Process: 323/2018-T

Date: February 7, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 323/2018-T addressed a dispute concerning IRS (Personal Income Tax) for the 2014 tax year, where taxpayers challenged an ex officio assessment of €160,731.58 plus interest of €16,770.47. The core issue involved the Tax Authority's classification of the taxpayer under the simplified regime despite the taxpayer declaring an option for the organized accounting regime upon commencing activity in February 2013. The taxpayers argued three grounds of illegality: (1) lapse of the assessment period under Article 77(1)(c) of CIRS and Article 45(2) of LGT, as the 2014 assessment was only notified in 2018; (2) incorrect ex officio reclassification to the simplified regime when a valid three-year option for organized accounting was made in 2013; and (3) improper application of the most onerous coefficient without considering the taxpayer's actual cost data. The Tax Authority contended that because the taxpayer failed to reach the €150,000 threshold under Article 28(2) of CIRS, automatic classification to the simplified regime occurred for 2014-2016, requiring a new option by March 2014. The tribunal had to determine whether the initial option remained valid, whether procedural deadlines were violated, and whether the assessment methodology was lawful. This case highlights critical issues regarding regime selection continuity, taxpayer notification obligations, assessment time limits, and the right to compensatory interest when assessments are annulled.

Full Decision

ARBITRAL DECISION

The arbitrators Judge José Poças Falcão (presiding arbitrator), Prof. Dr. Clotilde Celorico Palma and Dr. Rita Guerra Alves (panel arbitrators), appointed by the Ethics Council of the Centre for Administrative Arbitration to form the present Arbitral Tribunal, agree as follows:

I – REPORT

A..., taxpayer no. ..., and his wife B..., taxpayer no. ..., both residing at Rua ..., ..., ..., ...-... ... – Matosinhos, (hereinafter jointly referred to as "Claimants"), filed a petition for the constitution of an Arbitral Tribunal in tax matters and a request for arbitral pronouncement, pursuant to the provisions of paragraph a) of article 2, section 1, and paragraph a) of article 10, section 1, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, or RJAT), seeking the declaration of illegality and annulment of the assessment of Personal Income Tax (IRS), no. 2018..., in the amount payable of € 160,731.58, and the assessment of Interest no. 2018... of 20/04/2018 in the amount of €16,770.47, relating to the year 2014, which fixed a total tax payable of € 177,502.05 (one hundred and seventy-seven thousand five hundred and two euros and five cents).

The Claimants also request the reimbursement of tax paid unduly, plus compensatory interest.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The petition for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 10-7-2018.

On 30-08-2018, pursuant to the provisions of paragraph a) of article 6, section 2, and paragraph b) of article 11, section 1, of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective Arbitral Tribunal the undersigned signatories, who communicated acceptance of the appointment within the applicable time period.

On that same date, the parties were duly notified of such appointment and did not express any intention to refuse it, in accordance with the combined provisions of article 11, section 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of article 11, section 1, of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 19-09-2018.

The Tax Authority and Customs Authority filed its response, raising the issue of the material incompetence of the Arbitral Tribunal and defending the inadmissibility of the petition.

By order of 11-06-2018, the meeting provided for in article 18 of RJAT was dispensed with, and it was decided that the proceedings would continue with optional written submissions simultaneously for a period of 20 days.

The Claimants filed submissions. The Tax Authority did not file its submissions.

The Arbitral Tribunal was duly constituted, in accordance with the provisions of articles 2, section 1, paragraph a), and 10, section 1, of Decree-Law no. 10/2011, of 20 January.

The Parties are duly represented, enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, section 2, of the same decree-law and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are free from vices of nullity.

I-1 - CAUSE OF ACTION

To substantiate their request for arbitral pronouncement, the Claimants alleged, with a view to the declaration of illegality of the tax act, the following:

In their declaration of commencement of activity, effective from 2013-02-28, the Claimant (A...), in the capacity of sole proprietor, defined his framework as the Organized Accounting Regime.

No circumstances having arisen regarding IRS for 2013, the Claimants duly filed their IRS declaration for 2014, according to which the Global Income was €9,700.00, Specific Deductions of €4,104.00, and Taxable Income of €5,596.00, resulting in IRS refundable of €2,972.89.

When they intended to deliver the Model 3 declaration relating to the year 2014, they were surprised by the impossibility of delivery of Annex C, relating to organized accounting, as a result of an alleged classification made by the TA, under the simplified regime, of which they were never notified.

The Claimants argue that by letter no. ... of 2015-07-29, the Tax Authority's Directorate of Taxpayer Registration understood that, because the Claimant had not reached the amount provided for in section 2 of article 28 of CIRS, at the time €150,000 and currently €200,000, the Claimant should have opted for the organized accounting regime by the end of March 2014, failing which he would be automatically classified in the simplified regime for the three-year period 2014-01-01 to 2016-12-31, allegedly by virtue of paragraph b) of section 4 of article 28 of CIRS.

The Claimants argue that having made the option for the organized accounting regime immediately with the Declaration of Commencement of Activity, on 28-02-2013, such option was valid for the three-year period 2013 to 2015 and thereafter, which should be recognized, but which the TA persists in not recognizing.

Furthermore, they argue, in accordance with the ex officio assessment in dispute, it was established that the Taxpayers had a Global Income of €320,248.01, the same Specific Deductions, and a Taxable Income of €316,144.01, resulting in IRS payable of €160,731.58, as well as compensatory interest in the amount of €16,770.47.

The Claimants argue for the lapse of the assessment challenged, submitting that, although the IRS in question relates to the year 2014, the acts described in the preamble of the present request for arbitral pronouncement are from 2018, namely the Ex Officio IRS Assessment no. 2018..., relating to the year 2014, notified on 27/04/2018, to the effect that, both by violation of the time period provided for in Article 77, section 1, paragraph c) of CIRS, and by violation of section 2 of article 45 of the General Tax Law (LGT) (by reference to Article 92 of CIRS), the lapse of the Ex Officio Assessment in dispute is manifest, which should be declared.

The Claimants argue against the incorrect ex officio classification in the simplified regime, arguing: the option by the Taxpayer of the organized accounting regime immediately with the Declaration of Commencement of Activity, on 28-02-2013, such option was valid for the three-year period 2013 to 2015 and thereafter. No option having been made for the simplified regime, the Claimant should be taxed in 2014 under the same regime as in 2013, which did not occur only by imposition of the Tax Authority and Customs Authority which, due to the constraints of electronic submission of declarations, did not permit the Claimant to present Annex C, corresponding to the organized accounting regime.

Furthermore, the Claimants argue that the illegality from which the ex officio assessment in dispute suffers is, because, even if taxation under the simplified regime had been correct, the TA could never have proceeded as it did, taxing him by the most onerous coefficient and as if it had no data from this taxpayer, specifically regarding costs, a taxpayer who presented everything except complying with the TA's request to present the simplified regime schedule.

The Claimants conclude by arguing the complete merits of the present request for arbitral pronouncement and, consequently, that the triple illegality from which the assessments described in the preamble of this Request for Arbitral Pronouncement suffer be declared, the first, on grounds of lapse, the second, because he could not be classified ex officio in the simplified regime, and the third, because, even if taxation under the simplified regime had been correct, the TA could never have proceeded as it did, taxing him by the most onerous coefficient and as if it had no data from this taxpayer, specifically regarding costs, with all legal consequences.

I-2 - RESPONSE OF THE RESPONDENT

The Respondent, duly notified for such purposes, timely filed its response in which, in brief summary, besides raising the material incompetence of this Arbitral Tribunal, it alleged, without dispensing with the invocation of the aforementioned dilatory exception, the following:

The Claimant is classified in the activity of "Sale of light motor vehicles" (CAE 047210), since 2013-02-28, having opted in the declaration of commencement of activity for the organized accounting regime, with respect to category B income.

The Claimant commenced activity on 2013-02-28, having in that year opted for the organized accounting regime, in which he was classified.

In the year of commencement of activity (2013), classification is effected, where other requirements are met, in accordance with the annual estimated income value contained in the declaration of commencement of activity, as provided by section 10 of article 28 of the Personal Income Tax Code.

Law no. 83-C/2013, of 1 December, which approved the State Budget for 2014, altered the limit provided for in section 2 of article 28 of CIRS to € 200,000.00, with the consequent implications regarding the classification of taxpayers in the simplified regime.

In 2013, as the Claimant declared income of € 181,478.56 (sales) and €5,951.95 (provision of services), he was classified for the year 2014 in the simplified regime, since the annual gross income of category B in 2013 was below € 200,000.00.

Thus, for the Claimant to remain in the organized accounting regime, and given that the income earned in 2013 was below the legal limit, he would have had to exercise the option for taxation according to the organized accounting regime, which he did not do, whereby he was classified in the simplified regime.

It would be otherwise only if the Claimant had exercised the option of taxation by the organized accounting regime by the end of March 2014.

Whence it follows that if the Claimant intended to continue in the organized accounting regime, when in 2014 he obtained income below the legal limit, it was his responsibility to make the change to the organized accounting regime by option.

I-3 - ISSUES TO BE DECIDED

Considering the positions of the parties, adopted in the arguments presented by each, the following are the issues to be considered and decided:

  1. The incompetence of the arbitral tribunal;

  2. Illegality of the tax acts described below, on grounds of lapse;

  3. Illegality of the tax acts of assessment in the matter of Personal Income Tax (IRS) Assessment no. 2018.... in the amount payable of € 160,731.58 and statement of Interest Assessment no. 2018 ... of 20/04/2018 in the amount of €16,770.47, relating to the year 2014, which fixed a total tax payable of € 177,502.05 (one hundred and seventy-seven thousand five hundred and two euros and five cents).

  4. Compensatory interest.

II - PRELIMINARY ISSUE: THE EXCEPTION OF INCOMPETENCE OF THE TRIBUNAL

It is necessary to first consider the issue of the material incompetence of the arbitral tribunal, in accordance with article 13 of the Code of Procedure in Administrative Courts, applicable to tax arbitral proceedings by virtue of the provisions of article 29, section 1, paragraph c) of RJAT.

The Respondent invokes the dilatory exception of absolute incompetence of the Arbitral Tribunal ratione materiae, because, in its view, "the petition in question amounts to a request for an arbitral decision determining that the Respondent was classified in the organized accounting regime, in the years 2014 and 2015" and "what the Claimants seek is the declaration of illegality of the decision of the Tax Administration that classified the Respondent in the simplified regime of taxation", which does not constitute an act that can be classified under article 2 of RJAT.

It results from the case file that the Claimants expressly challenged the act of IRS assessment relating to the year 2014, requesting, ultimately, its annulment with the consequent reimbursement of tax paid, as well as the condemnation of the TA in the payment of compensatory interest.

Whence, the act challenged by the Claimants, and the indirect object of the present arbitral action, is the act of IRS assessment no. 2018....

In accordance with the provisions of article 2, section 1, paragraph a) of RJAT, arbitral tribunals have competence to declare the "(…) illegality of acts of assessment of taxes, of self-assessment, of withholding at source and of payment on account.", whereby the Tribunal has competence to consider the legality of the act of assessment challenged.

With respect to interlocutory acts in the assessment procedure, including the acts of the TA in applying the simplified regime, these cannot be autonomously challenged, as they are not injurious, and any illegality previously committed can be invoked in the challenge of the final decision, by virtue of the provisions of article 54 of CPPT applicable to tax arbitral proceedings by virtue of the provisions of article 29, section 1, paragraph c) of RJAT.

Indeed, since the tax assessment procedure consists of a series of preparatory and instrumental acts directed at the assessment proper, it is generally only the latter, as a tax act in the strict sense, that is capable of causing an objective, immediate and current injury to the sphere of the taxpayer, thus constituting the act that can be contenciously challenged. However, if injurious within the terms explained (objective, immediate and currently) or by express provision to the contrary, interlocutory acts of the procedure may be the subject of autonomous contentious challenge, as provided, a contrario sensu, in the scheme contained in article 54, first part, of the Code of Tax Procedure and Process ("CPPT"), according to which "except when they are immediately injurious to the rights of the taxpayer or unless provided otherwise, interlocutory acts of the procedure [...]" are not susceptible to contentious challenge.

Nevertheless, the final part of the same legal provision further provides that the general non-autonomy of challenge, or the non-autonomous challenge in the present case, always occurs "[...], without prejudice to the possibility of invoking in the challenge of the final decision any illegality previously committed".

In the case in question, the Claimants challenge the act of assessment, which was based, among other presuppositions, on the classification of the Claimant in the simplified regime of IRS. And they do so by precisely attacking the legality of this act of classification. The petition of the Claimants is, therefore, in accordance with the principle of unitary challenge of the tax act, provided for in article 54 of CPPT and applicable to the present proceedings by virtue of paragraph a) of section 1 of article 29 of RJAT.

This understanding is adopted, among others, in the decision of the Supreme Administrative Court dated 13-11-2013, delivered in the context of case no. 0897/13 "(…) Article 54 of CPPT enshrines the so-called principle of unitary challenge, according to which it is generally only possible to challenge the final act of the procedure, and not already the interlocutory or procedural acts, since only the final act directly affects or injures, immediately, the legal sphere of the taxpayer, establishing the position of the tax administration toward him and defining his rights and obligations. And it further results that in tax litigation, unlike what occurs currently in administrative litigation, the criterion for the challengeability of acts is that of their immediate and current injury (and not merely potential), or, in other words, depends on the production of negative effects immediately in the legal sphere of the taxpayer, through the violation of his rights or legally protected interests. In this way, interlocutory acts of the tax procedure, being merely instrumental or preparatory of the final decision, even if illegal, are not, in principle, immediately injurious to the interests of the taxpayer, since his tax situation is not defined or resolved by them. Indeed, since the tax assessment procedure consists of a series of interconnected acts directed at achieving a final legal result, that is, at determining the amount of tax that the taxpayer has to deliver to the State coffers, it is understandable that only the final act (assessment in the strict sense) is capable of affecting, in an objective and immediate manner, the legal sphere of the taxpayer, being that, therefore, the injurious act and contenciously challengeable.

In the same sense, decisions have already been rendered in the context of arbitral jurisdiction in cases 266/2013-T, 253/2013-T, 97/2017T and 114/2017T.

It is in the light of the petition or set of petitions formulated by the claimant that the appropriateness of special procedural forms, in particular arbitral proceedings, is assessed.

Article 54 of CPPT expressly provides that any illegality committed during the course of the procedure may be invoked in the challenge of the final decision of the procedure.

In light of the foregoing, no objection can be raised to the pretension manifested by the Claimants in their request for arbitral pronouncement, to have declared the illegality of the additional IRS assessment above identified, since, constituting this the final act of the tax procedure in reference, it can be contested on the ground of any illegalities, including those relating to interlocutory acts, such as that of ex officio alteration of the Claimant's tax registration framework in the context of IRS.

Regardless of the grounds (cause of action) supporting the request for arbitral pronouncement, the fact is that this petition has as its object the mentioned tax assessment and no other act, whereby the Arbitral Tribunal is competent to consider its (il)legality in accordance with article 2, section 1, paragraph a) of RJAT, and the exception of absolute incompetence, ratione materiae, alleged by the Respondent Entity does not exist.

Therefore, since the declaration of illegality of assessment acts is requested, this Arbitral Tribunal must be concluded to be competent to consider the pretension of the Claimants.

Therefore, the exception raised is unfounded.

III - ON THE MERITS

III-1: THE FACTS

III-1-1 PROVEN FACTS

The following facts are considered proven:

In the declaration of commencement of activity, effective from 2013-02-28, the Claimant – A..., in the capacity of sole proprietor, defined his framework as the Organized Accounting Regime.

No circumstances having arisen regarding IRS for 2013, the Claimants duly filed their IRS declaration for 2014, according to which the Global Income was €9,700.00, Specific Deductions of €4,104.00, and Taxable Income of €5,596.00, resulting in IRS refundable of €2,972.89.

The IRS in question relates to the year 2014.

Within the legal time period, the Claimants proceeded to deliver the annual IRS declaration for the year 2014 by electronic means.

In that declaration were declared the income of category B of the Claimant- B...- and quantified in accordance with the organized accounting regime of IRS.

The Claimants did not present the Model 3, requested by the TA, relating to the year 2014 in accordance with the simplified regime.

In the Claimants' Model 3 declaration relating to the year 2014, they were not permitted to deliver Annex C, relating to organized accounting.

The TA unilaterally proceeded to classify the Claimants in the simplified regime for the fiscal year 2014.

The Claimants were not notified of the classification made by the TA in the simplified regime.

The Claimants received from the TA a letter noting the existence of discrepancies in IRS for 2014 "existence of errors, after validation – C70-incompatibility between the annex sent and option in registration".

This discrepancy corresponded to the classification of the taxpayer husband for purposes of determining the taxable income of Category B of IRS in the simplified regime.

The firm responsible for the Claimant's accounting, called "C... Ltd.", through D..., contacted the Porto Tax Office in writing on 23/07/2014.

On 13/10/2015, the Claimants, through their representatives, filed a Request with the Tax Authority's Directorate of Taxpayer Registration, setting out and requesting what is petitioned in this request for arbitral pronouncement.

The request dated 13-10-2015 of the Claimant's representatives was dismissed through the Order of dismissal dated 2017.02.21, sent by the Tax Office of ... the Letter no. .../... of 2017-04-12.

The Claimants were notified of Letter no. 2018... of 2018-04-06, through which was notified "the final report".

The Claimants were subsequently notified of the Ex Officio IRS Assessment no. 2018..., relating to the year 2014, delivered on 27/04/2018, in the amount payable of €160,731.58, as well as compensatory interest in the amount of €16,770.47 assessed through the Statement of Interest Assessment contained in the compensation no. 2018... of 20/04/2018.

It is established that the ex officio assessment in dispute is effected pursuant to paragraph b) of section 1 of article 76 of CIRS.

In accordance with the Ex Officio Assessment in dispute, a Global Income of €320,248.01 was established, the same Specific Deductions, and a Taxable Income of €316,144.01, resulting in IRS payable of €160,731.58.

III-1-2 UNPROVEN FACTS AND JUSTIFICATION FOR THE DETERMINATION OF THE FACTUAL MATTER

The facts given as proven result from the documentary evidence attached to the request for arbitral pronouncement and the administrative proceedings.

There is no controversy regarding the facts relevant to the decision of the case.

III-2 - MATTERS OF LAW

Considering the positions assumed by the parties in the arguments presented, the thema decidendum to be resolved by this Arbitral Tribunal concerns the interpretation and application of the regime provided for in article 28 of CIRS in the version given by Law no. 83-C/2013, relating to the forms of determination of business and professional income, and the consequent determination of the correct classification in the context of IRS of the assessment act no. 2018... relating to the year 2014.

Given the factual matter fixed as proven, we shall determine the applicable law, giving priority, in compliance with the provisions of paragraph a) of section 2 of article 124 of CPPT, to the analysis of the vices of the assessment act, the acceptance of which determines a more stable and effective protection of the interests of the Claimants.

The Claimants essentially argue that the option of their classification as being the Organized Accounting Regime is by virtue of their Declaration of Commencement of Activity made on 2013-02-28, which option was valid for the three-year period 2013 to 2015 and thereafter.

The Respondent, counter-argued, essentially, that with Law no. 83-C/2013, of 1 December, which approved the State Budget for 2014, the limit provided for in section 2 of article 28 of CIRS was altered to € 200,000.00, with consequent implications regarding the classification of taxpayers in the simplified regime, and since in 2013, the Claimants declared income of € 181,478.56 (sales) and € 5,951.95 (provision of services), they were thereby classified for the year 2014 in the simplified regime, since the annual gross income of category B in 2013 was below €200,000.00.

Let us analyze each of the disputed points. The Claimants expressly opted for the application of the organized accounting regime, in their declaration of commencement of activity in 2013, and regarding the fiscal year 2013 they filed their income declaration in accordance with the organized accounting regime.

Let us now examine the relevant legislation, for the 2013 fiscal period, in particular article 28, section 2, of CIRS, in the wording prior to Law no. 83-C/2013, of 31 December, respectively in the wording of Decree-Law 211/2005, 7 December, which established the value of €150,000.00 as the maximum limit for application of the simplified regime.

With the wording of Law no. 83-C/2013, which came to approve the State Budget for 2014, section 2 of article 28 of CIRS was altered, which came to establish the following: "2 - Taxpayers are covered by the simplified regime if, in the exercise of their activity, they did not exceed in the immediately preceding tax period an annual gross amount of income of this category of (euro) 200,000.

Section 2 of article 28 of CIRC, in force in 2013 when the Claimants commenced activity, stated as follows: "Taxpayers are covered by the simplified regime if, in the exercise of their activity, they did not exceed in the immediately preceding tax period an annual gross amount of income of this category of (euro) 150,000." any of the sales volume or gross value of remaining category B income limits.

However, article 28, section 3, of CIRS in the wording of Decree-Law 211/2005, 7 December, version which remains in force for both tax periods in question (2013 and 2014), states the following: "Taxpayers covered by the simplified regime may opt for the determination of income based on accounting."

Consequently, taxpayers of category B of IRS may be subject to the organized accounting regime either by option or by legal imposition.

From the documentary evidence it results that the Claimants are subject to the organized accounting regime by option manifested in 2013.

Thus, the essential question is whether the initial option of the Claimants for the application of the organized accounting regime ceased to have relevance due to the fact that, subsequently, the application of the new regime became mandatory.

There is abundant jurisprudence on this question, which will be followed closely. We bear in mind, in particular, the decisions of the STA and CAAD, which we accept without reservation.

Note, in particular and still on this matter, the Decision for Fixing Jurisprudence, of the Supreme Administrative Court, of 25 October 2017, delivered in Case 0474/17 (Rapporteur ARAGÃO SEIA), where it was decided:

"Jurisprudence is hereby fixed to the effect that the option made in the declaration of commencement of activity for the application of the general regime is relevant for the three following years, even if that regime already resulted mandatory in light of the total annual volume of income estimated in the initial declaration. Although the taxpayer did not meet the legal factual requirements for the simplified regime of determination of taxable profit to be automatically applicable, upon formulating the option for the general regime of taxation, such option would always have a three-year duration. In this way, it must be concluded that the Tax Administration's action in classifying the taxpayer in the simplified regime of determination of taxable profit with respect to the fiscal year 2003 was illegal."

To the same effect, the Supreme Administrative Court in the decision of 11 May 2016, delivered in case no. 01536/15, ruled that "having the taxpayers opted to be taxed on the basis of their accounting, the Tax Administration cannot come to classify them in the simplified regime of taxation".

The same decision further states, "the Tax Administration could not have substituted itself for the taxpayers in that option, because the minimum period of permanence in the chosen regime was not exceeded, but above all, because only taxpayers can opt for a different regime, except when classified in the simplified regime they exceed the amount of income stated above for two successive periods – article 28, section 6 of CIRS".

In the same sense as the jurisprudence of the STA referenced above, decisions have already been rendered in the context of CAAD jurisprudence in cases nos. 772/2014T; 760/2015T; 434/2017T; 484/2017T; 114/2017T and 97/2017T. From which we transcribe, given that the matter of law to be resolved in this proceedings is identical to that opportunely decided in case no. 97/2017T, the legal grounds cited therein and which this Tribunal likewise subscribes to: "With the wording that Law no. 83-C/2013 - 31/12, of 29 December, gave to section 5 of article 28, a minimum period of permanence of three years in any of the regimes came to exist, "extendable for equal periods, except if the taxpayer communicates, in accordance with the terms of paragraph b) of the previous number, the change in the regime by which it is covered".

Thus, having the option been made for the organized accounting regime and the Respondent not having communicated the change in regime, the application of the organized accounting regime was extended, by periods of three years, successively through the years 2014 and 2015, which are at issue here.

(…)

Law no. 83-C/2013, of 31 December, did not alter this regime, limiting itself, insofar as matters here, to increasing the value of income from which application of the organized accounting regime is mandatory, without imposing its cessation.

As stated in that decision no. 01536/15, "if permanence in the simplified regime implies that taxpayers, in the exercise of their activity, did not exceed in the immediately preceding tax period an annual gross amount of income of this category of (euro) 200,000, there is no specific requirement as to the amount of income earned for them to be able to opt for the determination of income based on accounting".

There is no legal provision that permits the conclusion that the option for the organized accounting regime ceases to have relevance, due to the fact that application of that regime becomes mandatory."

Let us return to the present case, and given the jurisprudence and legislation presented, and the proof of the Claimants' option for the organized accounting regime, the application of the simplified regime is excluded, in accordance with article 28, section 3, of CIRS in the wording of Decree-Law 211/2005, 7 December, version which remains in force for both tax periods in question (2013 and 2014).

For the foregoing reasons, as the Tax Authority did not effect the correct legal classification of the taxable fact, the assessment object of challenge cannot be upheld, due to illegality (by virtue of paragraph a) of article 99 CPPT), a vice consisting of a legal error, being this the erroneous interpretation of section 5 of article 28 of CIRS.

Pursuant to articles 608, section 2, 663, section 2, and 679 of the Civil Procedure Code by application of article 29 of RJAMT, the present Arbitral Tribunal is not obligated to consider all arguments alleged in the initial petition by the Respondent or in the response filed by the Respondent, when the decision is prejudiced by the solution already given and which translates into the illegality of the assessments.

In these terms, the assessments challenged, which are based on the presupposition that the Claimants would be subject to the simplified regime, suffer from a vice of violation of law, which justifies their annulment, pursuant to article 163, section 1, of the Administrative Procedure Code, subsidiarily applicable in accordance with article 2, paragraph c) of LGT.

III-3 - COMPENSATORY INTEREST

The Claimants further petition for payment of compensatory interest.

In light of the foregoing, the IRS assessment, to the extent covered by the annulment, results from errors of fact and law attributable exclusively to the tax administration, to the extent that the Claimants complied with their duty to declare.

Indeed, it has been demonstrated that the Claimants paid the tax challenged insofar as it is superior to what is due. In this manner and by virtue of the provisions of articles 61 of CPPT and 43 of LGT, the Claimants have the right to compensatory interest due, such interest to be calculated from the date of payment of the unduly paid (annulled) tax until the date of issuance of the respective credit note, the payment time period for which is calculated from the date of commencement of the time period for voluntary compliance with the present decision (article 61, sections 2 to 5, of CPPT), all at the rate determined in accordance with the provisions of section 4 of article 43 of LGT.

III-4 - MATTERS OF KNOWLEDGE AFFECTED BY THE JUDGMENT

Given that the request for arbitral pronouncement is to be judged well-founded on grounds of violation of law, which prevents the possible issuance of a new act with the same import, the consideration of the remaining questions raised by the Claimants is affected and becomes unnecessary.

IV - DECISION

In accordance with the foregoing, the members of this Arbitral Tribunal agree to:

  1. Judge the exception raised by the Tax Authority and Customs Authority to be unfounded;

  2. Judge the request for arbitral pronouncement to be fully well-founded;

  3. Declare illegal and annul the IRS assessments nos. 2018... and statement of Interest Assessment no. 2018...;

  4. Condemn the Tax Authority and Customs Authority to reimburse the Claimants in the amount of € 177,502.05 (one hundred and seventy-seven thousand five hundred and two euros and five cents), plus payment of compensatory interest already due relating to the period between the date of payment of the tax and its reimbursement, as well as in the payment of compensatory interest due to accrue from the date of notification of this decision until effective and complete payment, all in accordance with sections 2 to 5 of article 61 of CPPT, at the legal rate determined in accordance with the provisions of section 4 of article 43 of LGT.

IV-1 - VALUE OF THE CASE

In accordance with the provisions of articles 296, section 1, of CPC and 97-A, section 1, paragraph a) of CPPT and 3, section 2, of the Regulation of Court Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 177,502.05 (one hundred and seventy-seven thousand five hundred and two euros and five cents).

IV-2 - COURT COSTS

Pursuant to article 22, section 4, of RJAT, the amount of court costs is fixed at €3,672.00 in accordance with Table I attached to the Regulation of Court Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.

Lisbon, 7 February 2019

(José Poças Falcão - presiding arbitrator)

Prof. Dr. Clotilde Celorico Palma

(panel arbitrator)

Dr. Rita Guerra Alves

(panel arbitrator)

Frequently Asked Questions

Automatically Created

What is the difference between the organized accounting regime and the simplified regime for IRS purposes in Portugal?
The organized accounting regime (contabilidade organizada) requires taxpayers to maintain complete accounting records and determine taxable income based on actual net profits calculated according to accounting standards. The simplified regime (regime simplificado) applies presumptive coefficients to gross income to determine taxable profit, without requiring full accounting records. Under Article 28 of CIRS, taxpayers with gross income exceeding €200,000 (previously €150,000) are mandatorily subject to organized accounting, while those below this threshold may choose either regime. The organized accounting regime typically benefits taxpayers with significant deductible expenses, as it taxes actual net income rather than presumed income based on fixed coefficients.
Can taxpayers choose between the organized accounting regime and the simplified regime for IRS income tax?
Yes, taxpayers can choose between regimes, subject to legal requirements. Under Article 28(2) of CIRS, taxpayers with income below the mandatory threshold may opt for organized accounting by declaring this choice in their commencement of activity declaration or by March 31st of the year they wish to change regimes. This option remains valid for a minimum three-year period. Taxpayers who do not make an explicit choice and fall below the threshold are automatically classified under the simplified regime. However, once an option is validly made for organized accounting, the law protects this choice for the entire three-year period, and the Tax Authority cannot unilaterally reclassify taxpayers without proper legal grounds and notification.
What was the outcome of CAAD arbitration case 323/2018-T regarding IRS tax assessment?
The decision excerpt does not provide the final ruling, as it contains only the Report section and the Claimants' arguments. However, the case concerned three principal claims: (1) declaration of lapse of the 2014 IRS assessment notified in 2018 under Articles 77(1)(c) CIRS and 45(2) LGT; (2) recognition that the taxpayer's 2013 option for organized accounting remained valid through 2015, making the Tax Authority's ex officio reclassification to the simplified regime illegal; and (3) improper application of the highest coefficient without considering actual cost data. The taxpayers sought annulment of the €160,731.58 assessment plus €16,770.47 interest, reimbursement of taxes paid, and compensatory interest. The tribunal's competence and admissibility were contested by the Tax Authority.
How can taxpayers challenge an IRS tax assessment through CAAD arbitral proceedings in Portugal?
Taxpayers can challenge IRS assessments through CAAD (Centro de Arbitragem Administrativa) by filing a petition for constitution of an arbitral tribunal under Decree-Law 10/2011 (RJAT). The petition must be filed within the legal deadline, specify the contested acts, state the grounds for illegality, and request specific relief. In this case, the taxpayers challenged both the principal assessment and interest, arguing procedural violations (lapse), substantive illegality (incorrect regime classification), and improper calculation methodology. After the petition is accepted, the Tax Authority files a response, arbitrators are appointed by the Ethics Council, and parties may present written or oral arguments. The tribunal issues a binding decision with the same effects as a court judgment, providing an alternative to hierarchical administrative appeals or judicial litigation.
Are compensatory interest (juros indemnizatórios) available when an IRS tax assessment is declared illegal by CAAD?
Yes, compensatory interest (juros indemnizatórios) is available when tax assessments are declared illegal and annulled. Under Article 43 of the General Tax Law (LGT), taxpayers are entitled to compensatory interest when they have paid taxes that are later determined to be undue, calculated from the payment date until reimbursement. The right to compensatory interest is automatic upon annulment of illegal tax assessments and does not require proof of fault by the Tax Authority. In this case, the taxpayers expressly requested reimbursement of unduly paid taxes plus compensatory interest as part of their petition. The rate and calculation method for compensatory interest are established by law and represent compensation for the taxpayer's loss of use of funds that should not have been collected.