of tax exemption.

In our view, let us say it from the outset, the answer to that question cannot but be negative.

The norm of Article 37, no. 1 of the EBF (currently corresponding to Article 39, no. 1 of the same legal diploma) when referring to 'persons transferred abroad pursuant to cooperation agreements', is aimed at persons who, directly or indirectly, serve the Portuguese State emerging from cooperation agreements. This is understandable. With a view to encouraging the participation of its citizens in cooperation actions which, directly or indirectly, the Portuguese State develops, the Portuguese State establishes a tax benefit through which it seeks to achieve that end in the assumption of the relevance of such actions within the framework of the defense of Portugal's strategic interests (as is known, in accordance with what is established in Article 2, no. 1 of the EBF, 'tax benefits are considered as measures of an exceptional character instituted for the protection of relevant public interests superior to taxation itself').

Now, in the case at hand, contrary to what is sustained by the Appellant, the teaching activity exercised by the latter in France does not correspond to or concretize any obligation of international law assumed by the Portuguese State before the French State through an international cooperation agreement.

It is true that, as the Appellant refers, on 12 June 1970, an Agreement on Cultural, Scientific and Technical Cooperation was signed between the Government of the Portuguese Republic and the Government of the French Republic, approved for ratification by Decree-Law no. 28/71, of 6 February, published in the Official Gazette, I Series, no. 31, of 6 February 1971. However, through that agreement, the Portuguese State, in matters of education, only obligated itself to favor the teaching of the French language in Portuguese territory (Article I of the Agreement) and obligated itself to make efforts to organize the teaching of the French language in Portuguese territory (Article II of the Agreement)".

Article I: "The Contracting Parties, recognizing the importance that the knowledge of the language and culture of each other has for each of the two countries, shall favor its teaching and dissemination in their respective territories. (…)"

Article II: "Each of the Contracting Parties shall endeavor to organize the teaching of the language of the other country in its respective schools, of all levels of education.(…)"

Manifestly, therefore, the Portuguese State did not assume before the French State any obligation to place or finance the placement of Portuguese language teachers in its (the French State's) schools.

On the other hand, the Agreement between the Portuguese Government and the Government of the French Republic regarding emigration, the Situation and the Social Promotion of Workers and their Families in France, signed in Lisbon on 11 January 1977, also invoked by the Appellant, sought only, under the terms that result therefrom, to facilitate professional and social advancement and improve the living and working conditions of Portuguese workers in France and ensure to those workers and their families residing there the preservation and development of their respective cultural identity and, therefore, from it do not result international cooperation obligations of the Portuguese State before the French State whose fulfillment implies for the Portuguese State the obligation to place Portuguese language teachers in French schools.

Moreover, it seems evident that in both international agreements we have referred to, regarding the teaching of Portuguese in France the cooperation obligations are of the French State before the Portuguese State and not the reverse. In this manner, there is no legal basis that allows us to sustain the thesis of the Appellant that she will have exercised the activity that justified the receipt of the income on which the tax assessment impugned was levied within the scope and by virtue of a cooperation agreement".

In this Appeal, and in reinforcement of its argument regarding the exercise of its functions by virtue of cooperation agreement between Portugal and France, the Appellant invokes, further, Law no. 13/2004, 14 April, which established the legal framework of the "Portuguese cooperation agent", specifically the provision of Article 2, no. 1, which defines the "Portuguese cooperation agent" as being "the citizen who, pursuant to a contract, participates in the execution of a cooperation action financed by the Portuguese State, promoted or executed by an entity of Portuguese public law or by an entity of private law with non-profit purposes in beneficiary countries".

However, the invoked Law no. 13/2004, of 14 April, does not alter the conclusion reached. Indeed, pursuant to subsection c) of Article 3 of the same legal diploma, it is established that for the purposes of this law the expression "cooperation action", to whose Article 2 no. 1, it refers, is the "action or project in favor of the development of countries receiving public development aid or beneficiaries of humanitarian aid" (moreover, in the wake of what was already provided in Articles 2, no. 1, and 3 of Decree-Law no. 363/85, of 10 September).

Whence, immediately one perceives, that it is not within this scope – of cooperation for development or humanitarian aid – that is inserted the teaching activity exercised by the applicant in France. Indeed, the applicant was, in 2004, in a secondment regime, in France, teaching Portuguese, by virtue of Decree-Law no. 13/98, of 24 January, a legal diploma that approved the legal regime of teachers of Portuguese teaching abroad, specifically the legal regime of competitions, the conditions of work and the respective remuneration system.

As it was stated in the said decision of this TCAN of 14.06.2012, process no. 1104/07.4 BEBRG, and which is reiterated here: "What is at issue, therefore, is, in accordance with the preamble of the said Decree-Law no. 13/98, a special modality of school education, resulting from duties of the Portuguese State defined in the Constitution of the Republic (cf. Articles 74 and 78), aiming at the contribution to the valorization of the Portuguese language and culture with Portuguese communities residing abroad, at various levels of education and teaching. Therefore, at issue is assuring, in the interest of Portugal, the dissemination of the Portuguese language and culture, which has nothing to do with cooperation agreements in which the Portuguese State obligates itself before other recipient/beneficiary States".

In sum, the activity exercised by the applicant, here Appellant, cannot, for purposes of the application of Article 37, no. 1 of the EBF, be qualified as the exercise of functions abroad by virtue of a cooperation agreement".

1. The Respondent also transcribes an extract from a decision of the same Tribunal, process no. 01104/07.4BEBRG, which it alleges goes in the same direction:

"1. The norm of Article 37, no. 1 of the EBF (currently, corresponds to Article 39, no. 1 of the same legal diploma) when referring to 'persons transferred abroad pursuant to cooperation agreements', is aimed at persons who, in a direct or indirect manner, serve the Portuguese State in the fulfillment of its obligations of international law that result for the latter from the conclusion of treaties, bilateral or multilateral, that take the form of international cooperation agreements.

II. The teaching activity that the Appellant exercised in France does not correspond to or concretize any obligation of international law assumed by the Portuguese State before the French State through an international cooperation agreement.

III. Law no. 13/2004, of 14 April, in its Article 3, subsection c), establishes that for the purposes of its application the expression "cooperation action", to whose Article 2 no. 1, it refers, is the "action or project in favor of the development of countries receiving public development aid or beneficiaries of humanitarian aid" (moreover, in the wake of what was already provided in Articles 2, no. 1, and 3 of Decree-Law no. 363/85, of 10 September), whereby the teaching activity developed by teachers of Portuguese in France in a secondment regime, by virtue of Decree-Law no. 13/98, of 24 January, does not fall within the scope of cooperation for development or humanitarian aid.

IV. The "residence supplement" granted monthly to the Appellant to compensate for differences in cost of living between Portugal and the host country and the necessity for teachers to reside temporarily abroad, constitutes a remuneration supplement that is framed in the norm of incidence of Article 2, no. 1, subsection c), and no. 3, subsection b), of the Personal Income Tax Code, in the applicable text.

V. Regarding child support payments paid by the Appellant, it is not the fact that the agreements for the fixing of child support do not correspond to any dispute, that prevents the consideration, for purposes of the provision of Article 56 of the Personal Income Tax Code, of the amounts paid under the same.

VI. The requirement that the law establishes concerns only the source of the obligation, specifying that this will have to result from a judicial decision or from an agreement approved under the terms of the law and this requirement is verified in the present case."

1. The Respondent further alleges that, "in sum, having analyzed the factual contours of the situation at issue in the present proceedings, the cultural agreements by virtue of which the Applicants initially began to teach Portuguese in Luxembourg, and even now, exercising functions in secondment, the Applicants could never be considered exempt from taxation under Article 39, no. 1 of the EBF.

2. And continues the Respondent to allege that by virtue of the teaching activity exercised by the Applicants in Luxembourg not corresponding to or concretizing any obligation of international law assumed by the Portuguese State before the French State through an international cooperation agreement, as it is an understanding corroborated by Institute C....,

3. Whence, it concludes for the lack of merit, as completely unfounded, of the thesis that the teaching contracts concluded are covered by Article 39, no. 1 of the EBF, by so resulting directly from the law, not only of the EBF, but of Law no. 134/2004, as well as from the Case Law cited, whereby the Respondent contests all that is alleged by the Applicants in Articles 71 to 83 of the allegations.

4. And this because, continues the Respondent, if the legislator did not refer to teaching contracts it was certainly because it did not want them to be covered and this is not a matter, as the Applicants intend, of the establishment of prerequisites through circulars, but only of the application of interpretation of the law.

5. In light of the foregoing, the Respondent alleges that the pretension of the Applicants is devoid of any factual, legal or case law support, whereby it should be considered without merit, as the income received in 2013 cannot be considered as covered by the tax benefit of Article 39 of the EBF, as they do not fulfill the legal prerequisites, as they were not received within the scope of a cooperation agreement established pursuant to Law no. 134/2004.

IV – MATTER OF FACT

IV.1. Proven facts

That on 22 March 2007 an Administrative Contract for Teaching Services was concluded between Applicant A... and the Ministry of Education, pursuant to Article 33 of the Teaching Career Statute and Article 21 of Decree-Law no. 165/2006, of 11 August, for the school year 2006/2007, as a teacher of the 1st Cycle of Primary Education for the exercise of teaching functions in the Consular Area of Luxembourg (conf. doc. 6 attached to the IP), later converted into an administrative contract for teaching services.

It appears from the said contract that the remuneration is paid in accordance with the Salary Scale approved by Joint Order of the Ministers of State and Foreign Affairs, of State and Finance and Education, in the amount of € 3.739,70, producing effects as of 1 September 2006, valid until 31 August 2007 and capable of being renewed pursuant to Article 20 of the cited Decree-Law no. 165/2006.

That on 11 September 2007 an identical contract was concluded with Applicant B..., on the basis of the said legal provisions, also as a teacher of the 1st Cycle of Primary Education, with equal remuneration and producing effect for the equal period (cf. doc. no. 7 of the I.P.).

Both contracts were subject to an Amendment, signed on 11 September, according to which there is noted a relevant alteration, namely the renewal of the contracts for the period of one year, valid until 31 August 2008 (cf. docs. 8 and 9 attached to the IP).

With date of 11 September 2008 new amendments to the said contracts occurred, being relevant to note the renewal of the same until 31 August 2009 (cf. docs. 10 and 11 attached to the IP).

The said Contracts were concluded pursuant to Article 21 of Decree-Law no. 165/2006, of 11 August, which establishes the Base Law of the Education System that establishes Portuguese teaching abroad and which came to be amended by Decree-Law no. 165-C/2009, of 28 July, whose Article 21 suffered no alteration and from whose Preamble it is derived that "it is important to establish a new general framework for the action of teachers of Portuguese teaching abroad, the teacher and the reader, and clarify their respective rights and duties by direct application of the principles regulating the provision of public service, with the adaptations required by the special conditions in which they are called upon to act" (cf. doc. no. 12 attached to the IP).

By Order (extract) no. 15612/2011, of 11 July 2011, published in the Official Gazette, 2nd Series – No. 221, of 17 November 2011, (pages 45565 and 45566) it is ascertained that "Pursuant to Article 20 of Decree-Law no. 165/2006, of 11 August, as amended by Decree-Law no. 165-C/2009, of 28 July and Articles 24 and 37 of Law no. 12-A/2008, of 27 February, the secondment is renewed for another year in the position of teacher of Portuguese teaching abroad of the teachers now Applicants (cf. doc. no. 13 attached to the IP).

By Decree-Law no. 234/2012, of 30 October, "The 19th Constitutional Government elected Portuguese teaching as the anchor of diaspora policy, being incumbent fundamentally on C... – Institute ..., I.P., hereinafter abbreviated as C..., I.P., to concretize the Government's objectives in that field".

This legal diploma also made amendments to Decree-Law no. 165/2006, of 11 August, republishing it, in which Article 21 appears repealed, on the basis of which the aforementioned contracts were concluded (cf. doc. 14).

By a Declaration issued on 24 January 2014 by the Ministry of Foreign Affairs – Coordination of Portuguese Teaching in Luxembourg, it is stated that Applicant A..., is a teacher of the 1st Cycle of Primary Education, exercising functions in the Consular Area of Luxembourg, since 01 September 2006 until the present date, being in a secondment in accordance with Decree-Law no. 234/2012, of 30 October (cf. doc. no. 15).

Identical Declaration, with the same parameters and dates, is issued Declaration relating to now Applicant B... (cf. doc. no. 16).

The Applicants proved, as per Declaration of 05/03/2014, that regarding 2013 the C..., I.P., with NIPC …, paid each of the now Applicants, the overall amount of € 44.981,63 of income of Category A, having made withholdings in the amount of € 13.712,00 regarding each one, added € 663,00 of Extraordinary Surtax and that were made deductions relating to Mandatory Contributions to social protection schemes of € 5.762,01, also regarding each of the now Applicants (cf. docs. 17 and 18).

On 15/04/2014 the taxable persons Applicants, with NIFs … and …, respectively, submitted, via internet, the income declaration for the year 2013, where it appears in Annex H, schedule 4, with Codes 406, the amount of € 48,754,50 regarding each of the Applicants, as well as the withholdings of € 15.580,00, also relating to each one (cf. doc. no. 19).

By Letter no. ..., of 2014-07-22, the Head of the Financial Service of ..., proceeds to notify the taxable Applicants, for purposes of prior hearing, informing them that the withholdings for dependent work declared are higher than those known and that the verification of the income declared as exempt must be made and notifying them of the intention to make corrections to the declared values contained in Annex H, Schedule 4, Field 406, of € 48.754,50 regarding each taxable person and moving them to Annex A, Schedule 4, Field 401, with the same amounts (cf. doc. no. 20).

This Letter was received on 24/07/2014 by the Applicants, who using the right of Response, sent on 20/07/2014 by registered mail, a letter to the Financial Service of ...s, informing it, in summary, that in their understanding the income received in 2013 are covered by the exemption provided for in Article 39, nos. 1 and 2 of the EBF, which does not need prior recognition, as they were received by virtue of cooperation agreements (cf. doc. no. 21).

The Head of the Financial Service of ...s sent to the taxable persons now Applicants the Letter no. ..., of 2014-10-07, notifying them that "no new elements were presented that would attest to the exemption of the income under Article 39 of the EBF (…) as they have no correlation with the cooperation agreements mentioned in Article 39 of the EBF (…) and that the corrections of which they were notified will be made ex officio, if they do not submit a substitute declaration, within the 15-day period [cf. doc. 22).

The Tax Authority, following the corrections made, rendered the assessment for Personal Income Tax for the year 2013 with no. 2014 ..., dated 2014-10-31, from which resulted a tax to be refunded of € 1.771,43, with notification that it may claim or challenge under the terms and periods established in Article 140 of the Personal Income Tax Code and 70 and 102 of the Code of Tax Procedure and Process (CPPT).

For its part, by the Respondent, the Tax and Customs Authority, the following documents were attached, for purposes of proof of the alleged:

Information from C... – Institute ..., with the No. S/2013/909, regarding the administrative contract for teaching services concluded with A..., to ascertain whether the said contract falls within the scope of Law no. 13/2004, of 14 April, whose opinion duly sanctioned by the Advisory Council on 13/05/2013, concludes that the teacher in question could not benefit from the exemption provided for in Article 39 of the EBF, for lack of fulfillment of the legally fixed requirements (Cf. Annex to the Procedural File).

IV.2. Unproven facts

There are no unproven facts.

IV.3. Substantiation of the fixation of the matter of fact

All the matter of fact that was invoked in the proceedings shows itself to be fully proven with the documents attached to the proceedings.

V – SANITATION

Applicant and Respondent opted for not designating an arbitrator, whereby the Deontological Council of the CAAD proceeded to the designation of arbitrator José Rodrigo de Castro, who was accepted by the parties – Applicant and Tax and Customs Authority.

The Arbitral Tribunal was duly constituted at the CAAD, on 26-03-2015, to appraise and decide the object of the present proceedings, as appears from the respective minute.

The request is legitimate and was presented timely on 19 January 2015, as the Applicant was notified on 17-11-2014 of the act of assessment for Personal Income Tax 2014 ..., relating to the fiscal year 2013.

By the Respondent was, however, raised the question of the incompetence of the arbitral tribunal, which constitutes a dilatory exception to be decided previously, as it may, eventually, condition the judgment on the merits of the cause.

There being, therefore, this exception to decide, it will be appraised forthwith, as a preliminary question.

VI – Of the preliminary jurisdictional question – Dilatory exception of incompetence

Recalling, the Respondent defends on this point that:

1. In light of the jurisdiction of arbitral tribunals set forth in subsection a) of no. 1 of Article 2 of the RJAT and the binding of the Tax Authority to the jurisdiction of arbitral tribunals, pursuant to Article 4 of the RJAT, not included within the scope of the material jurisdiction of the Arbitral Tribunal is the appraisal of matter relating to the recognition of exemptions and tax benefits.

2. And this because, according to the Respondent, it follows precisely from the request and the cause of action deduced, given that the pretension of the Applicants consists in the recognition of the exemption provided for in Article 39, no. 1 of the Tax Benefits Statute (EBF).

3. Whence results, in the understanding of the Respondent, in light of the "legal provisions invoked above, namely the provision of Articles 2 of the RJAT, that the arbitral tribunal is incompetent ratione materiae to appraise and decide the request of the Applicant or to know of the matter relating to it.

4. And specifies by noting that, in truth, "the tax acts relating to the recognition of tax exemptions constitute distinguishable acts of the tax procedure, susceptible to reaction by the taxable person through its own means, and the tax assessment resulting therefrom cannot be challenged through judicial review or, in the case that here interests, through a request for arbitral pronouncement, as, for example, appears in the case law expressed in the decision of the Supreme Administrative Court no. 0188/09, of 09/09/2009".

5. And on this point, the Respondent invokes what was decided in Arbitral Process no. 17/2012-T, of 14 May 2012:

"In truth, the lack of binding of the Tax and Customs Authority to the arbitral tribunal translates itself into the immediate impossibility of the subjective efficacy of a judgment which, if it were rendered by this tribunal in the matters excluded, would produce no effects whatsoever on the part that would have to execute it, thus constituting a lack of jurisdiction, which is delimited on the basis of the subject matter and, therefore, constitutes the material incompetence of this tribunal".

1. Thus, the Respondent understands that "it is, therefore, unequivocal, that the lack of jurisdiction of the tribunal to settle the dispute effectively constitutes the dilatory exception of incompetence and not any other, making, mindful of the arbitral nature, an integrated reading of no. 1 of Article 2 of the RJAT, with no. 1 of its Article 4 and, also, with the mentioned Article 2 of the Binding Ordinance transcribed above".

2. And in reinforcement of its thesis, the Respondent also refers to the decision rendered in Arbitral Process no. 310/2014-T, of 26 November 2014, in which it was concluded for the merit of the exception of absolute material incompetence of the Arbitral Tribunal ratione materiae:

"Now, as has been constant case law of this Tribunal, the Respondent is not bound to the Jurisdiction of the CAAD regarding the matters petitioned by the Applicant (…)"

1. Thus, considering that the Tax Authority is not bound to arbitral jurisdiction regarding acts of recognition of exemption from IMT[3] in tax matters, it shall be concluded, states the Respondent, for the incompetence of the present arbitral tribunal to decide the present dispute, which constitutes a "dilatory exception of knowledge ex officio that determines the dismissal of the instance pursuant to Articles 576 and subsection a) of Article 577 of the Civil Code of Procedure (CPC) applicable ex vi Article 29, no. 1, subsection e) of the RJAT, which is hereby requested".

2. Wherefore, consequently, concludes the Respondent, the Tribunal should abstain from knowing or pronouncing itself on questions relating to the recognition of tax benefits in question in the present proceedings.

It is important, therefore, to decide:

As per Article 4 of Point B of the I.P. of the Applicants, the following is stated:

"4. Constitutes the object of the present request for constitution of an arbitral tribunal the act of assessment for Personal Income Tax no. 2014 …, relating to the fiscal year 2013"[4]

Subsequently come the grounds of fact and law, which effectively refer to the administrative contracts for teaching services of the 1st Cycle Primary Education Teachers in the Consular Area of Luxembourg, in force since 01 September 2006 until January 2014, as per the documentary proof attached, and

For the application to the income received in this capacity of the benefit established in no. 1 of Article 39 of the EBF, as it is a matter of the exercise of functions by virtue of the cultural cooperation agreement between Portugal and Luxembourg of 12/07/1982, in the fields of education, science, culture, arts and sports, as well as in other fields of common interest, they refer to doc. no. 2 attached to the I.P. (among others), which relates to Decree no. 129/82, of 15 November.

In these terms, as the object of the request fits within the scope of jurisdiction of the Arbitral Tribunal, by virtue of subsection a) of no. 1 of Article 2 of the RJAT and Article 4 which refers to the ordinance that regulates the binding of the Tax Authority, presently Ordinance no. 112-A/2011, of 22 March, in whose object of binding provided for in Article 2 relates to taxes whose administration is committed to them referred to in no. 1 of Article 2 of Decree-Law no. 10/2011, of 20 January (RJAT) and does not integrate the exceptions provided in subsections a) to d) of this Article 2 - and in the present case does not integrate, it is important to appraise the request.

The Tax Authority defended that the proper means of defense would be a special administrative action, only that not being a matter of an Arbitral Appeal of a decision of refusal of a request for exemption from Personal Income Tax, by virtue of Article 39 or another, because the benefit invoked is automatic, verified the respective prerequisites – the argument invoked by the Tax Authority has no foundation.

Likewise, it would be the case if there had been a request for exemption from Personal Income Tax by virtue of Article 39 of the EBF or another, directed to the Tax Authority or to a Member of Government, and this was the subject of an unfavorable decision, against which the Applicant wished to react legally. There yes, it would be a reaction against an administrative act in tax matters, but not against an act of assessment of a tax.

In these terms, the Tribunal decides for the lack of merit of the exception invoked, for lack of legal foundations, as has just been proven.

VII – MATTER OF LAW

The controversial question therefore consists in knowing whether the income received by the Applicants in 2013, by the exercise of teaching functions in Luxembourg, will meet the conditions to enjoy the exemption provided for in no. 1 of Article 39 of the Tax Benefits Statute (EBF).

And they cite Article 39 of the EBF, whose no. 1 is transcribed, as it is the only one that interests the analysis of the object of the request:

"Article 39 - Cooperation agreements and relations

1 – Persons transferred abroad pursuant to cooperation agreements are exempt from Personal Income Tax, with respect to income received within the scope of the respective agreement.

2 - …

…

5 - …"

As was said, it was on the basis of the transcribed provision that the Applicants proceeded in the manner they did, when completing their income declaration for the year 2013, therein invoking the exemption from Personal Income Tax that they understand is owed to them.

Having fixed the matter of fact and proven, therefore, the exercise of teaching functions by the Applicants, in the Consular Area of Luxembourg, in the year 2013 at issue, by virtue of an administrative contract for teaching services of Portuguese language at the 1st Cycle of Primary Education, it is important to know whether the income received by the exercise of such functions are covered by the cooperation agreement of which speaks the norm of no. 1 of Article 39 of the EBF.