Process: 350/2018-T

Date: May 24, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 350/2018-T) addresses the taxation of severance compensation under Portuguese IRS law, specifically concerning Article 2(4)(b) of the IRS Code and the calculation of employee seniority under the Banking Sector Collective Agreement (ACT). The taxpayer, a banking sector employee, received €231,761.27 as severance pay upon termination of his employment contract with Bank C in 2014. The dispute centered on whether his period of service at D... S.A. (2001-2014), where he worked at C's request under a suspended employment contract, should count toward his seniority for tax exemption purposes. The Tax Authority assessed IRS of €71,951.88, arguing that only direct employment time counted. The taxpayers challenged this assessment through administrative complaint and hierarchical appeal, both rejected, before seeking arbitration at CAAD. The central legal question involved interpreting Article 2(4)(b) of the IRS Code, which exempts severance compensation from taxation based on employee seniority, and whether the Banking Sector ACT's provisions on seniority recognition applied. The tribunal had to determine if the period at D... constituted continuous service under the employment relationship with C, despite the formal suspension, given C's written guarantees of seniority preservation, benefit maintenance, and guaranteed reintegration rights throughout this period.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Jorge Bacelar Gouveia and Pedro Miguel Bastos Rosado, designated by the Ethics Council of the Center for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 20 July 2018, A..., taxpayer no. ..., and B..., taxpayer no. ..., resident at Rua ..., no. ..., ..., ...-... Lisbon, filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the Personal Income Tax (IRS) assessment act no. 2015..., in the amount of €71,951.88, as well as of the decision rejecting the administrative complaint no. ...2015... and the decision rejecting the hierarchical appeal no. ...2016... .

To substantiate their request, the Petitioners allege, in summary:

  • Defect of violation of law, resulting from breach of Article 2, no. 4, subparagraph b) and nos. 5 and 7 of the IRS Code;

  • Defect of lack of reasoning.

On 23-07-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Petitioners did not proceed with the appointment of an arbitrator, so, pursuant to the provisions of subparagraph a) of no. 2 of Article 6 and subparagraph a) of no. 1 of Article 11 of the RJAT, the President of the Ethics Council of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable time limit.

On 11-09-2018, the parties were notified of these designations and did not express any intention to refuse any of them.

In accordance with the provision in subparagraph c) of no. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 01-10-2018.

On 30-10-2018, the Respondent, duly notified for this purpose, presented its defence based solely on objection.

Pursuant to the provisions of subparagraphs c) and e) of Article 16 and no. 2 of Article 29, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was waived.

Having been granted a time limit for the submission of written arguments, these were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

It was indicated that the final decision would be notified by the end of the period provided for in Article 21/1 of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, no. 1, subparagraph a), 5 and 6, no. 2, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

Everything considered, the following decision is rendered:

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

  • On 01-04-1986, the male Petitioner signed an employment contract with Bank C... (hereinafter, C...), to commence work on 07-04-1986.

  • Since then, the male Petitioner has always worked at C... and at entities in the financial sector that were integrated, in terms of control relationship, into the C... Group or maintained with C... special relationships of economic cooperation.

  • At the request of C..., from December 2001 onwards, the Petitioner exercised the functions of member of the Board of Directors in company D... S.A, in its capacity as C...'s partner in asset management.

  • D... is not a subsidiary of the C... Group nor has any control relationship or Group relationship with it, both being independent entities from each other.

  • During this period, the employment contract between C... and the Petitioner was suspended.

  • By letter addressed by C... to the Petitioner, dated 09-01-2002, the Bank confirmed that the exercise of functions by the Petitioner at D... was done at the request of the Bank and expressly:

    • "confirmed the conditions under which such exercise takes place given his status as an employee of the C... Group";

    • Ensured that "although the suspension of functions in fact occurred, it does not affect the benefits he enjoys: seniority counting (etc)";

    • Guaranteed "the reintegration of the Petitioner into the ranks of the C... Group upon the cessation of functions at the company".

  • From 1986 to 2001, the Petitioner's salary was paid by C... or by E..., S.A., an entity wholly owned by C...

  • From December 2001 onwards, the Petitioner was effectively remunerated by D..., while maintaining the "suspension of functions" at C...

  • During the period of the Petitioner's exercise of functions at D..., C... committed itself to maintain, in favour of the Petitioner, the rights and benefits he enjoyed: seniority counting, access to credit facilities, allocation of shares reserved for employees in capital increases, participation in consolidated results or others that may be applied to collaborators of the same professional category.

  • By email of 11-12-2008, the then Human Resources Administrator dispatches, with reference to the Petitioner, in the sense "in agreement with the renewal of leave without pay" requested of him for one more year, by the Bank's Administrative Department of Collaborators.

  • On 08-09-2014, the employment contract between the Petitioner and C... was revoked, by agreement, with effect as of 31-08-2014.

  • Said revocation was agreed within the scope of a restructuring process at C... which resulted in the cessation of employment contracts between C... and hundreds of collaborators, and which began in 2012.

  • C... awarded the Petitioner, upon cessation of the employment contract, a gross compensation in the amount of €231,761.27, to which were added the remuneration rights accrued and to be accrued with respect to the year 2014.

  • C... subjected the entire indemnity to IRS withholding at source, delivering to the State, by way of IRS withholding at source, the amount of €93,863.00 plus an amount of €4,809.00 as an IRS surtax.

  • In the 5 years prior to the revocation of the contract with C..., the Petitioner did not receive any amount by virtue of cessation of the employment contract.

  • After the cessation of the employment contract, the Petitioner did not enter into any business or employment relationship with C... or with any company related to it.

  • On 27-05-2015, the Petitioners filed their Form 3 IRS declaration for the year 2014, with reference ...

  • When filling out the 2014 Form 3 IRS declaration, the Petitioners attempted to record only the withholding at source carried out on the indemnity amount, in the amount of €93,863.00, plus the amount of €4,809.00 as an IRS surtax, however, this was not accepted by the Tax Authority's computer system.

  • In that context, the Petitioners recorded the indemnity amount in Table 4 of Annex A, subjecting the entire compensation of €231,761.27 paid by C... to IRS.

  • The Petitioners were notified of the IRS assessment no. 2015..., for the year 2014, which resulted in tax due in the amount of €71,951.88.

  • On 31-08-2015, the Petitioners paid the said tax assessment.

  • On 27-05-2015, the Petitioners filed an administrative complaint numbered ...2015..., which had as its object the IRS assessment for the year 2014.

  • On 11-11-2016, the Petitioners were notified of the decision rejecting the administrative complaint.

  • The Petitioners appealed the decision rejecting the administrative complaint by means of hierarchical appeal no. ...2016...

  • The Petitioners exercised their right to prior hearing.

  • By dispatch of 17-04-2018, the hierarchical appeal was rejected.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Grounds for the Established and Not Established Matters of Fact

With respect to matters of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (see Article 123, no. 2, of the CPPT and Article 607, no. 3 of the CPC, applicable by virtue of Article 29, no. 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and defined in function of their legal relevance, which is established with regard to the various plausible solutions of the question(s) of law (see previous Article 511, no. 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, no. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions taken by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the administrative file attached to the proceedings, the facts listed above were considered proven, with relevance for the decision, taking into account that, as written in the Decision of the Southern Tax Court (TCA-Sul) of 26-06-2014, rendered in case 07148/13[1], "the probative value of the tax inspection report (...) may have evidentiary force if the assertions contained therein are not disputed".

No claims made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete matters of fact consolidated above, were considered proven or not proven.

B. ON THE LAW

On the Value of the Cause

The Petitioners assigned to the arbitral petition the value of €126,127.56, with the Respondent arguing that it should be assigned the value of €71,951.88, given that the Petitioners seek the annulment of IRS assessment no. 2015... and that pursuant to Article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by reference to Article 29, no. 1, subparagraph a) of the Legal Regime for Tax Arbitration (RJAT), when an assessment is disputed, the value of the case is the amount whose annulment is sought.

With all due respect, the Respondent's position is without merit.

Indeed, the value of €71,951.88 is the amount to be paid by the Petitioners, taking into account the withholdings at source carried out, and not the amount of the tax assessment, as shown in the document of the assessment statement itself.

The amount of tax assessed, and whose annulment the Petitioners seek, as expressly results from the arbitral petition formulated, which should be annulled, is the amount indicated by them, namely €126,127.56.

Moreover, and contrary to what the Respondent claims, what is at issue is not "the quantum, what is the amount of tax that actually applies to the value of the compensation, given that the amount actually subject to taxation is unknown, nor the amount of presumed indemnity interest", but rather strictly the amount of tax whose annulment the Petitioners seek, which is precisely determined, regardless of whether that is or is not the amount of illegally assessed tax.

Thus, and for the foregoing reasons, the value of the cause indicated by the Petitioners is maintained.

On the Merits of the Case

The main issue to be resolved in the present proceedings of the arbitral case is whether or not the compensation for termination of the employment contract received by the Petitioner in 2014 in the amount of €231,761.27, paid by Bank C... (C...), is subject to IRS, in light of the provision in Article 2, no. 4, subparagraph b), of the IRS Code as applicable, which reads as follows:

"4 - When, in any form, the contracts underlying the situations referred to in subparagraphs a), b) and c) of no. 1 cease, but without prejudice to the provision in subparagraph d) of the same number, as regards benefits that continue to be owed even if the employment contract does not subsist, or if the cessation of functions of public manager, administrator or manager of a legal entity occurs, as well as of representative of a permanent establishment of a non-resident entity, the amounts received, for any reason, are always subject to taxation: (...)

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

The Petitioner argues that, notwithstanding having commenced, from December 2001 onwards, to exercise the functions of member of the Board of Directors at company D..., his employment contract with C... was maintained.

For its part, the Respondent argues that the Petitioners failed to prove that the compensation would be covered by the provision in Article 2, no. 4 of the IRS Code, that is, that the value of the indemnity would be excluded from taxation by force of the norm.

This issue, in precisely identical terms to those now formulated, was already examined at the CAAD within the scope of arbitral case 55/2018T[2].

Both the Petitioners and the Respondent recognize that the doctrine expounded therein is transposable, without any adaptation, to the present case.

Thus, the Petitioners state that "This Decision addresses the exact situation of the present proceedings", and the Respondent that "the Tax Authority adheres to the explanation in the decision rendered in the case identified above, (...) being that Article 2, no. 4, subparagraph b) of the IRS Code should be read and interpreted to mean that seniority for purposes of exclusion from taxation should be assessed in relation to the debtor entity of the income in question, namely the entity paying the indemnity."

Here too, we subscribe to the learned exposition in that arbitral decision rendered in case 55/2018, which conducted an exhaustive and precise analysis of the issue sub iudice, considering therein, in summary, that "the period of exercise of the functions of member of the Board of Directors and the remuneration earned as an administrator should not be admitted in the calculation formula that determines the amount of compensation derived from an employment relationship excluded from IRS taxation", but that "the suspension effect of the employment contract occurs, due to a circumstance relating to the employee, under the general terms of Articles 294 and following of the Labor Code", so "Despite the Petitioner's advocacy for a broader concept of seniority and consideration of the value of the last remuneration received as an administrator, a position which this Tribunal did not accept, it appears that the right remains within his sphere to be taxed according to the assumptions of Article 2, no. 4, subparagraph b) of the IRS Code, that is, to benefit from the exclusion of IRS incidence on the part of the compensation received that results from the unequivocal application of the formula contained in the provision. Moreover, if this were not so, it would violate the principle of legality, as tax would be due without the necessary legal support. It may have been for that same reason that, although falling short of the objective sought by the Petitioner, he proved, in the present arbitral proceedings, as he had already done in the administrative procedure, the latest remuneration statements as a functionary (in 2000 and 2001) and not only the remuneration earned as an administrator (in 2013 and 2014)."

The learned decision concludes, to which we fully subscribe and to which, obviating tedious transcriptions, we refer, that "the decision rejecting the hierarchical appeal and the mediate object, the IRS assessment, are partially voidable for violation of the provision in Article 2, no. 4, subparagraph b) of the IRS Code, in that they do not exclude from taxation by this tax the part of the compensation received by the Petitioner that corresponds to the product of the multiplier of 8 (years or fraction of seniority) by the value of the average of the regular remuneration with the character of compensation mentioned in subparagraph i) of the established facts, earned between December 2000 and November 2001, when subject to taxation (which is not the case, by way of example, of the meal allowance whose value falls within the legal limits of non-taxation)."

Here too, for the grounds set forth therein, we conclude that the decision rejecting the hierarchical appeal and the IRS assessment are partially voidable for violation of the provision in Article 2, no. 4, subparagraph b) of the IRS Code, in that they do not exclude from taxation by this tax the part of the compensation received by the Petitioner that corresponds to the product of the multiplier of 15.67 years by the value of the average of the regular remuneration with the character of compensation earned by the Petitioner between 01-04-1986 and December 2001, when subject to taxation (which is not the case, by way of example, of the meal allowance whose value falls within the legal limits of non-taxation), the concrete value of which, if necessary, may be determined in execution of this judgment.

On the Lack of Reasoning

The Petitioners further allege that the tax act should be annulled for lack of reasoning.

With all due respect, the Petitioners are under a misapprehension.

Indeed, IRS assessment acts are based, exclusively, on the tax return, whether properly or improperly, filed by the Petitioners, so it does not require any additional reasoning.

Thus, as the Decision of the Southern Tax Court (TCA-Sul) of 03-12-2015, rendered in case 07854/14, stated, "The reasoning for the IRS assessment carried out by the Public Treasury and object of the present proceedings may have summary characteristics, since it is a legal consequence of the income tax return filed by the appellants, and the law expressly provides for such possibility in Article 77, no. 2, of the LGT."

The decisions on administrative complaint and hierarchical appeal are only included as the object of the present arbitral action insofar as they address the legality of the tax assessment that was their object, and not insofar as they concern defects specific to such acts.

As Carla Castelo Trindade explains[3], "This is the first matter that must be made clear: the object of the arbitral case is the assessment act (...)".

The same author continues, explaining that "acts of second or third degree may always be arbitrable, insofar as they themselves involve, and only to that extent, the (il)legality of the tax assessments in question".

A consequence of what has been stated is that "defects specific to acts rejecting administrative complaints, hierarchical appeals or requests for review of the tax act are not arbitrable because they fall outside the material scope of tax arbitration."[4]

As the same author further exemplifies[5], among those defects specific to acts of second and third degree are included the formal defects that affect them, including their lack of reasoning.

That is, and in short, Article 2 of the RJAT takes as the object of the competence of arbitral tribunals the primary acts ("acts assessing taxes, self-assessment, withholding at source and payment on account"), with secondary acts being relevant only as elements providing timeliness for the impugned claim, as results from Article 10, no. 1, subparagraph a) of that Regime, which requires that requests for constitution of an arbitral tribunal be presented within 90 days, counted from the facts provided for in nos. 1 and 2 of Article 102 of the Code of Tax Procedure and Process.

Thus, in the first place, the present proceedings are examining the legality of the Petitioners' IRS assessment act (direct object of the competence of arbitral tribunals), with the legality of secondary acts of decision on administrative complaint and hierarchical appeal – whose main function in tax arbitral proceedings is to ensure timeliness of arbitral impugnation of the primary act – being merely reflective or derivative of the legality of the former.

Thus, and for the foregoing reasons, since the object of the present arbitral action is the IRS assessment act, and the acts of decision on administrative complaint and hierarchical appeal only and insofar as they incorporate the (il)legality of that first act, not including therein the defects specific to such acts, including their lack of reasoning, this Tribunal cannot pronounce on that defect raised by the Petitioners, and therefore the arbitral petition is not well-founded in that respect.

Regarding the request for indemnity interest formulated by the Petitioners, Article 43, no. 1, of the LGT provides that indemnity interest is due when it is determined that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due.

In the present case, the error affecting the annulled assessment is attributable, in the first place, to the Petitioners, who filed the tax return and proceeded to payment of the tax arising therefrom.

Only from the decision on administrative complaint onwards can the Tax and Customs Authority be held responsible for the maintenance in the legal order of the tax assessment act that is the object of the present arbitral action, in the part that is now annulled.

The Petitioners, therefore, have the right to be reimbursed for the amount they paid (pursuant to the provisions of Articles 100 of the LGT and 24, no. 1, of the RJAT) by force of the partially annulled act and, further, to be indemnified for the improper payment through the payment of indemnity interest by the Respondent, from the date of rejection of the administrative complaint until their reimbursement, at the legal subsidiary rate, pursuant to Articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, Article 559 of the Civil Code and Order no. 291/2003, of 8 April.

C. DECISION

For these reasons, this Arbitral Tribunal rules that it finds the arbitral petition partially well-founded and, consequently:

  • Partially annuls the IRS assessment act no. 2015..., insofar as it did not exclude from IRS taxation, for 2014, the product of the multiplier of 15.67 years by the value of the average of the regular remuneration with the character of compensation earned by the Petitioner between 01-04-1986 and December 2001, when subject to taxation of seniority, pursuant to Article 2, no. 4, subparagraph a) of the IRS Code, in the concrete amount to be determined, if necessary, in execution of judgment, as well as the decisions on administrative complaint and hierarchical appeal which had that assessment as their object;

  • Condemns the Respondent to the payment of indemnity interest, under the terms determined above;

  • Condemns the parties in the costs of the proceedings, in proportion to their respective failure, fixing the amount of €1,836.00 to be borne by the Petitioners and €1,224.00 to be borne by the Respondent.

D. Value of the Proceedings

The value of the proceedings is fixed at €126,127.56, pursuant to Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,060.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective failure, fixed above, since the petition was partially well-founded, pursuant to Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the cited Regulation.

Notify.

Lisbon, 27 March 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Jorge Bacelar Gouveia)

The Arbitrator Member

(Pedro Miguel Bastos Rosado)

[1] Available at www.dgsi.pt, as is the other case law cited without mention of source.

[2] Available for consultation at: https://caad.org.pt/tributario/decisoes/.

[3] "Legal Regime for Tax Arbitration - Annotated", Almedina, 2016, p. 69.

[4] Ibid., p. 70.

[5] Ibid., p. 71.

ARBITRAL DISPATCH

Reform of the Decision

By petition presented on 08-04-2018, the Petitioners requested, pursuant to Articles 615, no. 1, subparagraph c) and no. 4 and 616, no. 1 of the CPC and Article 29, no. 1, subparagraph e) of the RJAT, reform/correction of the decision under the following terms and grounds:

a) Considering that it was established that the remuneration for the month of December 2001 was not paid by the C... Group as evidenced in the evidentiary basis of the arbitral decision, the reference to "the average of regular remuneration with the character of compensation earned by the petitioner between 01-04-1986 and December 2001" should rather refer to the remuneration earned in the months of November 2000 to November 2001, further considering the wording of Article 2, no. 4, subparagraph b) of the IRS Code in the part concerning remuneration for the last "twelve months";

b) Reform as to costs, given that the arbitral decision determined that "the amount of the arbitration fee is fixed at €3,060.00" and "condemns the parties in the costs of the proceedings, in proportion to their respective failure," given that it was ordered to annul the assessment act "insofar as it did not exclude from IRS taxation, for 2014, the product of the multiplier of 15.67 years by the average of regular remuneration with the character of compensation earned by the Petitioner," it results in an allocation of costs to the Petitioner in the amount of €1,774.80 (58%) and €1,285.20 to the Tax Authority (48%), when the part of compensation excluded from taxation is €133,436.31 (average remuneration of reference of €8,515.40 multiplied by 15.67) which corresponds to tax of €72,617.81, totaling the value of the action to the sum of €126,127.56.

The Respondent was granted the opportunity to exercise its right of reply, which it chose not to do.

Article 29, no. 1, subparagraph e) of the RJAT provides that:

"Subsidiary application shall be made to tax arbitral proceedings, according to the nature of cases not provided for: (...)

e) The Code of Civil Procedure."

Article 615, nos. 1, subparagraph c) and 4, of the CPC provides that:

"1 - A judgment is void when (...):

c) The grounds are in opposition to the decision or there is some ambiguity or obscurity that makes the decision unintelligible; (...)

4 - The nullities mentioned in subparagraphs b) to e) of no. 1 can only be raised before the court that rendered the judgment if the judgment does not admit ordinary appeal"

Article 616, no. 1, of the CPC provides that:

"A party may request, in the court that rendered the judgment, its reform as to costs and fine, without prejudice to the provision in no. 3."

With relevance to the matter at issue, Article 614/1 of the CPC also provides that:

"If the judgment omits the name of the parties, is silent as to costs or any of the elements provided for in no. 6 of Article 607, or contains errors in writing or calculation or any inaccuracies due to another omission or manifest lapse, it may be corrected by simple dispatch, at the request of any of the parties or by initiative of the judge."

As results from reading the decision in question, the same is based on the application of the rule of Article 2, no. 4, subparagraph b), of the IRS Code as applicable, the wording of which is transcribed therein, and from which results, among other matters and insofar as the case is concerned, that it subjects to taxation the "part exceeding the value corresponding to the average of regular remuneration with the character of compensation subject to taxation, earned in the last 12 months".

As the Petitioner points out, it is evident that the subsequent references in the decision, in the second paragraph of page 12 and in subparagraph a) of section C on page 15, to the "average of regular remuneration with the character of compensation earned by the petitioner between 01-04-1986 and December 2001" intended to refer to the "average of regular remuneration with the character of compensation earned by the petitioner between November 2000 and November 2001".

This is therefore an inaccuracy due to a manifest lapse, to be corrected by mere dispatch, pursuant to Article 614/1 of the CPC.

Given the foregoing, and pursuant to the cited Article 614/1 of the CPC, the correction of the lapse in question is ordered, so that in the second paragraph of page 12 and in subparagraph a) of section C on page 15, where it reads "average of regular remuneration with the character of compensation earned by the petitioner between 01-04-1986 and December 2001", the expression reads "average of regular remuneration with the character of compensation earned by the petitioner between November 2000 and November 2001".

Regarding the reform as to costs requested by the Petitioners, it is found that, as they indicate, a proportion corresponding to 58% of the value thereof was allocated to them.

The portion of costs allocated to the Respondent corresponds to 42%, and not 48%, as the Petitioner indicates, of the value thereof.

Said apportionment of costs suffers likewise from a lapse, in that, as results from the proceedings and flows from the values themselves, it is reversed, with the action having succeeded in the proportion of 58% and failed in the proportion of 42%.

Given the foregoing, and pursuant to the already supra-referenced Article 614/1 of the CPC, the correction of said lapse is ordered, so that in subparagraph c) of section C on page 15, the following appears:

"Condemns the parties in the costs of the proceedings, in proportion to their respective failure, fixing the amount of €1,224.00, to be borne by the Petitioners, and €1,836.00, to be borne by the Respondent".

Notify.

Lisbon, 24-05-2019

The Presiding Arbitrator,

(José Pedro Carvalho)

Frequently Asked Questions

Automatically Created

How is severance compensation for employment termination taxed under Portuguese IRS rules?
Under Portuguese IRS rules, severance compensation for employment termination is partially exempt from taxation based on Article 2(4)(b) of the IRS Code. The exempt amount is calculated by multiplying the employee's seniority (years of service) by a statutory multiplier. Any amount exceeding this exempt threshold is subject to normal IRS taxation. The Tax Authority withholds tax at source on the entire compensation amount, and taxpayers must declare it in their annual IRS return (Form 3, Annex A). In this case, the bank withheld €93,863.00 plus €4,809.00 as surtax on the €231,761.27 severance payment.
What does Article 2(4)(b) of the Portuguese IRS Code establish regarding employment termination indemnities?
Article 2(4)(b) of the Portuguese IRS Code establishes that compensation paid for employment contract termination is exempt from IRS up to a limit determined by the employee's seniority and applicable legal or conventional formulas. The provision creates a partial exemption regime where only the portion of severance pay exceeding the statutory calculation becomes taxable income. The calculation of this exempt amount depends critically on determining the employee's total seniority, which became the central dispute in this case, particularly whether periods of service at third-party entities at the employer's request count toward total seniority under the Banking Sector Collective Agreement.
How is employee seniority calculated for tax exemption purposes under the Banking Sector Collective Agreement (ACT)?
Under the Banking Sector Collective Agreement (ACT), employee seniority for tax exemption purposes is calculated based on continuous service recognition. The key issue in this arbitration was whether time spent working at D... S.A. (2001-2014) counted toward the taxpayer's seniority with Bank C. The tribunal examined whether the formal 'suspension' of the employment contract interrupted seniority counting, despite C's written commitment to preserve seniority rights, maintain all employee benefits, guarantee reintegration, and treat the assignment as occurring within the C Group employment relationship. The Banking Sector ACT provisions on seniority recognition were interpreted alongside the specific contractual arrangements between the parties.
Can taxpayers challenge IRS assessments on severance pay through CAAD tax arbitration after a rejected hierarchical appeal?
Yes, taxpayers can challenge IRS assessments on severance pay through CAAD (Centro de Arbitragem Administrativa) tax arbitration after a rejected hierarchical appeal. This case followed the complete administrative procedure: first filing an administrative complaint (graciosa) numbered ...2015..., which was rejected on 11-11-2016; then pursuing a hierarchical appeal (recurso hierárquico) numbered ...2016..., which was also rejected; and finally seeking arbitration at CAAD on 20-07-2018 under Decree-Law 10/2011 (RJAT). The arbitral tribunal confirmed its material competence under Articles 2(1)(a), 5, and 6(2) of RJAT to review the legality of IRS assessment no. 2015... and the administrative decisions rejecting the complaint and appeal.
What is the legal basis for reforming an arbitral decision in Portuguese tax arbitration proceedings?
The legal basis for reforming an arbitral decision in Portuguese tax arbitration proceedings is governed by the RJAT (Legal Regime for Arbitration in Tax Matters, Decree-Law 10/2011). The reference to 'Reforma de decisão' (reform of decision) in the case header indicates this decision involved reviewing or correcting a prior arbitral ruling. Article 27 of RJAT establishes that arbitral decisions are final but may be subject to reformation for material errors, calculation mistakes, or clarification of ambiguities. The reform procedure allows the arbitral tribunal to correct its own decision when errors are identified, ensuring accuracy in tax determinations without requiring appeals to judicial courts, maintaining the efficiency objectives of the administrative arbitration system.