Process: 349/2017-T

Date: December 14, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Decision 349/2017-T addresses a fundamental dispute in Portuguese IRS taxation regarding severance pay exemptions and the calculation of seniority (antiguidade). The case involved a banking sector employee who received €120,397.14 in severance compensation upon termination of his employment contract with credit institution C…, where he worked for 5 years and 23 days. The employer calculated the severance based on 26 years of total seniority across multiple banking institutions, pursuant to Article 17(1)(a) of the Banking Sector Collective Labor Agreement (ACTV), which defines seniority as 'all time of service rendered in Credit Institutions in Portugal.' The Tax Authority issued an additional IRS assessment for 2013, treating €95,074.55 as undeclared employment income, calculating the tax exemption under Article 2(4)(b) of the IRS Code based solely on the 5-year tenure at the final employer. The taxpayers challenged this through CAAD arbitration, arguing that the ACTV definition of seniority should apply for tax purposes, making the entire severance payment exempt from IRS. They cited Article 17(2) of the ACTV, which places the burden of full severance payment on the last employer, and referenced supportive case law from the Central Administrative Court - South and prior CAAD decisions. The taxpayers contended that the Tax Authority's interpretation violated the ACTV provisions, constituted abuse of rights, and created discriminatory treatment of banking workers. The case presents critical questions about the interaction between collective labor agreements and tax law definitions, particularly whether sector-specific employment regulations can override tax code provisions for determining exemption eligibility. The procedural aspects demonstrate the full CAAD arbitration process, including deposit of security amounts, compensatory interest assessments, and claims for indemnity interest recovery upon potential annulment of the additional assessment.

Full Decision

ARBITRAL DECISION

Arbitrator Marisa Almeida Araújo, designated by the Deontological Council of the Administrative Arbitration Center (CAAD) to form this Singular Arbitral Tribunal, hereby renders the following:

ARBITRAL DECISION

A) Report:

A… and B…, taxpayers no. … and …, (hereinafter referred to as "Claimants"), married, resident at …, no. … –…, …-… Lisbon, filed a request for arbitral opinion and establishment of a singular arbitral tribunal on May 30, 2017, under the provisions of article 4 and no. 2 of article 10 of Decree-Law no. 10/2011, of January 20 (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as "RJAT"), in which the Tax and Customs Authority (hereinafter designated as "Respondent" or "TA") is the respondent.

The Claimants seek in the aforementioned request for arbitral opinion before the Arbitral Tribunal:

(I) The declaration of illegality and annulment of the additional Personal Income Tax assessment for the year 2013, as they do not agree with the alleged inaccuracies detected by the Tax Authority in the income declaration, expressed in the notification made to them by office letter 2017.01.20, presupposing an amount of undeclared work income of €95,074.55, corresponding to the overall balance determined of €52,266.10, by additional Personal Income Tax assessment, encompassing:

- Reversal of 2013 assessment – Assessment 2014 … in the amount of €4,963.38;

- Adjustment of 2013 assessment – Assessment 2017 … in the amount of €42,464.24;

- Compensatory interest – Assessment 2017 … in the amount of €4,351.12;

- Compensatory interest for improper receipt – Assessment 2017 …, in the amount of €487.36;

(II) The restitution of the amount deposited as security in the amount of €66,425.61, guaranteeing the amount assessed in pending execution;

(III) The payment of indemnitory interest calculated on the amount deposited by the Claimants as security.

3. The request for establishment of the Singular Arbitral Tribunal was accepted by the President of CAAD and notified to the Respondent on May 30, 2017.

The Claimant did not proceed to designate an arbitrator, wherefore, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable period and the parties did not manifest refusal of the designation, pursuant to article 11, no. 1 paragraphs a) and b) of the RJAT and article 7 of the Deontological Code.

On August 24, 2017, the arbitral tribunal was established.

Notified for this purpose on August 28, 2017, the Respondent filed its Reply on October 3, 2017, and sent a copy of the administrative file on October 20, 2017.

On October 4, 2017, the arbitral hearing provided for in article 18 of the RJAT was dispensed with, and the Claimant and Respondent were invited to present written arguments.

On November 28, 2017, the deadline for publication of the final decision was set for December 21, 2017.

The Claimants did not file written arguments and the Respondent filed its arguments on November 28, 2017.

The Claimants support their request, in summary, as follows:

(i) The Claimant husband, in 2013, terminated by mutual agreement the employment contract he had with the credit institution where he worked, C….

(ii) A severance indemnity of €120,397.14 was paid to the Claimant husband, taking into account the seniority resulting from the time of service rendered to it and other banking institutions where he worked, which totaled 26 years of seniority.

(iii) The Claimant husband worked, specifically, at C… for 5 years and 23 days.

(iv) The employer of the Claimant husband paid the aforementioned indemnity corresponding to 26 years of service considering the Collective Labor Agreement of Bankers (ACTV of the banking sector hereinafter) which provides, in its article 17, no. 1 paragraph a), that "seniority is all time of service rendered in Credit Institutions in Portugal".

(v) The Claimant husband, a union member, paid contributions to the Union of Bankers of the South, including in the month of termination of the employment contract in May 2013.

(vi) The Claimant, upon termination of the employment contract with the previous credit institutions for whom he worked, did not receive any indemnity for termination considering, namely, that the ACTV of the banking sector would safeguard this compensation at the next institution.

(vii) Since, according to the rules that result for the banking sector from the respective ACTV, the last banking institution for which the taxable person worked bears the burden of making the indemnity payment considering the worker's seniority in any banking institution.

(viii) Considering thus all the seniority for the sector, provided for in the ACTV, the same is not subject to Personal Income Tax, being contained in the provisions of the application of the negative delimitation rule of the scope of article 2, no. 4 paragraph b) of the Personal Income Tax Code according to the position espoused by the Claimants.

(ix) As well as, according to their claims, is the interpretation that has been made by the jurisprudence, indicating the Judgments of the Central Administrative Court - South (TCA South hereinafter) of May 11, 2004 (Case 6002/01), of September 21, 2010 (Case 3748/10) and also of March 12, 2013 (Case 5971/12) and, furthermore, they cite jurisprudence of CAAD – Case no. 230/2016-T.

(x) The Claimants do not agree, therefore, with the interpretation of the TA as to the non-applicability of the ACTV of the banking sector for determining the concept of "seniority" considering, only, the indemnity value calculated in relation to the seniority of the taxable person in the (last) entity owing the compensation for the termination of the employment contract.

(xi) What, for the Claimants, constitutes a violation of article 17 of the ACTV of the banking sector which appears, according to their interpretation, binding for workers and employers and applied by Labor Courts or supervised and enforced by ACT (Authority for Labor Conditions).

(xii) And, therefore, the employer of the Claimant husband itself accepted to pay an indemnity covering all seniority in the banking sector, prior to the time of service rendered to C….

(xiii) Since, according to the Claimants, the rules created by the banking sector that leave, in accordance with no. 2 of article 17 of the ACTV of the banking sector, for the last employer of the taxable person the payment of the indemnity for termination of the employment contract as to all seniority and, on the other hand, the legal provision for non-subjection to taxation established in the Personal Income Tax Code, based on that seniority.

(xiv) Considering the Claimants that the calculation of "seniority" relevant for determining the multiplier to which paragraph b) of no. 4 of article 2 of the Personal Income Tax Code alludes is that which results from the instrument of collective regulation of the banking sector whereby they disagree with the interpretation that TA adopted, i.e., the consideration for the calculation of the amount subject to taxation only the seniority of the taxable person in the last entity owing the compensation for the termination of the employment contract.

(xv) The Claimants further contend that the interpretation of the TA constitutes, on one hand, an abuse of right, since they understand that the rule (of the ACTV of the banking sector) intended to effectively exclude the taxation of the indemnity under Personal Income Tax and, on the other hand is discriminatory since they consider that banking workers had in a contractual clause, inherent in a binding agreement concluded between employer entities and union associations, the accumulation of their seniority with respect to all credit institutions in which they worked, to be indemnified by the last employer entity.

(xvi) And that, in any case, it would always be a violation of the principle of justice since there existed, with the interpretation of the TA, a benefit to the State to the detriment of the Claimants.

(xvii) And, on the contrary, according to the perspective of the Claimants no prejudice is reasonably and soundly invocable by the TA, since, taking into account their understanding, if the Claimant husband had received partial indemnities for each period of work and in each Institution, whenever he changed banking institution, it would also be excluded from taxation under Personal Income Tax.

(xviii) The understanding of the TA would always be, in the position of the Claimants, unconstitutional, particularly because it is an indemnity attributed for loss of employment, usually of grave personal and social fragility, which reason would have led the legislator to establish exceptionally a non-subjection to taxation under Personal Income Tax.

(xix) Furthermore, the Claimants assert the violation by the TA of article 68-A, no. 4 of the LGT since considering the decisions of the judicial courts that they cite, in a sense contrary to the position assumed by the Respondent, it would always be obliged to adjust its understanding to the sense of the decisions of the superior courts that the Claimants allege support their position, namely the judgments of the TCAS rendered in cases nos. 6002/01 of 11/05/2004, 3748/10 of 21/09/2010, 5971/12 of 12/03/2013 and also a decision of the CAAD itself in case no. 230/2016-T.

(xx) It is imposed, according to the Claimants, that legal-administrative action must conform to the Constitution and the law, according to the principles of legality, universality, equality, proportionality, justice, impartiality and good faith, all in accordance with articles 226, no. 2, 3, 2, 3, 18, 12, 13, no. 2 of the CRP and articles 8 and 9 of the LGT.

(xxi) For all this, the Claimants understand that the additional Personal Income Tax assessment for the year 2013, in the amount of €52,266.10, is illegal, including the corresponding compensatory interest, given the erroneous qualification and quantification of the taxable matter and defect of reasoning regarding the correction made, which is grounds for annulment of the tax act through the assessment.

(xxii) Furthermore, the Claimants understand they are entitled to indemnitory interest corresponding to the security in the amount of €66,425.61 that they constituted, by deposit and whose restitution they petition, to prevent the seizure and execution of their assets within the execution process no. …2017….

(xxiii) In sum, the Claimants argue that there is an error of fact and law in the interpretation and application of the rules of article 17 of the ACTV of the banking sector and article 2, no. 4 of the Personal Income Tax Code, as well as the corresponding compensatory interest, such amounts being owed to the Claimants, in addition to indemnitory interest.

For its part, the Respondent replied supporting the lack of merit of the request for arbitral opinion and alleging, in summary, that:

(i) At issue is the taxation of the indemnity paid by C… to the Claimant husband, in the amount of €120,397.14 as a result of the termination of the employment contract.

(ii) In the inspection action at C…, it was found that, during the year 2013, that banking institution terminated the employment contract, among others, with the Claimant husband and had accounted for, regarding him, for purposes of seniority, all time of service rendered in the banking sector, that is, 26 years.

(iii) Being that, as regards C…, the time of service of the Claimant husband pertains to 5.23 years.

(iv) Faced with the discrepancy, the TA proceeded to make technical corrections to the Personal Income Tax Declaration form 3 for the fiscal year 2013, giving rise to the Personal Income Tax assessments and compensatory interest in question.

(v) The TA understands that the seniority to be counted, for purposes of no. 4 of article 2 of the Personal Income Tax Code, is the seniority in the entity owing the compensation for termination of the employment contract, and it is not appropriate to consider, in the application of the aforementioned legal provision, the seniority in a previous employer, even if the worker and the new employer entity have agreed to consider it in eventual future "indemnities", by employment contract or that results from collective regulation instruments.

(vi) Thus, it was on the basis of the seniority of 5.23 years that the TA determined the indemnity amount excluded from Personal Income Tax taxation, because this is the time of service rendered at the last employer, on whom the duty to pay the compensation rests.

(vii) For this purpose, the Respondent considers that the concept of seniority – seniority per se, without any qualifier – in the labor context does not carry a special scientific density that would distinguish it significantly from the meaning of common language: translating, as in other legal contexts, a legally relevant interval, with various effects, between a certain starting point and a certain ending point.

(viii) Although collective regulation instruments add several qualifiers to labor seniority, the truth is that the Labor Code does not define what "seniority" is nor does it present a univocal qualification of it, observing, however, quite amply, the prevalence of the notion of "seniority in the company", including in the matter of termination of the employment contract.

(ix) The TA understands that, according 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 the matter of termination of the employment contract, collective labor regulation instruments may regulate the criteria for definition of indemnities (compensations) and the periods of procedure and prior notice, and may also 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.

(x) Termination of the employment contract, dismissal for objective causes, the replacement of reinstatement resulting from the unlawfulness of the dismissal or the termination of the contract by the worker on the grounds of an unlawful act by the employer – that is, the situations that give rise to the aforementioned compensations or indemnities – must be distinguished from the agreement of distrate/revocation of the individual employment contract, in which the freedom of contract and, thus, the negotiating autonomy between the parties is not limited, and they may agree with each other various pecuniary counterparts for the termination of the contract, perhaps translated into a global pecuniary compensation which, not having to respect legal limits, is entirely within the availability of the parties.

(xi) Analyzing the content of the collective labor agreements of the banking sector, which contain that clause 17 (under the heading "Determination of seniority"), it is important to conclude that, beyond the indemnity regime for replacement of reinstatement resulting from the unlawfulness of the dismissal, such instruments do not address compensations/indemnities for termination of the employment contract, for dismissal for objective causes, for termination of the contract by the worker on the grounds of an unlawful act by the employer or for agreement of distrate/revocation of the employment contract – matters which, properly considered, are therefore removed from the normative effects emerging from such clause 17, simply because they do not integrate "all the effects provided for" in such instruments.

(xii) The legal regime of article 2, no. 4 of the Personal Income Tax Code has an evident anti-abuse purpose, characteristic of special clauses preventive of tax evasion – a purpose that has special reason to be, because in any case it would not be acceptable for agreements to provide on labor seniority recognizing merely artificial seniorities and imposing such recognition for purposes of negative delimitation of the scope of tax.

(xiii) The TA further states that the cited judgments of 12/03/2013, contained in Case 5971/12, and of 21/09/2010, Case 3748/10, merited an Annotation (cf. Annotation to the Judgment of the Central Administrative Court - South on the seniority of the banking worker (for purposes of calculating the amount of compensation for termination of the employment contract not subject to taxation, pursuant to no. 4 of article 2 of the Personal Income Tax Code), by Cláudia Reis Duarte and Filipe Fraústo da Silva, in Review of the Bar Association, no. 1, 2012).

(xiv) The TA, referring to and citing the annotation from which it is extracted that "Indeed, we consider it incontestable that the concept of seniority included in the fattispecie of the norms of the Labor Code that establish the aforementioned criteria for definition of indemnities (or compensations) within the scheme of termination of the employment contract is that of seniority in the company (...)".

(xv) Concluding the TA, in the wake of the authors of the annotation "that the doctrine arising from the decision under annotation deserves the criticisms previously stated, and we therefore tend to consider rather, as to the specific question of seniority, that from the very literality of the normative provision it results that this corresponds to the number of years or fraction of seniority in the employer entity with which the contract ceases at the origin of the amounts paid (with the reservation of seniority verified in other entities in a relationship of dominance or group with that one by virtue of the extension of the concept operated by no. 10 of article 2 of the CIRS). It further appears that — and even if there were that recourse, in filling the concept in question (which we understand not to be the case insofar as the tax legislator was clear and established in the letter of the law that seniority is that verified in the entity owing), had to be made to labor law — the solution would still be identical, since in the Labor Code we do not find a definition of seniority and, if any we have to extract from it, that will be seniority in the company, and not the seniority that results from a clause of any collective labor convention or agreement established between the parties".

(xvi) Further adding that recourse to the rule of article 11, no. 2 of the LGT presupposes – in light of the expression "unless otherwise directly from the law" – the inexistence in the legal norm (paragraph b) of no. 4 of article 2 of the Personal Income Tax Code) of any proper sense of seniority, something that the Judgment of the TCA South of 21-09-2010 seems to have taken as established a priori.

(xvii) In turn, as to the judgments of the TCA South of 11-05-2004 and 12-03-2013, the TA considers that, although detecting in the aforementioned norm a proper sense of the concept, they immediately obscured it so that, without realizing the absurdity into which they fell, they justified with no. 2 of article 11 of the LGT the search for a so-called less restrictive sense.

(xviii) In any case, the TA considers that recourse to no. 2 of article 11 of the LGT would always imply, as is logical, the prior assumption of a methodologically valid criterion that would allow choosing one of the multiple qualifications of seniority existing within the labor sphere, to the exclusion of all others, something that the jurisprudence on which the Claimants rely did not express at all.

(xix) The legal issue subject of the present case does not limit itself to knowing which concept of seniority to consider in the application of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, in light of the provision of no. 2 of article 11 of the LGT.

(xx) Quite the contrary, according to the TA, the question is whether that paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, while holding a proper sense of the concept of "seniority in the company" which is proven to exist, can be permeable to other qualifications of seniority agreed in legal instruments of a negotiable nature, bilateral or collective, which impose on the entity owing the pecuniary benefit referred to in that norm a seniority greater than that corresponding to the duration of the contractual relationship granted by such entity.

(xxi) Considering the TA that "the qualification of the legal transaction made by the parties (...) does not bind the tax administration" according to no. 4 of article 36 of the LGT – a norm that encompasses, naturally, by reason of a fortiori, the qualifications of the parties bearing on the subject matter of the negotiation -, the issue will have to obtain its solution in the complete legal interpretation of all the normative provisions implied by the expression "number of years or fraction of seniority or of exercise of functions in the entity owing", contained in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code.

(xxii) Once the mandatory legal limits with respect to compensations or indemnities for termination of the employment contract are respected, it is not, of course, in question the full legitimacy of legal negotiable instruments binding the entity owing to pecuniary compensations/indemnities superior to the amount corresponding to the negative delimitation of the scope of taxation provided in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code.

(xxiii) In the understanding of the TA, the interpretation it makes finds support in the spirit of the law which, according to the Respondent, calls for an interpretation in literal terms of the expression "number of years or fraction of seniority or of exercise of functions in the entity owing" referenced to the "entity owing", not allowing that in the "seniority in the entity owing" be considered, beyond the seniority inherent to the effective duration of the contractual relationship granted by that entity, increases resulting from legal negotiable instruments.

(xxiv) Furthermore, according to the TA, the literal element of legal interpretation allows confirming, in a perspective of syntactical correction, that the seniority provided in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code is the seniority in the "entity owing", corresponding to "seniority in the company" which, by virtue of the historical-systematic element inherent to the norm of the current no. 10 of the same article, corresponds to the "employer entity", with the amplitude resulting from this norm, as well as situations of succession in the position of this entity, especially by effect of the equation inherent to article 285 of the Labor Code of 2009.

(xxv) In fact, according to the TA, it was the reason why the legislator combined, alternatively and inclusively, the expressions "seniority" or "of exercise of functions" has to do with 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 one hand, and the exercise of a function, public service or office, on the other hand.

(xxvi) Furthermore, the interpretation of the TA, according to this, has support in historical-systematic and teleological elements that, at the infra-constitutional level, are only compatible, whether with "seniority in the entity owing", whether with the inadmissibility of the consideration in this seniority, corresponding to the effective duration of the contractual relationship granted by that entity, of increases resulting from legal negotiable instruments.

(xxvii) The TA further considers that there are powerful moments of the constitutional system – inherent, whether to the principle of equality, whether to the principle of legality in the matter of tax scope, whose corollaries of equality, responsibility and security call for an intense determinability – which unequivocally presuppose in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code a "seniority" referenced to the "entity owing" and which do not allow, in light of the teleological element measured by the purpose of the exclusion of the scope of taxation established in that same norm, that legal negotiable 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 amplitude of that exclusion of the scope of taxation.

(xxviii) Considering, thus the TA that, although the Labor Code does not contain a definition of what "seniority" is, purifying oneself among the numerous uses of the concept, with different amplitudes and contexts, one, more coherent and systematic, which is the one that conforms the term "seniority" to "seniority in the company" (cf. articles 368, no. 1, paragraph e); article 112, no. 6, article 147, no. 3, etc.) the doctrine referring to, which it cites (cf. Taxation 13/14, Manuel Faustino and Others, "On the sense and scope of the new wording of article 2, no. 4 of the CIRS) from which it understands that regarding the seniority to be considered in the application of no. 4 of article 2 of the CIRS, "The ACTV of the banking sector clause is not opposable to the tax administration (…)".

(xxix) The TA further raised that for the aforementioned ACTV to be applicable, it would always have had to be demonstrated the principle of dual affiliation, pursuant to clause 2, that is, it is necessary that the worker in question be affiliated with one of the aforementioned unions and that the credit institution be a subscriber to the aforementioned Agreement: "The present Collective Labor Agreement is applicable throughout the national territory, within the scope of the banking sector, and binds the Credit Institutions and Financial Companies that subscribe to it (hereinafter generically designated as Credit Institutions or Institutions), as well as all workers in its service affiliated with the Unions of Bankers of the Center, North and South and Islands, represented by the signatory D… and hereinafter designated as Unions, covering 26 employers and estimated at 54,300 the workers covered.(...)".

(xxx) In sum, the Respondent considers that the request for arbitral opinion should be judged to lack merit, thus maintaining the acts of assessment in question.

B) Preliminary Ruling

The Tribunal is competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, all of the RJAT.

The parties have legal personality and capacity, are legitimate and are represented, pursuant to articles 4 and 10 of the RJAT and 1 of Ordinance no. 112-A/2011, of March 22.

There are no nullities nor preliminary questions that affect the entire case, wherefore it is incumbent to now address the merits of the request.

C) Object of the Arbitral Opinion

It will be assessed whether the assessment in question suffers from any illegality that prevents its maintenance in the legal order.

It will be assessed the applicability of the concept of "seniority" that results from clause 17, especially its no. 1 paragraph a), of the ACTV of the banking sector for purposes of Personal Income Tax scope, given the provision of article 2, no. 4 of the Personal Income Tax Code, in the case of compensation for distrate of the employment contract.

It will further be assessed, should the concept of "seniority" that results from clause 17 of the ACTV of the Banking Sector be applicable, the question of the principle of affiliation, as mere caution since it does not appear in the reasoning of the decision adopted by the TA.

As to this last point, the matter adduced by the Respondent and which was reproduced in (XXIX) of the Report above, does not appear in the reasoning of the decision adopted by the TA. Nevertheless, considering the factuality given as proven, the TAS will address the subject matter as mere caution (see judgments of the STA of 10-11-98, of the Plenary, rendered in appeal no. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207, of 19/06/2002, case no. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289, of 09/10/2002, case no. 600/02, of 12/03/2003, case no. 1661/02).

The following questions are placed before the Tribunal, according to the terms described above:

(I) Should the act of additional Personal Income Tax assessment for the year 2013 be annulled, increased by the corresponding compensatory interest?

(II) And the corresponding restitution of the amount deposited as security in the amount of €66,425.61?

(III) Are the Claimants entitled to indemnitory interest calculated on the amount deposited as security?

D) Proven and Unproven Matters of Fact

It is the tribunal's role to select the facts that matter for the decision of the case and to distinguish proven matters of fact from those unproven (in accordance with article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the relevant facts for the adjudication of the case are chosen and delineated in function of their legal relevance, which is established in light of the various plausible solutions of the question(s) of law (in accordance with previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable ex vi of article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the Administrative File attached to the record, the following facts have been considered proven, with relevance for the decision:

(i) The Claimant husband, in 2013, terminated by mutual agreement the employment contract he had with the credit institution where he worked, C….

(ii) A severance indemnity of €120,397.14 was paid to the Claimant husband, taking into account the seniority resulting from the time of service rendered to it and other banking institutions, which totaled 26 years of seniority.

(iii) The employer of the Claimant husband paid the aforementioned indemnity corresponding to 26 years of service considering the Collective Labor Agreement of Bankers (ACTV of the banking sector) which provides, in its article 17, no. 1 paragraph a), that "seniority is all time of service rendered in Credit Institutions in Portugal", with both – Claimant husband and employer entity, which paid the indemnity considering seniority as provided in article 17 of the ACTV of the banking sector – bound by the Agreement.

(iv) On August 22, 2016, the Head of Division, in light of the draft report regarding the year 2013 of the Claimant, for containing inaccuracies/omissions and in light of the opinion of the Head of Team, having no objection, ordered the notification of the Claimant husband to exercise prior hearing, in accordance with the administrative file attached to the record.

(v) From the draft it appears that "(…) in accordance with the report prepared by the Division of Inspection of Banks and other Financial Institutions (DIBIF), irregularities were detected in Personal Income Tax, namely with the calculation of time of service, considered in the payment of indemnities".

(vi) The procedure originated from information no. …/2015, prepared by the Unit of Large Taxpayers, supervised by a dispatching issued in 2015-12-07, sent to the competent services of the TA for purposes of analysis of taxable persons with irregularities detected in Personal Income Tax, for the year 2013 and the Personal Income Tax declaration of the taxable person A…, Tax ID …, was examined.

(vii) It is further stated in the aforementioned draft that it was verified that "the taxable person received in 2013 an indemnity (from C…) in the amount of €120,397.14 considering he did not declare the amount of €95,074.55".

(viii) The draft further contains that the matter in question results from the discrepancy "for purposes of calculating the amount to be excluded from taxation, regarding the item – seniority, specifically, whether to consider the time of service rendered at the entity owing (time of service – 5.07), or the seniority considered by C… (time of service – 26), in the calculation of the portion of the indemnity subject to taxation under Personal Income Tax".

(ix) From the draft of the TA it is extracted that called to rule on the Personal Income Tax Services Directory on the calculation of the indemnity for purposes of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code related to its application to banking sector workers covered by the respective ACT, a dispatching was issued by the Director General on 2016.03.21, from which results the understanding that "the amounts accrued by banking sector workers, in the form of indemnity for the termination of the employment contract, covered by the ACT, paid by the last entity to which they rendered service, being applicable the exclusion rule provided in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, must take into account for purposes of its calculation only the number of years or fraction of seniority or of exercise of functions in the last entity owing the income that, by virtue of the historical-systematic element inherent to the norm of the current no. 10 of the aforementioned article, corresponds to "employer entity", with the amplitude resulting from this norm, as well as situations of succession in the position of this entity, especially by effect of the equation inherent to article 285 of the Labor Code of 2009".

(x) And it is concluded in the draft that the amount of €95,074.55 should be added to the income obtained at C…, that is, the initial income recorded in Annex A – Table 4 of the Personal Income Tax Declaration Form 3 for the fiscal year 2013 should be corrected to the amount of €130,009.24".

(xi) On August 22, 2016, the Claimant husband was notified, by office letter with work order no. OI2016…, of the draft corrections of the inspection report to exercise prior hearing right – in accordance with the administrative file.

(xii) The Claimant on September 2, 2016, exercised prior hearing right with, summarily, the same arguments that result from the request for arbitral opinion.

(xiii) On January 4, 2017, the Claimants were notified of the corrections resulting from the inspection action and of the alteration made pursuant to no. 4 of article 65 of the Personal Income Tax Code, for the fiscal year 2013 with final decision that reproduces the aforementioned draft, having been added what was argued at prior hearing by the Claimant, which raises the applicability of clause 17 of the ACTV of the banking sector which, "for purposes of the banking worker's seniority, shall cover all years of service rendered in Portugal in credit institutions with activity in the country" and, thus, "according to the rules of substantive law applicable to the case, the signatory, upon distracting the last contract (with C…), had the seniority corresponding to the sum of all times of work rendered to the banks for which from the beginning he worked", concluding that there will be nothing to correct in the income declaration.

(xiv) In response to prior hearing, the position contained in the draft was maintained, maintaining the proposed correction.

(xv) The Claimant husband, a union member, paid contributions to the Union of Bankers of the South, including in the month of termination of the employment contract in May 2013 – in accordance with document no. 4 attached with the petition.

(xvi) The Claimant, upon termination of the employment contract with the previous credit institutions for whom he worked, did not receive any indemnity for termination considering, namely, that the ACTV of the banking sector would safeguard this compensation at the next institution.

(xvii) The TA proceeded to make an additional Personal Income Tax assessment for the year 2013, in the amount of €52,266.10, including the corresponding compensatory interest (as well as reversal of 2013 assessment and respective compensatory interest), presupposing an amount of undeclared income of €95,074.55 to which corresponds a tax adjustment to be paid in the amount of €42,464.24.

(xviii) The Claimants proceeded to deposit €66,425.61 as security in the pending execution in the case with no. …2017… on April 24, 2017, in accordance with documents nos. 5 and 6 attached with the petition.

(xix) On May 30, 2017, the Claimants filed the request for arbitral opinion.

The facts given as proven result from the tribunal's conviction based on the examination of the documents attached to the case and the administrative file and the absence of controversy about them.

There are no unproven facts with interest for the decision of the case, considering the possible legal solutions.

E) On the Law

On the assessment of the legality of the assessment acts in question, increased by the corresponding compensatory interest.

At issue is the assessment of the norm contained in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, with the object of dispute being the multiplier that establishes the "(…) number of years or fraction of seniority or exercise of functions in the entity owing, in the other cases (…)".

The Claimants conclude that "seniority" should be understood by virtue of article 11, no. 2 of the LGT, what results from article 17 of the ACTV of the banking sector, making use of several judicial decisions of the TCA South and of the CAAD itself.

For its part, the TA understands that this multiplier is the number of years of seniority in the company, in the entity owing, in the employer entity that pays the indemnity and that appears as a party to the agreement of distrate of the employment contract with the worker.

As to this, having due regard for the learned commentaries to the Judgment of the TCA South transcribed in the reply, as well as the position of the TA as to this matter, it does not appear, notably and from the outset from its literal element, that the legislator intended that "seniority" be only that referring to the employer entity owing, the last one that pays the compensation for the termination of the employment contract, on pain of leaving without content the expression "(…) in the other cases (…)".

As it appears from case 5971/12 of March 12, 2013 of the TCA South, the interpretation of tax laws should be made "(…) it being necessary to determine its true meaning in accordance with the techniques and interpretive elements generally accepted by the doctrine (cf. article 9 of the Civil Code; article 11 of the General Tax Law; José de Oliveira Ascensão, The Law, Introduction and General Theory, Editorial Verbo, 4th edition, 1987, page 335 et seq.; J. Baptista Machado, Introduction to Law and to Legitimating Discourse, Almedina, 1989, page 181 et seq.; Nuno Sá Gomes, Manual of Tax Law, II, Notebooks of C.T.Fiscal, no.174, 1996, page 363 et seq.)".

The tax legislator did not define the concept of worker "seniority", so it is necessary to resort to the concept that results from the labor regime and, thus, it does not appear from the provision in question that "(…) the concept of seniority refers solely to the time of service in the entity owing the compensation for the termination of the employment contract, and nothing justifying a restrictive interpretation of the rule of scope, the broader notion of seniority arising from labor law should be accepted for the calculation of the amount subject to taxation under Personal Income Tax. (cf. Judgment of TCA South, 11/5/2004, case 6002/01; Judgment of TCA South, 21/9/2010, case 3748/10)".

Thus, in the wake of that decision of case 5971/12 of March 12, 2013 of the TCA South "(…) it constitutes current doctrine (currently embodied in article 11 of the General Tax Law) that whenever tax norms employ terms proper to other branches of law, they should be interpreted in the same sense as they have there, unless otherwise directly from the law. Labor law provides a broad concept of seniority by allowing that be taken into account the time of service and the category already achieved in other employer entities, so that it be admitted without prejudice to the seniority acquired there, since such is not prohibited either by the law (cf. e.g. articles 129, no. 1, paragraph j), and 396, of the Labor Code) nor by the principles of good faith, being a practice observed in some Instruments of Collective Labor Regulation and in the uses of the labor profession and of enterprises".

In this manner, being the instruments of Collective Regulation of Labor, what, as the aforementioned judgment of the TCA South, whose position we hereby endorse, one of the sources that may establish that seniority, in addition to the law and the individual employment contract, is excluded from taxation an amount of the income that accrued to him from the termination of the labor relationship calculated on the basis of seniority as it results from the ACTV of the banking sector now in question, with the Claimants having reason in their claim to see recognized the illegality of the assessment that did not take into account this fact.

As it appears from the decision rendered in case no. 230/2016-T of the CAAD, it is not a question of opposability to the TA of the ACTV of the banking sector but rather of the interpretation of the term "seniority" "(…) expressed in general terms in the tax law, through the mechanisms that the tax law provides for, that is, ex vi article 11 no. 2 of the General Tax Law, the interpreter making use of the source of law that best defines that concept, in the case the ACT of the banking sector, by virtue of the legal-labor system concretely applicable to the case".

At issue is the ACTV of the banking sector applicable to the Claimant husband – a union member – as well as to the banking entity owing whose action, i.e., the payment of the indemnity in accordance with the aforementioned ACTV, demonstrates that binding which, in any case, is not called into question by the Respondent in the reasoning of its decision nor was the applicability between the Claimant husband and the entity owing of that regime called into question.

For all this, and following the guidance of the TCA South aforementioned and the decision of the CAAD, it does not result in any manner from the provision sub judice (cf. article 2, no. 4 of the Personal Income Tax Code) that the concept of "seniority" to be considered should be, restrictively, only to the time of service in the entity owing the compensation for the termination of the employment contract.

Considering further that, as was given as proven, the Claimant husband did not receive any compensation prior to any termination of the employment contracts he had with other banking institutions for whom he worked, whereby it is not demonstrated that any tax advantage accrued to him.

As the decision of the CAAD states in the context of case no. 230/2016-T, on this matter, and which we hereby endorse, "the banking worker when he entered the banking institution, coming from another, may have negotiated an exit by mutual agreement and have received an indemnity for the seniority time he had there. And it would not be acceptable that, at a later moment, he come to use - again - that "seniority" to increase the multiplier of the compensation".

But, continuing, "in the context of the instruction of the procedure of no. 2 of article 65 of the Personal Income Tax Code, the TA can make use of the records of Personal Income Tax declarations filed many years earlier and other declarative obligations of paying entities. Specific information can be obtained from, namely, the banking institution, current employer entity making the distrate and from the worker (principle of inquisitorial investigation and principle of collaboration)".

In this manner, the factuality, should there be misuse of this tax regime through the application of the general anti-abuse clause of no. 2 of article 38 of the General Tax Law, would always have to be investigated by the TA.

For its part, in the wake of case no. 230/2016-T of the CAAD, we consider that "(…) in a decisive manner, the various decisions cited by the parties of the TCA South are all in this sense (of invoking the concept of seniority set out in the ACT of the bankers, when it comes to workers in that sector and in contracts terminating by distrate), whereby the TAS would always have to judge according to the "constituted law", and the reading of the law as embodied there should be considered as the most assertive and generating legal certainty before citizens and economic agents".

Adding that, in the wake of this decision, "having regard to the date of rendering of the decisions of the TCA South in question (2010, 2012 and 2013), if the legislator understood that the reading of the law as embodied there deserved objection, it would have already proceeded to alter or correct the text of the law".

As to the principle of affiliation, considering clause 2 of the ACTV of the banking sector, the subject matter does not appear in the reasoning of the decision but, even if the TA had raised it opportunely, it could always obtain these elements to substantiate its decision (or obtain information of their non-existence) in the exercise of the powers-duties at its disposal, of raising this very matter to the taxpayer, to the former employer entity or to the unions that are party to the ACT. Not having done so, it will not be now at the jurisdictional level that the reasoning of the act here contested can be altered or supplemented.

In any case, given what is alleged by the Claimants and the matter of fact given as proven, it is appropriate for us to assess it with the reservation described, out of an abundance of caution.

It should be considered that, on one hand, the Claimant husband paid contributions, as given as proven factuality, to the Union of Bankers of the South, including in the month of termination of the employment contract in May 2013 and, on the other hand, from the action of the bank results a behavior of acceptance of the Agreement by applying the rules of clause 17 of the ACTV of the banking sector, without limitations or conditions, nor was the question raised either for purposes of substantiating the decision of the TA, demonstrating that there was binding of the Bank to the aforementioned Agreement because, if it were not so, it would be the first to have interest in not applying it and substantially reducing the value to be paid in terms of compensation to the Claimant husband.

The action, in concrete, of the employer entity indicates that there existed, both the union affiliation of the worker, and its own binding, assuming the concept of seniority as it results from article 17 of the ACTV of banking.

In this manner, nothing appears to justify a restrictive interpretation of the rule of scope (cf. article 2, no. 4 of the Personal Income Tax Code), the broader notion of seniority arising from labor law should be accepted for the calculation of the amount subject to taxation under Personal Income Tax.

Whereby, given the above, the request for arbitral opinion is well-founded, which determines the annulment of the acts of additional Personal Income Tax assessment for the year 2013 and, consequently, the Claimants are not liable for any compensatory interest.

On the restitution of the amount paid as security in execution case no. …2017….

It appears from the documents that the amount of €66,425.61 was deposited as security to guarantee the amount assessed in the pending execution on April 24, 2017, in accordance with the factuality given as proven.

Considering what results from the decision of the preceding point and the consequent annulment of the act of additional Personal Income Tax assessment for the year 2013 and that which gives rise to it, the aforementioned amount should be returned to the Claimants since there ceases to exist, by the annulment of the act, the underlying relationship that would justify the execution and, consequently, the respective security deposited in that process.

Whereby, given the above, the request for arbitral opinion is well-founded, which determines the restitution of the amount deposited as security in the amount of €66,425.61.

On the right to indemnitory interest:

As to this point, we consider that there is an error attributable to the services, which is the presupposition to be considered – articles 43, no. 1 and 100 of the General Tax Law.

The right to indemnitory interest presupposes an error attributable to the services, which in this case exists, since the Tax Administration assessed the tax, as was verified, having considered an erroneous interpretation of the law (cf. of no. 4 of article 2 of the Personal Income Tax Code).

It being true that the erroneous assessment carried out by the TA had at its genesis an error by it, it incurs the obligation to indemnify the Claimants.

In light of the above, the request for indemnitory interest is deemed well-founded, from the date of deposit of the security on April 24, 2017, until full and complete payment.

On the responsibility for payment of arbitral costs:

In accordance with article 527, no. 1 of the Code of Civil Procedure, ex vi 29, no. 1, e) of the RJAT, it is established that the party that caused the costs shall be condemned in costs or, where there is no success of the action, whoever obtained benefit from the case.

Given the above, the Respondent should be condemned in costs.

F) Decision

In these terms, and with the grounds set forth, the present Arbitral Tribunal decides:

(i) To deem well-founded the request for declaration of illegality and annulment of the act of additional Personal Income Tax assessment for the year 2013, to which corresponds the overall balance determined of €52,266.10, by additional Personal Income Tax assessment, encompassing:

- Reversal of 2013 assessment – Assessment 2014 … in the amount of €4,963.38;

- Adjustment of 2013 assessment – Assessment 2017 … in the amount of €42,464.24;

- Compensatory interest – Assessment 2017 … in the amount of €4,351.12;

- Compensatory interest for improper receipt – Assessment 2017 …, in the amount of €487.36;

(ii) To deem well-founded the request for restitution of the amount deposited as security in the amount of €66,425.61.

(iii) To deem well-founded the request for indemnitory interest calculated on the amount deposited by the Claimants as security, from the date of its deposit on April 24, 2017, until full and complete payment.

(iv) To condemn the Respondent in costs of the present case.

G) Value of the Case

In conformity with the provisions of articles 306, no. 2 of the CPC and 97-A, no. 1 of the CPPT and 3, no. 2 of the Regulation of Costs in Tax Arbitration Processes, the value of the case is fixed at €52,266.10.

H) Arbitration Fee

The amount of the arbitration fee is fixed at €2,142.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Processes.

Let notification be made.

Lisbon, December 14, 2017

The Arbitrator

(Marisa Almeida Araújo)

Frequently Asked Questions

Automatically Created

How is compensation for termination of an employment contract taxed under Portuguese IRS rules?
Compensation for termination of employment contracts in Portugal is generally subject to IRS taxation as category A income (employment income). However, Article 2(4)(b) of the IRS Code provides a partial exemption: severance payments are exempt up to an amount equal to the monthly remuneration multiplied by the years of seniority (or fraction thereof) with the employer, subject to certain limits. Any amount exceeding this calculation becomes taxable income. The Tax Authority typically calculates the exemption based on the employee's tenure with the specific employer paying the compensation, not accumulated seniority across multiple employers in the same sector.
What is the legal concept of seniority (antiguidade) for calculating IRS tax exemptions on severance pay?
Under Portuguese tax law, 'seniority' (antiguidade) for calculating IRS exemptions on severance pay traditionally refers to the length of service with the employer making the payment, as per Article 2(4)(b) of the IRS Code. However, sector-specific collective labor agreements may define seniority differently. In banking, Article 17(1)(a) of the ACTV defines seniority as all time served in credit institutions in Portugal, creating a conflict between labor law and tax law definitions. This case examines whether the broader ACTV definition can apply for tax exemption purposes. Courts and CAAD have issued varying interpretations, with some decisions recognizing collective agreement definitions while the Tax Authority maintains that only direct employer tenure counts for tax calculation purposes.
Can a taxpayer challenge an additional IRS assessment on undeclared employment termination income through CAAD arbitration?
Yes, taxpayers can challenge additional IRS assessments through the Administrative Arbitration Center (CAAD) under the Legal Regime of Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). This includes assessments for allegedly undeclared employment termination income. The arbitration process provides an alternative to judicial courts for resolving tax disputes. Taxpayers must file a request for arbitration within the legal deadlines, may be required to provide bank guarantees or deposits to suspend collection of the contested amounts, and can seek declarations of illegality, annulment of assessments, restitution of amounts paid or deposited, and payment of indemnity interest. CAAD arbitration decisions are binding and have the same enforceability as court judgments.
What are the procedural steps for filing a tax arbitration request with CAAD against the Portuguese Tax Authority (AT)?
The CAAD arbitration process involves several steps: (1) Filing a written request for arbitral opinion and establishment of an arbitral tribunal with CAAD, identifying the contested tax act and legal grounds; (2) CAAD President accepts and notifies the Tax Authority; (3) Parties may designate an arbitrator or the CAAD Deontological Council appoints one; (4) The arbitral tribunal is formally constituted once the arbitrator accepts and parties don't object; (5) The Tax Authority files a reply and submits the administrative file; (6) The tribunal may hold hearings or request written arguments; (7) The arbitrator issues a final decision within the established deadline. Throughout the process, deadlines are strictly regulated by RJAT provisions, and taxpayers may need to provide security deposits to suspend tax collection during proceedings.
Are compensatory interest and indemnity interest recoverable when an IRS additional assessment is annulled by a tax arbitration tribunal?
Yes, when an additional IRS assessment is annulled by a CAAD arbitral tribunal, both compensatory interest and indemnity interest are recoverable. Compensatory interest (juros compensatórios) initially charged by the Tax Authority for late payment must be reversed and refunded if the underlying assessment is annulled. Indemnity interest (juros indemnizatórios) is payable by the Tax Authority to the taxpayer on amounts unduly paid or deposited as security, calculated from the payment date until restitution, as provided in Article 43 of the General Tax Law (LGT) and Article 61 of the Tax Procedure Code (CPPT). The tribunal's decision will specify the amounts to be restituted along with applicable interest, ensuring taxpayers are compensated for the time value of money during the dispute period.