IRS Tax on Employment Termination Compensation: Seniority Calculation in Banking Sector - CAAD 323/2017-T

ARBITRAL DECISION

I – REPORT

A..., taxpayer number ... and B..., taxpayer number ..., hereinafter referred to as "Claimants", with tax domicile at Street ..., number ..., ..., ..., ... - ... Vila Nova de Gaia, came, on 11-05-2017, to file a request for constitution of a single arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework of Arbitration in Tax Matters, hereinafter referred to only as RJAT).

The request for arbitral pronouncement seeks the annulment of the additional Personal Income Tax (IRS) assessment No. 2017 ... and demonstration of account settlement No. 2017 ... and respective demonstration of compensatory interest calculation, relating to the 2013 tax period, which resulted from the correction to taxable income in the same period, following an inspection procedure conducted pursuant to Service Order No. OI2016..., issued at the Finance Directorate of Porto, from which resulted an amount payable of €14,539.77.

The Tax and Customs Authority (hereinafter referred to only as "Respondent") is named as the respondent.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Respondent on 19-05-2017.

Given that the Claimant did not proceed with the appointment of an arbitrator, pursuant to the provisions of article 6, paragraph 2, letter a) of RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of CAAD, with the appointment having been accepted within the legally prescribed timeframe and terms.

On 04-07-2017, the Parties were duly notified of this appointment and did not manifest a willingness to refuse the appointment of the arbitrator, pursuant to the provisions of article 11, paragraph 1, letters a) and b) of RJAT, combined with articles 6 and 7 of the Deontological Code.

In accordance with the provisions of letter c), paragraph 1, of article 11 of RJAT, the Arbitral Tribunal was constituted on 19-07-2017.

The Claimants petition for partial annulment of the disputed assessments, alleging, in summary, the following:

• Considering the position of case law, their seniority in the banking sector should be counted by reference to all time of service provided in the banking sector and not only in the employer entity that bore the burden of the compensation paid for termination of the employment contract;

• The position assumed by the Tax Authority results from the content of a binding ruling – which, as of the date of the facts in question, was not, as it did not have to be, known to the Claimant – and which, as results from the law, only binds the Tax Authority and not the Taxpayers, and, furthermore, only in the specific circumstances object of the ruling, as follows from article 68 of the General Tax Law (LGT).

The Respondent filed a Reply, in which it defends itself by objection, alleging, for the purpose of the dismissal of the request for arbitral pronouncement, in summary, the following:

• The seniority to be calculated, for purposes of paragraph 4 of article 2 of the IRS Code, is the seniority with the entity owing the compensation for cessation of the employment contract, and the seniority with a previous employer entity should not be considered in the application of the said legal provision, even if the worker and the new employer entity have agreed to consider it in possible future "indemnities," by employment contract or arising from collective regulation instruments;

• Therefore, it was on the basis of seniority of 6.26 years that the indemnity amount excluded from IRS taxation was calculated, because this is the time of service provided with the last employer entity, on whom the duty to pay the compensation falls;

• The concept of seniority – seniority per se, without any qualifier – in labor matters does not entail a special scientific density that distances it significantly from the sense of common language: translating, as in other legal contexts, a legally relevant interval, with diverse effects, between a certain starting point and a certain ending point;

• Although collective regulation instruments – but not only these – adduce several qualifiers to labor seniority, the truth is that the Labor Code does not define what "seniority" is nor presents a univocal qualification of it, finding, however, thoroughly, the prevalence of the notion of "seniority within the company," including in matters of cessation of employment contract;

• Pursuant to article 339 of the Labor Code of 2009 (cf. Article 383 of the Labor Code of 2003), interpreting the expression "indemnity" also as "compensation," in matters of cessation of employment contract, collective labor regulation instruments may regulate the criteria for defining indemnities (compensations) and the procedural and prior notice periods, and may further regulate the values of indemnities (compensations) but, in this case, within the limits set in the Code – matters excluded from the availability of the parties in the employment contract;

• From the expiration of the employment contract, from dismissal for objective causes, from the substitution of reinstatement resulting from the unlawfulness of dismissal or from the termination of the contract by the worker based on an unlawful act by the employer – that is, from the situations that give rise to said compensations or indemnities – the agreement of distrate/revocation of the individual employment contract must be distinguished, in which the freedom of contract is not limited and, thus, the contractual autonomy between the parties, who may agree among themselves various pecuniary counterparts for the contractual cessation, perhaps translated in a global pecuniary compensation that, not having to respect legal limits, is entirely at the availability of the parties;

• Analyzing the content of the collective labor agreements of the banking sector, which contains said clause 17 (under the heading "Determination of seniority"), it is important to conclude that, beyond the indemnity regime by substitution of reinstatement resulting from the unlawfulness of dismissal, such instruments do not address compensations/indemnities for expiration of the employment contract, for dismissal for objective causes, for termination of the contract by the worker based on an unlawful act by the employer, or for agreement of distrate/revocation of the employment contract – matters which, properly viewed, are therefore removed from the normative effects emerging from such clause 17, simply by not being part of "all effects provided" in such instruments;

• The legal framework of article 2, paragraph 4, of the IRS Code underlies a notorious anti-abuse purpose, typical of special clauses preventive of tax evasion – a purpose that has special reason to exist, as it would not in any case be acceptable for agreements that disposed on labor seniority recognizing merely artificial seniorities and imposing such recognition for purposes of delimiting negatively the incidence of tax;

• Having in mind that "the qualification of the legal business made by the parties (…) does not bind the tax administration" according to paragraph 4 of article 36 of the General Tax Law – a rule which naturally encompasses, by a fortiori, the qualifications of the parties incident on the business object – the issue will have to obtain its solution in the complete legal interpretation of all the normative involved in the expression "number of years or fraction of seniority or exercise of functions with the debtor entity," contained in letter b) of paragraph 4 of article 2 of the IRS Code;

• Once the imperative legal limits regarding compensations or indemnities for cessation of the employment contract are respected, there is naturally no question as to the full legitimacy of the negotiated legal instruments binding the debtor entity to pecuniary compensations/indemnities superior to the amount corresponding to the negative delimitation of the tax incidence provided for in letter b) of paragraph 4 of article 2 of the IRS Code;

• The literal element of legal interpretation makes it possible to confirm, in a perspective of syntactic correction, that the seniority provided for in letter b) of paragraph 4 of article 2 of the IRS Code is the seniority with the "debtor entity," corresponding to "seniority within the company" which, by force of the historical-systematic element inherent in the provision of the current paragraph 10 of the same article, corresponds to the "employer/employer entity," with the breadth resulting from this rule, as well as from situations of succession in the position of this entity, especially by virtue of the equation inherent in article 285 of the Labor Code of 2009;

• The reason why the legislator combined, alternatively and inclusively, the expressions "seniority" or "exercise of functions" relates to the need for a comprehensive normative provision, so as to capture the multiple situations generating dependent work income, respectively the employment contract or the provision of services, on the one hand, and the exercise of public function, service or office, on the other;

• Several are the historical-systematic and teleological elements which, at the infraconstitutional level, are compatible only, either with "seniority with the debtor entity," or with the inadmissibility of consideration in this seniority, corresponding to the effective duration of the contractual relationship granted by that entity, of increases resulting from negotiated legal instruments;

• There are also powerful moments of the constitutional system – inherent, either in the principle of equality, or in the principle of legality in matters of tax incidence, whose corollaries of equality, responsibility and security demand an intense determinability – which unequivocally presuppose in letter b) of paragraph 4 of article 2 of the IRS Code a "seniority" referenced to the "debtor entity" and which do not admit, in the face of the teleological element assessed by the purpose of the exclusion of tax incidence established in that same rule, that negotiated legal instruments be permitted, through increases of the seniority inherent to the effective duration of the contractual relationship granted by that entity, to voluntarily delimit the breadth of that exclusion of tax incidence;

• Knowing that the constitutional principle of equality, stated in article 13 of the Constitution of the Portuguese Republic (CRP), entails a positive sense of identical or similar treatment of identical or similar situations, respectively, and of unequal treatment of substantially and objectively unequal situations, with verification by a process of comparison, justifying differentiated treatment only as a function and to the extent of the diversity of situations, it would become very difficult to accept the inequality of treatment that would result from permitting that negotiated legal instruments could delimit seniorities with effects in the integration in the regime of exclusion of tax incidence of article 2, paragraph 4 of the IRS Code, without those same instruments being able, with the same effects, to delimit the "exercise of functions with the debtor entity";

• The interpretation adopted by the Respondent is the only one in accordance with the constitutional principle of legality in matters of tax incidence, which cannot admit that in seniority with the debtor entity one considers, beyond the seniority inherent to the effective duration of the contractual relationship granted by this entity, increases resulting from negotiated legal instruments, for to admit that these instruments could delimit seniorities with effects in the integration in the regime of exclusion of tax incidence of article 2, paragraph 4 of the IRS Code would translate a notorious obscuration of all the foundations of the principle of legality, especially in the combination of tax justice with the certainty and legal security of taxation: as if it were a voluntary taxation;

• The "debtor entity" to which paragraph 4 of article 2 refers must be the "employer entity" mentioned in paragraph 10 of the same legal provision, which becomes explicit when in paragraph 4 the exclusion from taxation is conditioned on the non-creation of a new professional or business link within 24 months with the same "entity";

• Therefore, the act of additional assessment, in dispute in these proceedings, does not suffer from any defect that puts into question its legality and validity. For this reason, there is no place for the payment of any compensatory interest.

By order of 09-10-2017, this Tribunal, pursuant to the principles of autonomy in conducting the process, expedience and simplicity and informality of proceedings (articles 19, paragraph 2, and 29, paragraph 2, of RJAT), and considering that no exceptions were raised, decided to dispense with the holding of the meeting provided for in article 18 of RJAT, determining that the process proceed with optional written arguments.

The Claimants presented written arguments, in which they reiterated the arguments presented in the request for arbitral pronouncement.

The Respondent did not present arguments.

II – SANEAMENTO (RULING ON OBJECTIONS)

No exceptions were invoked.

The Parties have legal personality and capacity, are legitimate as to the request for arbitral pronouncement and are duly represented, pursuant to the provisions of articles 4 and 10 of RJAT and article 1 of Portaria (Order) No. 112-A/2011, of 22 March.

No nullities are found, therefore it is imperative to proceed to the merits.

III. MERITS

III.1. MATTERS OF FACT

§1. Facts Established

The Tribunal considers the following facts established:

• The Claimants are married and are not judicially separated in relation to persons and property;

• Regarding income earned in 2013, the Claimants presented a joint "Model 3" declaration;

• The matters and income at issue in these proceedings relate to the 2013 year and are related exclusively with the professional activity of the male Claimant;

• In an inspection action at Bank C..., the Tax Authority found that, during 2013, that banking institution terminated the employment contract, among others, with the male Claimant, having counted, as regards the latter, for seniority purposes, all time of service provided in the banking sector, that is, 16 years, whereas, with regard to Bank C..., the time of service of the male Claimant refers to 6.26 years;

• An amount of 84,245.00€ was paid by C... to the male Claimant, in 2013, as compensation for termination of the employment contract, considering 16 years of service in the banking sector, as described in the following table contained in the Tax Inspection Report (RIT):

[Table content preserved as in original]

• The Claimant was unionized in the Union of Supervisors and Technicians of the Banking Sector;

• The Claimants were subject to an internal inspection action, of partial scope, which proceeded under Service Order No. OI2016...;

• Based on the RIT, the Tax Authority made corrections to the taxable income in IRS of the Claimants, concerning the year 2013, in the amount of €31,259.70, as it considered seniority of 6.26 years, as can be seen from the following tables contained in the RIT:

[Table content preserved as in original]

• The Tax Authority issued and notified the Claimants of the demonstration of additional IRS assessment/2013 No. 2017..., the demonstration of account settlement No. 2017... and the respective demonstration of compensatory interest calculation, relating to the 2013 tax period, which resulted from the correction to taxable income in the same period, following the inspection procedure mentioned above, from which resulted an amount payable of €14,539.77.

• The Claimants did not exercise the right to prior hearing, despite being notified for this purpose;

• The Claimants, invoking economic insufficiency, did not proceed with payment of the disputed assessment and requested suspension of the enforcement procedure and waiver of the requirement to provide security due to incapacity.

§2. Facts Not Established

With relevance to the decision, there are no essential facts not established.

§3. Reasoning Regarding Matters of Fact

With regard to the facts established, the Tribunal's conviction was based on the free assessment of the positions taken by the Parties regarding facts, in the Administrative Process and on the content of the documents attached to the proceedings, not contested by the Parties.

III.2. MATTERS OF LAW

§1. Question for Decision

From the positions taken by the Parties, it follows that the central question to be considered and decided by this tribunal is the one referring to the legality of the act of additional IRS assessment, to which the Claimants impute the vice of violation of law, by non-compliance with the rule contained in article 2, paragraph 4, letter b) of the IRS Code.

Thus, the disputed question in this process concerns the interpretation of the said legal provision, and it is important to know whether from the same it results that the counting of the seniority of the male Claimant, for purposes of IRS incidence, in the case of compensation for termination of the employment contract, should be made taking into account the time of service provided in the banking sector (thus including the time of service previously provided in another banking institution), or whether, on the contrary, the said provision determines that only the time of work provided with the entity with which the Claimant terminated the employment contract should be considered.

§2. Application of Law to the Case at Issue

Article 2, paragraph 4, of the IRS Code provided, as of the date of the facts, as follows:

"[…]

4 - When, in any manner, the contracts underlying the situations referred to in letters a), b) and c) of paragraph 1 cease, but without prejudice to the provisions of letter d) of the same paragraph, as regards the benefits that continue to be due even if the employment contract does not subsist, or if there is a cessation of the functions of public manager, administrator or manager of a legal entity, as well as of representative of a permanent establishment of a non-resident entity, the amounts received, on any basis, are always subject to taxation:

(a) In their entirety, if these are amounts received by a public manager, administrator or manager of a legal entity, as well as by a representative of a permanent establishment of a non-resident entity;

(b) In the part exceeding the value corresponding to the average of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions with the debtor entity, in other cases, except where within the 24 months following a new professional or business link is created, irrespective of its nature, with the same entity, in which case the amounts will be taxed in their entirety.

[…]"

Regarding the interpretation of tax law, articles 1 and 2 of the General Tax Law (LGT) provide as follows:

"1 - In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2 - Whenever tax rules employ terms specific to other branches of law, these shall be interpreted in the same sense that they have therein, unless otherwise directly results from the law.

[…]"

As for the general rules of interpretation, article 9 of the Civil Code provides as follows:

"1. The interpretation shall not be limited to the letter of the law, but shall reconstruct the legislative thought from the texts, having especially in account the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied.

1. However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

2. In determining the meaning and scope of the law, the interpreter shall presume that the legislator established the most correct solutions and knew how to express its thought in adequate terms."

It is on the basis of the interpretation rules cited that one must seek the meaning of the concept of "seniority" used by the legislator in article 2, paragraph 4, letter b) of the IRS Code.

The starting point of the interpretation is the text of the rule, which, in the case of letter b) of paragraph 4 of article 2 of the IRS Code, points to the consideration of seniority with the debtor entity.

Indeed, the expression "with the debtor entity," contained in letter b) of paragraph 4 of article 2 of the IRS Code, refers to the expression preceding it, "number of years or fraction of seniority or exercise of functions."

Thus, the legislator delimits the scope in which seniority (or exercise of functions) assumes relevance in the application of the calculation method provided for in said letter b).

This understanding is not hindered by the inclusion, between commas, following the expression "or exercise of functions," of the term "in other cases."

In the arbitral award rendered in the scope of process No. 230/2016-T, cited by the Claimants, it is argued that "the rule adds following the last expression (or exercise of functions with the debtor entity): 'in other cases,' leading to the perception that it contains two distinct mechanisms for obtaining the multiplier, alternatively, thus existing, at least, 'two' cases, distinct, contained in the provision of the rule."

However, when the text of letter b) of paragraph 4 of article 2 of the IRS Code alludes to other cases, it does so to encompass all those that do not fall under letter a).

That is, the amounts to which article 2, paragraph 4 of the IRS Code refers are taxed in their entirety when earned by a public manager, administrator or manager of a legal entity, as well as by a representative of a permanent establishment of a non-resident entity [letter a)], and are taxed only in the amount exceeding the limit calculated pursuant to letter b), in other cases.

Thus, the reference to other cases does not allow the interpreter to conclude, as the arbitral tribunal does in process No. 230/2016-T, that the provision under analysis "contains two distinct mechanisms for obtaining the multiplier."

An interpretation that considered that the expression "with the debtor entity," contained in letter b) of paragraph 4 of article 2 of the IRS Code, refers only to the expression "exercise of functions," would imply accepting that the legislator, in this provision, delimited the scope in which the exercise of functions assumes relevance in the application of the calculation method provided therein, but left undelimited the scope in which seniority operates.

Such an interpretation would also result in the acceptance of differentiated criteria applicable to "seniority" and "exercise of functions," without apparent justifying reason.

But if, instead of considering that the legislator was incoherent or arbitrary in the text that it adopted, we presume, as provided in paragraph 3 of article 9 of the Civil Code, that the legislator "established the most correct solutions and knew how to express its thought in adequate terms," then we must conclude that, with coherence and in accordance with an identifiable and objective criterion, the legislator delimited the scope in which "seniority" or "exercise of functions" assume relevance for the purpose of the application of letter b) of paragraph 4 of article 2 of the IRS Code, through the use of the expression "with the debtor entity."

This interpretive result, according to which the seniority to which the legislator refers in letter b) of paragraph 4 of article 2 of the IRS Code is seniority with the debtor entity, reflects a declarative interpretation, in which this Tribunal limits itself to "choose one of the meanings that the text directly and clearly bears, because that is the one that corresponds to the legislative thought" (cf. JOÃO BAPTISTA MACHADO, Introdução ao Direito e ao Discurso Legitimador, Coimbra, Almedina, 2008, p. 185).

This Tribunal does not, therefore, follow the case law of the Central Administrative Court of the South (TCAS) which has assumed that the tax legislator does not define, for purposes of application of letter b) of paragraph 4 of article 2 of the IRS Code, the concept of worker seniority (cf., in this sense, the following decisions of the TCAS: decision of 11/05/2004, rendered in the scope of process No. 06002/01; decision of 21/09/2010, rendered in the scope of process No. 03748/10; decision of 12/03/2013, rendered in the scope of process No. 05971/12), nor does it follow the case law of CAAD which has adopted the same line of reasoning (cf. the arbitral awards rendered in the scope of processes Nos. 616/2015-T and 230/2016-T).

It follows, therefore, from the text of letter b) of paragraph 4 of article 2 of the IRS Code that the tax legislator expressly refers, for the purpose of its application, to seniority with the debtor entity, and no reason is apparent for inquiring into the meaning that the concept of seniority assumes in labor law.

Thus, in the case at issue, in the calculation of the compensation for cessation of the employment contract of the male Claimant, only seniority with the debtor entity – C... – should be considered.

It should be noted that we would arrive at the same conclusion if we applied the concept of seniority that prevails in labor law.

That is, even if we were to follow the interpretive path traced by the case law of the TCAS cited above, we would arrive at a result opposite to that affirmed in such case law, as we shall see below.

On this matter, we subscribe to the content of the decision of the Supreme Court of Justice of 01/10/2014, rendered in the scope of process No. 1202/11.0TTMTS.P1S1, approved unanimously, in the excerpt which follows:

"The aforementioned Labor Code, as happened in the preceding legislation, does not explicitly explain the concept of seniority, which, in a general sense, refers to seniority within the company, but which may also refer to a specific professional situation, such as seniority in the activity or category.

It is thus appropriate, to give substance to the legal meaning of seniority, to examine the legal provisions that refer to that particular figure of labor law dogmatics.

Paragraph 6 of article 112 establishes the rule according to which '[w]orker seniority is counted from the beginning of the trial period,' while article 113 establishes that '[t]he trial period counts from the beginning of the execution of the worker's service, including training determined by the employer, to the extent that it does not exceed half the duration of that period' (paragraph 1), and should not be 'considered in the counting the days of absence, even if justified, of leave, of dispensation or of suspension of the contract' (paragraph 2), a disregard that will only apply, specifically, to the counting of the trial period, because, in the general regime, such periods count for purposes of seniority, as is extracted from the provisions of articles 255, 295 and 317.

And paragraph 1 of article 129 states that it is forbidden for the employer to '[c]ease the contract and readmit the worker, even with his agreement, with the purpose of prejudicing him in any right or guarantee resulting from seniority' [letter j)].

On the other hand, paragraph 3 of article 147 provides that, in situations of conversion of a fixed-term employment contract into an indefinite-term employment contract, 'worker seniority is counted from the beginning of the provision of work,' except when successive fixed-term employment contracts with the same worker are configured, in which case the said counting 'comprises the time of work provided in fulfillment of successive fixed-term contracts.'

For its part, paragraph 5 of article 162 commands that '[t]ime of service provided under a commission basis counts for purposes of worker seniority as if it had been provided in the category of which the latter is a holder.'

Already article 245, providing for the particular situation of cessation of the employment contract when the worker has not yet enjoyed accrued leave, stipulates that '[t]he leave period is considered for purposes of seniority,' there being other situations in which, despite the fact that no work is performed, the pertinent periods count for purposes of seniority, as happens in absences from work linked to the parental protection regime (article 65, paragraph 1), in the so-called rest days (daily and weekly breaks, holidays and leave — articles 232 to 247), in justified absences (article 255), in the reduction or suspension of the employment contract (article 295, paragraph 2), in unpaid leave (article 317) and in suspension of the employment contract due to strike participation (article 563, paragraph 3).

It is clear that, in unjustified absences, the period of absence is not counted in the worker's seniority, as article 256 specifies in detail.

It should be noted that letter b) of paragraph 2 of article 262 establishes seniority pay as compensation to which the worker is entitled as a function of seniority.

Finally, the notion of seniority is addressed in the normative provisions relating to the fixing of prior notice with regard to the date of cessation of the employment contract (articles 363, paragraph 1, 371, paragraph 3, and 378, paragraph 2), to the calculation of compensation for cessation of the employment contract for objective causes (articles 366, paragraph 1, 372 and 379), to compensation in substitution of reinstatement, at the request of the worker, in the case of unlawful dismissal (article 391, paragraph 1) and, furthermore, to compensation due in the case of termination of the employment contract on the initiative of the worker, with just cause (article 396, paragraphs 1 and 2).

Thus, the legal meaning of seniority, in its general sense, comes down to the period of integration of a worker in a business organization, a legal situation that is relevant, namely, for purposes of promotion, assignment of seniority pay, fixing the dimension of prior notice with regard to the date of cessation of the contract and determination of the value of compensation/indemnity, in the case of dismissal or termination of the contract on the initiative of the worker.

This is, moreover, the understanding generally accepted in legal doctrine.

According to BERNARDO DA GAMA LOBO XAVIER and OTHERS (Manual de Direito do Trabalho, 2nd revised and updated edition, Verbo, Babel, Lisbon, 2014, pp. 432-433), '[t]he continuity of the worker's service, normally referenced to the same company, determines for the worker a certain seniority computed in years of service, which gives a particular concrete physiognomy to the worker's rights, enhancing them,' effects which 'are based on the progressive involvement of the worker in the company […] rewarded by the recognition of a more favorable status and by special protection of contract stability, thus corresponding to the worker's "expectation of security" (an aspect that today is reflected, essentially, in the protection enjoyed by more senior workers in certain cases of dismissal: in the dimension of prior notices — indemnities).

The same AUTHORS emphasize that '[i]t is questionable whether there may exist a purely conventional seniority,' and that it is necessary to distinguish, 'since there are situations in which such provision is perfectly lawful (thus if seniority acquired in another company in the group is counted), as there will be others in which conventional seniority is unlawful, when it seeks to defraud normative preferences regarding seniority (preferences in job retention or promotion assigned to workers effectively more senior).'

In this same line of thinking, ANTÓNIO MONTEIRO FERNANDES (Direito do Trabalho, 16th edition, Almedina, Coimbra, 2012, p. 191 et seq.) notes that '[t]he employment relationship is not exhausted in a moment, in an instantaneous performance. Whatever its duration, it always implies some continuity, a "state of fact that indicates the more or less prolonged integration of a worker in a business organization." The continuity determines, in the legal sphere of the worker, seniority. […] From the worker's point of view, it is intimately related to the risk of rupture: the greater the duration of the contract, the deeper the psychological integration of the worker in the company, the more undesirable or disturbing, therefore, the possibility of cessation of the contract. Thus, seniority creates and increases an expectation of security in the worker. As for the interests of the employer, it means that the company was able to realize, over a certain period, the work availability it needed, maintaining incorporated an element whose integration in the company's objectives is guaranteed by this same period of commitment. That is why the seniority regime is fully suited only to situations of work within the company.'

The aforementioned AUTHOR, following the passage transcribed, stresses that '[i]t is the moment of effective admission of the worker, that is, the moment in which the worker actually begins to find himself "in the service" of the company […], which should be relevant for purposes of counting seniority. It is not therefore properly identified with "duration of actual work," but with the duration of "pertinence to the company" which begins, not with the execution of the contract, but with incorporation in the company.'

As PEDRO ROMANO MARTINEZ states (Direito do Trabalho, 6th edition, Almedina, Coimbra, 2013, p. 382), '[f]or purposes of seniority one has regard to the duration of the employment contract and not to its execution,' whereby 'seniority is not equal to the number of days of effective work, it relates, rather, to the duration of the contractual relationship. In principle, whenever the worker exercises his activity without any violations, the period is continuous.'

An identical conceptual framework is adopted by MARIA DO ROSÁRIO PALMA RAMALHO (TREATISE ON LABOR LAW, PART II – INDIVIDUAL LABOR SITUATIONS, 5th edition, Almedina, Coimbra, 2014, pp. 492-494), in pointing out that '[t]he concept of seniority expresses the special relevance of the continuous character of the employment contract and the element of organizational integration of the worker that inheres to the labor link,' that is, 'seniority values the integration or the sense of belonging of the worker to a given organization, from the beginning of the execution of his employment contract until its cessation' and 'because seniority values the element of organizational integration of the labor link and not actual work performance, it is understood that its counting does not interrupt in normal situations of non-performance of work (during the worker's rest period and leaves) and even in the generality of situations of suspension of the employment contract […]; and it is still this scope that justifies that the worker's seniority in an employment contract may be enjoyed in the contract that succeeds the first in the same company — this is what happens in the case of renewal of the fixed-term employment contract and its conversion into an indefinite-term employment contract (articles 147, paragraph 3, and 149, paragraph 4).'

All to conclude that the legal notion of seniority adopted in matters of cessation of employment contract, whether for fixing the dimension of prior notice with regard to the date of cessation of the contract, whether for determining the amount of compensation, in the case of collective dismissal, is that of seniority within the company.

And it should not be said that, in the case at hand, because the claimant exercised activity in the banking sector, the content of Clause 17 of the Collective Labor Agreement (CLA) concluded between various credit institutions and the Union of Bankers of the North and Others, published in the Labor and Employment Bulletin (BTE), 1st Series, No. 4, of 21 January 2005, with subsequent amendments, the last of which was published in BTE No. 8, 1st Series, of 29 February 2012, applies.

This is because, beyond the claimant not having proved, as was his responsibility (article 342, paragraph 1, of the Civil Code), that he was affiliated with a union party to that CLA, and there being no applicable extension ordinance, the certain fact is that said Clause 17 only regulates the determination of seniority for the purposes provided in that agreement, as clearly results from the body of its paragraph 1, and it is well known that the mentioned CLA does not regulate the matter of cessation of the employment contract by collective dismissal, in particular, the dimension of prior notice with regard to the date of cessation of the contract and the determination of the amount of compensation for collective dismissal."

In this Supreme Court of Justice decision, the concept of seniority is analyzed for the purpose of fixing the dimension of prior notice with regard to the date of cessation of an employment contract, as well as for determining the amount of compensation due to the worker in the case of collective dismissal.

Despite the differences regarding the case at issue, the reasoning contained in the cited decision, and the conclusions reached by the Supreme Court of Justice, are transposable to the analysis of the concept of seniority in the case of cessation of an employment contract by agreement between the employer entity and the worker.

Also relevant is the fact that in the same Supreme Court of Justice decision the seniority in the banking sector is at issue, with it being raised and analyzed the possible relevance that Collective Labor Agreements assume in this matter.

The Supreme Court of Justice decision cited allows us to extract the following conclusions, with relevance to the matter being discussed in the case at issue:

• The Labor Code does not explicitly explain the concept of seniority, but several provisions contained therein point to a legal meaning of seniority that, in its general sense, comes down to the period of integration of a worker in a business organization;

• In the same sense – that of seniority within the company – labor law doctrine points;

• Thus, the legal notion of seniority adopted in matters of cessation of employment contract is that of seniority within the company (both in the case analyzed in the Supreme Court of Justice decision – that of collective dismissal – and in other cases of cessation of employment contract);

• Clause 17 of the CLAs of the banking sector only regulates the determination of seniority for the purposes provided therein, with the matter of cessation of the employment contract not being the object of regulation by the mentioned CLAs.

Thus, even if the recourse to labor law were necessary for the purpose of application of letter b) of paragraph 4 of article 2 of the IRS Code, we would always conclude, as did the Supreme Court of Justice in the cited decision, that the general sense recognized in the concept of seniority is that of seniority within the company, and that Clause 17 of the CLAs of the banking sector is not applicable in the case at issue, whose letter a) stipulates the following:

"For all purposes provided in this agreement, worker seniority shall be determined by counting time of service provided as follows:

• All years of service, provided in Portugal, in Credit Institutions with activity in Portuguese territory;

[…]" [emphasis in original]

Now, besides the indemnity regime for substitution of reinstatement resulting from the unlawfulness of dismissal, the CLAs of the banking sector do not regulate the matter relating to compensations paid to the worker for cessation of the employment contract.

One could still discuss, in the abstract, what the legal consequence is of the parties recognizing, by agreement, a seniority that goes beyond seniority within the company.

On this question, it could always be said that, in light of the interpretation that this Tribunal makes of letter b) of paragraph 4 of article 2 of the IRS Code, it is irrelevant, for the purposes of this rule, any possible agreement between the parties to the effect of recognizing a broader seniority, which goes beyond seniority within the company, by force of the principle of the prevalence of law.

What is at issue is not the exercise of contractual freedom by the parties, who may legitimately agree to the recognition of a broader seniority; what cannot, because the tax legislator does not permit, is that from such agreement result tax consequences, namely the reduction of tax payable.

And it is well understood that this is so, because, as point out Filipe Fraústo da Silva and Cláudia Reis Duarte, referring to the TCAS decisions of 21/09/2010 and 11/05/2004, "the admission of this position [the acceptance of the concept of seniority as agreed in the employment contract], and in an interpretation consistent with that profiled in those decisions, the court would be obliged to admit that, if in a given employment contract termination agreement, a clause is included in which agreement is reached on the recognition of a fictitious seniority, or immediately before that termination agreement the contract is amended to include in it a clause of the same content, that is the seniority that is attendable for labor purposes, and therefore the seniority to be considered as a multiplier criterion in the delimitation of the negative scope of the tax incidence in IRS. […] It is, therefore, crystal clear that, by taking as reference for filling the tax rule the concept of seniority adopted for labor purposes at the moment of cessation of the contract and for purposes of calculating the compensation to be attributed to the worker, the means would be found for the limit of the exclusion of taxation to be freely manipulable by the parties, which, it will be agreed, was certainly not – could not have been – the intention of the tax legislator" ["Annotation to the Decision of the Central Administrative Court of the South on Worker Seniority in the Banking Sector (for purposes of calculating the amount of compensation for cessation of the employment contract not subject to taxation, pursuant to paragraph 4 of article 2 of the IRS Code)," in Revista da Ordem dos Advogados, No. 1, 2012, pp. 463-465].

In the same sense, MANUEL FASUTINO had already pronounced, for whom "[t]he clause of the Collective Labor Agreement of the banking sector is not opposable to the tax administration if it imposes, in the transfer of a worker between credit institutions, the counting of time of seniority verified in the prior or prior credit institutions of which he was a worker. As, by a fortiori, neither are any agreements that, concerning the guarantee of benefits inherent to seniority, have been concluded between the worker and the employer entity. Without considerations that today could be afforded by the subjective extension of the concept of employer entity operated by paragraph 10 of article 2, since that is based on relationships of domination or group between companies, irrespective of their geographic location, we reaffirm here the known orientation of the Tax Administration according to which the time of seniority relevant is, only and solely, the time of seniority 'acquired' with the entity with which the individual employment contract ceases, as literally follows from the law, and it does not seem there is any room for another type of interpretation" ["On the meaning and scope of the new redaction of article 2, paragraph 4, of the IRS Code — the taxation of amounts received for cessation of the employment bond with the employer entity," Fiscalidade, Nos. 13-14, January/April 2003, p. 10].

It should be noted, however, that the issue of a possible agreement between the parties, contained in the employment contract concluded, that would accept a broader concept of seniority, does not arise in the case at issue, since the employment contract was not attached to the proceedings.

Beyond that, the content of the agreement for cessation of the employment contract is not relevant, since, as is affirmed in the arbitral award rendered in process No. 616/2015-T, "this cannot be considered as an addendum to the Individual Employment Contract […]. All the more so because the agreement for termination of the employment contract is precisely the contract extinguishing the labor relationship, which does not aim to establish conditions regarding the execution of the labor relationship but rather regarding its cessation."

Finally, it should be noted that the interpretive result reached here is also the most coherent with constitutional principles of legality, legal security and equality, insofar as the criteria for determining the measure of taxation result from the law (including the criteria for the exclusion of incidence); they do not depend on vicissitudes such as the fact that workers are or are not unionized and which union they belong to, nor on the fact that the employer entity has or has not executed a Collective Labor Agreement, or on the circumstance that the worker exercised his functions in a certain sector of activity or another, or still on what may have been agreed between the parties.

Through an objective criterion defined in the law, consistent with the requirements of constitutional legal security, the taxation of the increase in contributive capacity (which realizes the principle of equality in tax matters) resulting from the amounts paid by the debtor entity is ensured, allowing the exclusion of incidence also in accordance with an objective criterion legally defined, which has as reference the fraction of seniority or exercise of functions of the worker with the said entity.

In conclusion, the tax act of additional assessment disputed in these proceedings does not suffer from any defect of violation of law, and therefore the request for annulment of that act is dismissed, and consequently also dismissed is the request for condemnation of the Respondent to payment of costs and other charges with the process.

IV – DECISION

In these terms, and with the reasoning set forth, this Arbitral Tribunal decides to wholly dismiss the request for arbitral pronouncement and to absolve the Respondent of the claim, with all legal consequences.

V - VALUE OF PROCEEDINGS

In accordance with the provisions of article 306, paragraph 2, of the Code of Civil Procedure and article 97-A, paragraph 1, letter a), of the Code of Tax Procedure and article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €14,539.77.

VI – COSTS

Pursuant to article 22, paragraph 4, of RJAT, the amount of costs is fixed at €918.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Claimants.

Lisbon, 13/12/2017

The Arbitrator

(Paulo Nogueira da Costa)