Process: 365/2018-T

Date: April 11, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 365/2018-T) addresses whether a company created through a corporate demerger (cisão) can claim the net job creation tax benefit (Criação Líquida de Empregos - CLE) under Article 19 of the Portuguese Tax Benefits Statute (EBF) for IRC purposes in 2013. The claimant company, A... S.A., resulted from a 2011 spin-off of B... Lda. under the fiscal neutrality regime (Articles 73+ of the IRC Code). Workers who had previously been counted for CLE benefit purposes by the predecessor company were transferred to the claimant as part of the demerger. In 2013, the claimant employed several workers under fixed-term contracts and sought to claim the CLE benefit in its IRC self-assessment. Following a tax inspection, the company submitted a replacement declaration and subsequently filed a gracious claim (reclamação graciosa) seeking recognition of the CLE benefit, which was partially denied by the Tax Authority. The AT argued that workers transferred through the demerger could not be counted as new job creation for benefit purposes, as they merely represented a continuation of existing employment relationships. The claimant challenged this decision through hierarchical appeal, which was rejected, leading to this arbitration proceeding at CAAD. The central legal question involves interpreting whether the fiscal neutrality regime applicable to corporate restructurings permits successor entities to claim employment-related tax benefits for transferred employees, and whether the CLE benefit's requirements for 'net job creation' are satisfied when employment relationships are transferred rather than newly created.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Marisa Isabel Almeida Araújo and Cristina Aragão Seia, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree on the following:

I – REPORT

On 31 July 2018, A..., S.A., Tax Identification Number..., with registered office at Street..., ...-... ..., submitted a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the express dismissal act issued in Hierarchical Appeal No. ...2017..., arising from the partial approval of Gracious Claim No. ...2016..., presented against an error in the self-assessment of Corporate Income Tax (IRC) relating to the tax period of 2013, in the amount of €114,667.21.

To substantiate its request, the Claimant alleges, in summary, the illegality of the said self-assessment, insofar as it failed to properly consider the tax benefit associated with net job creation for young people and long-term unemployed ("CLE"), provided for in Article 19 of the Tax Benefits Statute.

On 01-08-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed with the appointment of an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph a) of paragraph 1 of Article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable period.

On 21-09-2018, the parties were notified of these designations and manifested no intention to refuse any of them.

In accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 12-10-2018.

On 13-11-2018, the Respondent, duly notified for this purpose, submitted its response defending itself by challenge.

Pursuant to the provisions of subparagraphs c) and e) of Article 16, and paragraph 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 period for the submission of written pleadings, the parties abstained from doing so.

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

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 2, subparagraph a), 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 Ordinance No. 112-A/2011, of 22 March.

The proceedings are not affected by nullities.

Thus, there is no obstacle to the consideration of the merits of the case.

Accordingly, it is necessary to render

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

The Claimant is a Portuguese public limited company, with registered office and effective management in Portugal.

The Claimant is subject to and not exempt from taxation under the IRC.

The Claimant was created through a spin-off process, which occurred in 2011, of the company "B..., Lda." ("B..."), which benefited, under the IRC, from the special fiscal neutrality regime, enshrined in Articles 73 et seq. of the applicable IRC Code.

Through the said spin-off process, part of the assets of "B..." was separated, constituting an autonomous economic unit integrated by a chain of branded clothing retail stores "...".

In the context of the spin-off process, a number of workers assigned to the separated economic unit were transferred from B... to the Claimant, who had been considered eligible for the purposes of calculating the Tax Benefit relating to Net Job Creation (CLE), provided for in Article 19 of the applicable EBF, in the sphere of "B...", in the years 2008, 2009 and 2010.

In the year 2013, the Claimant had in its employ, under fixed-term contracts, the workers listed in the table below, whose ages, date of entry into the employment of the Claimant, and date of departure (if applicable), are as stated in the said table, with the Claimant bearing the costs equally set out in such table:

[Table details omitted in original]

In fulfilment of the declaration obligations to which it is bound, the Claimant submitted, on 26 March 2014, its periodic income statement (Model 22) for the IRC, relating to the year 2013.

In that statement, the Claimant determined, in the year 2013, a taxable income of €107,165.60, which was declared in Field 778 of Table 07 of the periodic income statement (Model 22) for the IRC referred to, and a tax collection of €26,791.40, declared in Field 351 of Table 10 of the same periodic income statement (Model 22).

In the same periodic income statement (Model 22) for the IRC of the year 2013, the Claimant proceeded to deduct the amount of €18,753.98, as an Extraordinary Fiscal Investment Credit ("CFEI").

Following a tax inspection procedure, A... proceeded, on 18 August 2015, to submit a replacement periodic income statement (Model 22) for the IRC, by reference to the year 2013.

In the said statement, the Claimant determined a taxable income of €414,624.97 and a tax collection of €103,656.24, inserted in Fields 778 and 351, respectively, of that same statement.

In the replacement periodic income statement (Model 22) for the IRC, the Claimant continued to deduct, in the year 2013, the amount it had already stated in the original version, namely €18,753.98, as CFEI.

In the statements referred to, the Claimant added to the taxable profit for the year 2013, in Field 710 thereof, the amount of €50,685.90, as corrections relating to previous years, of which €32,686.37, the Claimant considered added by error.

The Claimant submitted, on 24 March 2016, a Gracious Claim, against the IRC assessment resulting from the statements it submitted, requesting the following corrections:

  • The consideration of the tax benefit associated with net job creation for young people and long-term unemployed ("CLE"), provided for in Article 19 of the Tax Benefits Statute ("EBF");

  • The corrections relating to previous years to the extent they were declared by error; and

  • The deductibility of tax benefits that operate by deduction from the tax collection, arising from the corrections requested.

The Claimant was notified of the draft partial dismissal of that gracious claim and timely exercised the right of hearing available to it.

The said draft was based on prior information provided by Tax Inspection Division III, of the Finance Directorate of..., whose content, to the extent relevant to the present proceedings, was as follows:

[Details of prior information omitted in original]

The draft decision on the Gracious Claim notified to the Claimant referred to the foregoing information, upon which it was based.

The Claimant exercised its right to prior hearing.

On 23 November 2017, "A..." was notified of the final decision on the gracious claim submitted, which approved the claims relating to the corrections identified in points b) and c) of point 14 above.

The said final decision maintained the draft notified to the Claimant, adding the AT's pronouncement on the right of hearing exercised by the Claimant, containing the following, to the extent relevant to the case, of the said decision:

[Details of AT's pronouncement omitted in original]

On 21 December 2017, the Claimant filed a hierarchical appeal regarding the partial dismissal of the claim submitted.

In that hierarchical appeal, a dismissal order was issued, notified to the Claimant on 7 May 2018.

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. Substantiation of the Established and Unproven Matter of Fact

Regarding the matter of fact, the Tribunal does not have to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven from the unproven matter (cf. Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established having regard to the various plausible solutions of the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, paragraph 1, subparagraph e), of the RJAT).

Accordingly, considering the positions assumed by the parties, in light of Article 110, paragraph 7 of the CPPT, the documentary evidence and the administrative file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the TCA-Sul of 26-06-2014, issued in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

In particular, the fact established under point 6 was duly alleged by the Claimant in its subsidiary claim and is supported by documents 9 and 13 attached to the initial request, which were not challenged by the Respondent, and result from data already analysed and validated by the AT in gracious proceedings.

No pronouncement was made as proven or not proven on allegations made by the parties, presented as facts, consisting of strictly conclusive statements, incapable of proof, and whose truthfulness must be assessed in relation to the concrete matter of fact established above.

B. LAW

The question that arises in the present arbitral proceedings concerns the regime of the tax benefit to which the Claimant claims to be entitled, relating to net job creation, provided for in Article 19 of the applicable EBF, for the years 2008, 2009 and 2010, calculated in the tax sphere of Company B..., by the spin-off of which the Claimant was created.

Indeed, and as results from the matter of fact established as proven, the Claimant was created through a spin-off process, which occurred in 2011, of the company "B..., Lda." ("B..."), which benefited, under the IRC, from the special fiscal neutrality regime, enshrined in Articles 73 et seq. of the applicable IRC Code.

Through the said spin-off process, a line of business of B... was transferred to the Claimant, constituting an autonomous economic unit integrated by a chain of branded clothing retail stores "...", including a number of workers assigned to the separated economic unit, who had been considered eligible for the purposes of calculating the Tax Benefit relating to Net Job Creation (CLE), provided for in Article 19 of the applicable EBF, in the sphere of "B...", in the years 2008, 2009 and 2010.

The Claimant sustains its entitlement to the said tax benefit, essentially on three grounds of argument, namely:

  • the entitlement to the tax benefit in question derives directly from the spin-off process that occurred, with no "transfer of the tax benefit" occurring, insofar as, the economic unit being the same, albeit now in the sphere of A..., the tax benefit associated with employees assigned to that economic unit follows those same employees;

  • even if this were not the case, the said transfer should be admitted, since "with the spin-off, the totality of all rights and obligations inherent are transferred, and it is entirely legitimate (and unquestionable) to understand that tax benefits are included in the list of active and passive legal relationships subject to transfer!";

  • In the alternative, "the transfer of employees to the Claimant, in the context of the spin-off of "B...", can be viewed as job creation, in other words, they correspond to new entries of employees in the sphere of a new entity, in this case A..., and it should evaluate whether or not it meets the requirements set out in Article 19 of the EBF on job creation", and that "in this scenario, (...) A..." would be in a position to benefit from the tax benefit on CLE with respect to those employees in 2011 and, likewise, in subsequent years, until completing 5 years, since (i) those employees, despite being eligible in the sphere of B..., were not considered, in that company's sphere, for the purposes of the tax benefit in question and (ii) would meet the conditions to be considered as eligible entry in the sphere of A..." in 2011.";

  • not permitting "the benefit from the tax benefit relating to net job creation in the sphere of A..." violates the principles provided for in the Constitution of the Portuguese Republic, namely the principle of the Democratic Rule of Law, in its aspect of legal security and certainty (Article 2)".

Let us examine this, then.

i.

Regarding the first argument listed above, it is believed that the Claimant manifestly has no reason.

Indeed, in this case, we are faced with a simple spin-off, in which part of the Claimant's assets was separated to constitute another company (cf. Article 118, paragraph 1, subparagraph a) of the Commercial Companies Code).

In these cases, there is no analogy or similarity with the situations of merger by incorporation, to which the overwhelming majority of the case law on which the Claimant relies refers.

Indeed, notwithstanding repeatedly stating that what was expounded "in the context of a merger by incorporation" is "equally applicable to a simple spin-off operation", the truth is that it is not so.

Indeed, if in merger by incorporation, it can be stated that "The merger of one company with another, to which all its assets are transferred, implies the loss of legal personality of the former, but does not necessarily imply the disappearance of the economic and business reality that it constituted."[2], in a simple spin-off, this does not occur, by definition, insofar as there is no transfer of all the assets of the spun-off company to the beneficiary company.

This circumstance cannot fail to be considered decisively relevant, particularly with regard to the protection of the interests of third parties, which includes the Tax Administration, and consequently in the conditions and effects specific to each of those types of operation.

In the case at hand, and as referred to, the simple spin-off consists, essentially, of the separation of part of the assets of the spun-off company, which becomes autonomous from the assets that remain with the spun-off company.

In these terms, the operation in question must be regarded as a true transfer of assets (assets and liabilities, rights and obligations), and cannot, in any case, it is believed, be framed as a mere continuity of the legal situation existing pre-spin-off.

That this is so becomes evident, it is believed, for example, if one notes the regime for the protection of creditors' interests, which requires, in spin-off processes, that both the spun-off company and the beneficiary company of the spin-off be jointly and severally liable for debts that, by virtue of the spin-off, have been assigned to the incorporating company or the new company (cf. Article 122 of the CSC).

What is at issue, to the extent relevant to the case, is the reality that, with the spin-off, there is a separation of assets, with the allocation of part thereof to a third entity, a circumstance which, as is noted, conflicts with the consistency of the legal positions of third parties who related to the original legal entity.

In any case, and for now, what should be emphasized is that in the case of a simple spin-off, unlike what happens in merger by incorporation, there is no continuity of the pre-existing economic reality, which was spun off, now to be divided between the spun-off entity and the incorporating company or the new company.

Thus, it cannot fail to be framed as a simple spin-off process as a transfer of part of the assets of the spun-off company, to the incorporating company or the new company beneficiaries of such transfer.

ii.

Established that, in the spin-off process in question, there is a transfer of patrimonial elements of the spun-off company to the beneficiary company of the spin-off, it is clear that the situation sub iudice, relating to a tax benefit, must be resolved in the light of the specific rules regulating the transfer of such benefits.

In this area, as is well known, Article 15 of the EBF stands out, which in its applicable version provides that:

"1 - The entitlement to tax benefits is, without prejudice to the provisions of the following paragraphs, non-transferable inter vivos, but is transferable mortis causa if the transfer conditions of the benefit are met in the transferee, except if such benefit is of a strictly personal nature.

2 - The entitlement to objective tax benefits that are inseparable from the legal regime applicable to certain goods is transferable inter vivos, in particular those that benefit income from securities, public debt securities and properties subject to the limited rent regime.

3 - Likewise transferable inter vivos, by authorization of the Minister of Finance, is the entitlement to tax benefits granted, by act or tax contract, to natural or legal persons, provided that the conditions for the benefit are met in the transferee and the protection of public interests pursued by it is ensured."

In light of this norm, clearly paragraph 1 of the norm referred to will not be applicable to the case, insofar as it provides for the transferability of benefits mortis causa, which is not at issue in these arbitral proceedings.

Equally, paragraph 3 of that norm should not be invoked for the case, insofar as it requires the existence of authorization from the Minister of Finance, which in the case is not established, nor is it even alleged to have occurred.

Thus, only in paragraph 2 of the norm in question could some acceptance be found for the Claimant's claim.

However, that paragraph 2 only permits inter vivos transfer of "entitlement to objective tax benefits that are inseparable from the legal regime applicable to certain goods, in particular those that benefit income from securities, public debt securities and properties subject to the limited rent regime", and in the case, we are manifestly not faced with a tax benefit of the type listed.

Thus, it must be concluded that, in light of the said Article 15 of the EBF, the transfer of the tax benefit which the Claimant seeks to benefit from is not permitted.

Still in the context of the transfer of the tax benefit in question, the Claimant seeks that it be authorized by the fiscal neutrality regime, under which the spin-off that occurred was effected.

As results, first and foremost, from Council Directive 2009/133/EC, of 19 October 2009, the fiscal regime of neutrality of mergers and spin-offs "should avoid taxation of mergers, spin-offs, partial spin-offs, contributions of assets and exchanges of shares, while safeguarding the financial interests of the Member State of the contributing or acquiring company", it being noted, from the outset, that the Community regime regulating this matter contains no specific provision regarding tax benefits.

On the other hand, having examined the provisions of Articles 73 et seq. of the applicable CIRC (2011 version), no provision is found from which it results, minimally, that within the framework of the fiscal neutrality regime of spin-offs, tax benefits held by the spun-off company should be transferred to the beneficiary entity of the spin-off, outside the rules contained in Article 15 of the applicable EBF.

Nor does it result, contrary to what the Claimant invokes, from the nature, or the ratio legis, of the regime of neutrality of spin-offs that tax benefits not encompassed in Article 15 of the applicable EBF should be transferred to the beneficiary entity of the spin-off.

Thus, and from the outset, as already referred to, the Community provisions relating to such matter contain no specific provision relating to tax benefits.

On the other hand, the teleology of the tax benefits regime opposes the transfer of the tax benefit in question, by virtue of the mere occurrence of a simple spin-off, such as that at issue in the present arbitral proceedings.

Indeed, and as results from Article 14 of the applicable EBF, tax benefits, even if automatic, as is the case, cease to operate in cases where:

  • The taxable person has ceased to make payment of any income, expenditure or property tax and contributions relating to the social security system, and the situation of non-compliance persists;

  • The tax debt has not been subject to claim, challenge or opposition, with the provision of adequate security, when required.

Now, the permission, pure and simple, of transfer of tax benefits, via a simple spin-off process, such as that at issue in the proceedings, would result in an open avenue for tax evasion, allowing an entity that had ceased to make payment of any income, expenditure or property tax and contributions relating to the social security system, and remained in a situation of non-compliance, to spin off part or parts of its assets, in order to maintain in them tax benefits from which it benefited, without incurring the penalties specific to the situation of tax non-compliance in which it had placed itself.

Thus, in the fiscal neutrality regime of mergers and spin-offs, instituted in the CIRC in force from 2014 onwards, it was established, in Article 75-A, which came to expressly regulate the matter in question, that, unlike mergers conducted under the fiscal neutrality regime, spin-offs would only entail the transfer of tax benefits held by the spun-off company, subject to, among other things, authorization from the government member responsible for the finance area, as established by Article 75-A of the CIRC in force from 2014 onwards, a control which is justified, precisely, in order to ensure that the transfer of tax benefits via spin-off processes does not underlie the impairment of any fiscally relevant interest.

From this it follows, without margin for doubt, it is believed, that contrary to what the Claimant seeks, the transfer of tax benefits of the nature at issue in the present arbitral proceedings, in the context of a simple spin-off process, does not occur automatically, nor is it of the nature of the fiscal regime of neutrality of which such operations (simple spin-off) may benefit, nor was it authorized within the framework of the legal regime in force at the date of the spin-off sub iudice.

This matter, moreover, was already analysed with pertinence and depth in the context of arbitral process No. 83/2013-T, of CAAD, with whose grounds, generally, agreement is reached, and which here, for brevity, it is opted not to transcribe.

In the alternative, the Claimant alleges that "the transfer of employees to the Claimant, in the context of the spin-off of "B...", can be viewed as job creation, in other words, they correspond to new entries of employees in the sphere of a new entity, in this case A..., and it should evaluate whether or not it meets the requirements set out in Article 19 of the EBF on job creation", and that "in this scenario, (...) A..." would be in a position to benefit from the tax benefit on CLE with respect to those employees in 2011 and, likewise, in subsequent years, until completing 5 years, since (i) those employees, despite being eligible in the sphere of B..., were not considered, in that company's sphere, for the purposes of the tax benefit in question and (ii) would meet the conditions to be considered as eligible entry in the sphere of A..." in 2011.".

The Claimant further relies on a passage, which it invokes, from the decision on the hierarchical appeal, which it transcribes as stating that ""any other company to which he [employee] is transferred will have or will not have the right to an identical benefit as it complies or does not comply, for its part, with the requirements set out in the article of the EBF on job creation".".

First and foremost, and agreeing with what is stated, it must be noted that the transcribed passage is not directly stated by the decision on the hierarchical appeal, but rather appears in the transcription made therein of the grounds of the decision issued in arbitral process 201/2013T, of CAAD.

This being so, let us examine the question, which was not the subject of the aforementioned arbitral decision issued in the context of arbitral process No. 83/2013-T, of CAAD.

This question centers on the regime of Article 19 of the applicable EBF, whose content was as follows:

"1 - For the determination of taxable profit of taxable persons under the IRC and taxable persons under the IRS with organized accounting, the costs corresponding to net job creation for young people and for long-term unemployed, admitted under an indefinite-term employment contract, are considered at 150% of their respective amount, accounted as a cost of the year.

2 - For the purposes of the foregoing paragraph, the following are considered:

a) 'Young people' workers aged over 16 and under 35 years, inclusive, assessed at the date of conclusion of the employment contract, with the exception of young people under 23 years of age, who have not completed secondary education, and who are not attending an education-training offer that would enable them to raise the level of education or professional qualification to ensure the completion of such level of education;

b) 'Long-term unemployed' workers available for work, within the terms of Decree-Law No. 220/2006, of 3 November, who are unemployed and registered with employment centres for more than 9 months, without prejudice to the fact that during this period, fixed-term contracts may have been concluded for a period of less than 6 months, whose combined duration does not exceed 12 months; (Wording of Law No. 10/2009-10/03)

c) «Costs» the amounts borne by the employer with the worker, as fixed remuneration and contributions to the social security system borne by that same entity;

d) «Net job creation» the positive difference, in a given economic year, between the number of eligible hiring under paragraph 1 and the number of departures of workers who, at the date of their admission, were in the same conditions.

3 - The maximum amount of the annual increase, per job, is that corresponding to 14 times the guaranteed minimum monthly remuneration.

4 - For the purposes of the determination of net job creation, workers who are members of the family unit of the employer are not considered.

5 - The increase referred to in paragraph 1 applies for a period of five years from the beginning of the employment contract, and is not cumulative, either with other tax benefits of the same nature, or with other employment support incentives provided for in other diplomas, when applicable to the same worker or job.

6 - The regime provided for in paragraph 1 can only be granted once per worker admitted in that entity or in another entity with which special relationships exist within the terms of Article 63 of the IRC Code.

As results from the norm transcribed, for the said tax benefit only the costs corresponding to net job creation for the following are eligible:

  • young people; and

  • long-term unemployed.

Being understood by the former, "workers aged over 16 and under 35 years, inclusive, assessed at the date of conclusion of the employment contract, with the exception of young people under 23 years of age, who have not completed secondary education, and who are not attending an education-training offer that would enable them to raise the level of education or professional qualification to ensure the completion of such level of education".

In the present case, there are only situations relating to this type of workers, with no hiring of long-term unemployed being in question.

The Claimant was created, as results from the facts established as proven, in the year 2011, by spin-off of company B... .

And, from the time of its creation, in the year 2011, until 2013, it began to have in its employ, under indefinite-term employment contracts, the workers listed in the table integrating point 6 of the facts established as proven, having equally terminated the employment relationship with the workers as indicated in the same table, and borne the costs also discriminated therein.

Concluding, as was seen above, that there was no transfer of the benefit in question, from the sphere of B..., to that of the Claimant, since, among other things, and as the AT repeatedly stated, they are juridically distinct and autonomous entities, it will be concluded, as appears in the decision issued in arbitral process 201/2013T, of CAAD, that the Claimant "will have or will not have the right to an identical benefit insofar as it complies or does not comply, for its part, with the requirements set out in the article of the EBF on job creation".

That is, considering that the AT has sustained, and above was ratified, that there was a transfer of the employment relationship from the spun-off company to the created company, in such terms as to cease the legal and fiscal framework that corresponded to such relationship, it must be considered that we are faced with a relationship with renewed legal-fiscal relevance.

On the other hand, there will be no doubt that, with regard to the Claimant, the requirement of paragraph 1 of Article 19 of the applicable EBF is fulfilled, relating to workers previously in the employ of B... having been "admitted under indefinite-term employment contracts", in its service.

Thus, among the various requirements and legal exclusions provided for in the regime of the tax benefit in question, only within the framework of the norm of paragraph 6 of Article 19 EBF, the existence of the Claimant's entitlement to the tax benefit can be discussed.

At the time, the following wording, introduced by Law No. 55-A/2010 of 31/12, was in force: "The regime provided for in paragraph 1 can only be granted once per worker admitted in that entity or in another entity with which special relationships exist within the terms of Article 63 of the IRC Code.".

This norm succeeded a former wording which provided, until then, that "The regime provided for in paragraph 1 can only be granted once in relation to the same worker, whatever the employing entity".

That is, if until then, there would be no doubt that the Claimant would not be entitled to benefit from the tax benefit in question, given that the workers who would ground it had already been qualified for the purposes of the same benefit, in the sphere of the former employer (B...)[3].

However, in light of the norm in force when the workers in question were admitted in the employ of the Claimant, these could only fail to be relevant for the purposes of the tax benefit in question, if they had previously been in the employ of another entity with which special relationships existed within the terms of Article 63 of the IRC Code.

And paragraph 4 of that norm provided, at that date:

"Special relationships are considered to exist between two entities in situations where one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other, which is considered to be verified, in particular, between:

a) An entity and the holders of its capital, or their spouses, ascendants or descendants, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

b) Entities in which the same capital holders, their spouses, ascendants or descendants hold, directly or indirectly, a participation not less than 10% of the capital or voting rights;

c) An entity and the members of its corporate bodies, or any bodies of administration, management, direction or supervision, and their spouses, ascendants and descendants;

d) Entities in which the majority of the members of corporate bodies, or of the members of any bodies of administration, management, direction or supervision, are the same persons or, being different persons, are linked by marriage, legally recognized de facto union or kinship in the direct line;

e) Entities linked by a subordination contract, equal partnership agreement or other contract of equivalent effect;

f) Companies that are in a relationship of control, within the terms as defined in diplomas that establish the obligation to prepare consolidated financial statements;

g) Entities between which, by virtue of commercial, financial, professional or legal relationships between them, directly or indirectly established or practised, there is a situation of dependence in the exercise of their respective activity, in particular when any of the following situations occurs between them:

  1. The exercise of activity of one depends substantially on the assignment of industrial or intellectual property rights or know-how held by the other;

  2. The supply of raw materials or access to sales channels for products, goods or services by one depend substantially on the other;

  3. A substantial part of the activity of one can only be carried out with the other or depends on decisions of the latter;

  4. The right to set prices, or conditions of equivalent economic effect, relating to goods or services transacted, provided or acquired by one is, by imposition of a continuous legal act, in the ownership of the other;

  5. By the terms and conditions of its commercial or legal relationship, one can condition the management decisions of the other, on the basis of facts or circumstances unrelated to the commercial or professional relationship itself.

h) A resident or non-resident entity with a permanent establishment located in Portuguese territory and an entity subject to a clearly more favorable tax regime resident in a country, territory or region included in the list approved by order of the Minister of Finance.".

Now, the proceedings do not contain any elements that demonstrate, albeit probably, that any one or more of the relationships listed in that paragraph 4 of Article 63 of the CIRC existed between the Claimant and B... .

And, above all, nothing to that effect is even alleged by the AT, either in administrative or in arbitral proceedings, despite the Claimant already in the exercise of its right of hearing in gracious claim proceedings having petitioned that:

[Details of petition omitted in original]

And, notwithstanding, already previously, in proceedings for information conducted at the Finance Directorate of ..., it was noted that:

[Details of note omitted in original]

Being certain that, among the elements collected in the course of the instruction of the gracious claim, were:

[Details of collected elements omitted in original]

That is, the AT had, both in administrative and in arbitral proceedings, where the Claimant formulated the subsidiary claim now in question, all the conditions and elements to, being appropriate to do so, invoke and demonstrate that there was indeed, any one or more of the relationships listed in paragraph 4 of Article 63 of the applicable CIRC, between the Claimant and B... .

Having failed to do so, it cannot, it is believed, under penalty of incurring in excess of jurisdiction, this Tribunal presume or infer the existence of such relationships and apply the corresponding legal rules thereto.

Thus, and in view of the foregoing, this Tribunal cannot reach any other conclusion except for the allowance of the subsidiary claim, in the amount of €152,160.05, an amount from which must be deducted the amount recognized and corrected by the AT itself in gracious proceedings of €30,485.49, totalling €121,674.56.

It should be noted, further, that the present decision only is conclusive regarding the year 2013, so that it does not prejudice that, regarding other periods that are or may come under discussion, the AT allege and demonstrate the existence of special relationships between the Claimant and B..., drawing the appropriate legal consequences therefrom.

In view of what is now decided, the examination of the question raised by the Claimant regarding the violation of the principles provided for in the Constitution of the Portuguese Republic, namely the principle of the Democratic Rule of Law, in its aspect of legal security and certainty (Article 2), is prejudiced.

The Claimant petitions, in addition to the annulment of the acts of express dismissal issued in Hierarchical Appeal No. ...2017..., of the partial approval of Gracious Claim No. ...2016..., and of the self-assessment of IRC relating to the tax period of 2013, that:

  • it be permitted to carry forward the CFEI in subsequent years, resulting from the impact at the level of the IRC Tax Collection resulting from the acceptance of the tax benefit relating to net job creation as required;

  • the amounts of IRC paid in excess, in the amount of €69,811.81 and €70,442.47, respectively, be refunded.

As stated in the Decision issued in arbitral process 244/2013T of CAAD:

"The competence of arbitral tribunals operating in CAAD is, first and foremost, limited to the matters indicated in Article 2, paragraph 1, of Decree-Law No. 10/2011, of 20 January (RJAT).

This norm refers to the competence of arbitral tribunals comprising the consideration of the following claims:

a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and advance payment;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of collectable matter and of acts of fixing patrimonial values; (wording of Law No. 64-B/2011, of 30 December)

Beyond the direct consideration of the legality of acts of this type, also included in the competencies of arbitral tribunals operating in CAAD are competencies to consider second or third instance acts which have as their object the consideration of the legality of acts of those types, in particular acts deciding gracious claims and hierarchical appeals, as can be inferred from the express references made in Article 10, paragraph 1, subparagraph a), of the RJAT to paragraph 2 of Article 102 of the CPPT (which reports to judicial review of decisions on gracious claims) and to the "decision of the hierarchical appeal". (...)

Indeed, although it has come to be understood, in keeping with long uniform case law of the Supreme Administrative Court that, following a declaration of illegality of assessment acts, issued in judicial review proceedings, decisions condemning payment of indemnity interest may be issued, and, by virtue of Article 171, paragraph 1, of the CPPT, condemnation to payment of indemnities for improper guarantee, the fact is that there is no legal basis permitting the issuance of decisions condemning other types of payments, even if they are consequences, at the executive level, of the declaration of illegality of assessment acts.

Indeed, as results from the provision of Article 24 of the RJAT, the definition of the acts in which the execution of arbitral awards should be concretized is, in the first place, the responsibility of the Tax and Customs Authority, with the subsequent possibility of recourse to the tax courts to require coercively the execution, within the framework of the proceedings for execution of awards, provided for in Article 146 of the CPPT and Articles 173 et seq. of the Code of Procedure in the Administrative Courts."

Thus, it is not for this arbitral Tribunal, being a question to be resolved, if necessary, in execution of awards, to permit the carrying forward of the CFEI in subsequent years, resulting from the impact at the level of the IRC Tax Collection resulting from the acceptance of the tax benefit relating to net job creation as required.

As regards the request for refund of the tax paid in excess in the year 2013, the Claimant naturally has the right thereto, by virtue of the decision in the present arbitral action.

However, no facts were alleged, nor consequently proven, that would allow this tribunal to determine the amount of tax paid nor, consequently, the amount to be refunded, so the specific amount to be refunded to the Claimant should, if necessary, be determined in execution of the present award.

C. DECISION

Accordingly, this Arbitral Tribunal decides:

  1. To dismiss entirely the principal arbitral claim formulated by the Claimant;

  2. To allow entirely the subsidiary arbitral claim formulated by the Claimant and, in consequence, to partially annul the self-assessment of IRC relating to the tax period of 2013 of the Claimant, as it subsists after the partial approval of the gracious claim, to the extent that it does not consider the tax benefit provided for in Article 19 of the applicable EBF, in the amount of €121,674.56, and, consequently and to the same extent, to also annul the decisions of dismissal of Hierarchical Appeal No. ...2017..., and of partial approval of Gracious Claim No. ...2016...;

  3. To condemn the AT to refund the tax improperly paid, by virtue of the act of self-assessment of tax, now partially annulled;

  4. To condemn the Respondent in the costs of the proceedings, in the amount set below.

D. Value of the Proceedings

The value of the proceedings is set at €121,674.56, in accordance with Article 97-A, paragraph 1, subparagraph a), of the Code of Procedure and Process in Tax Matters, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the subsidiary claim was entirely allowed, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 5, of the said Regulation.

Let notification be made.

Lisbon, 11 April 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator (Vogal)

(Marisa Isabel Almeida Araújo)

The Arbitrator (Vogal)

(Cristina Aragão Seia)

[1] Available at www.dgsi.pt, as well as the remaining cited case law without mention of origin.

[2] Decision of the STA of 13-04-2005, issued in case 01265/04.

[3] It is true that in gracious claim proceedings (cf. Article 39), the Claimant states that "none of the employees selected for the calculation of the tax benefit on net job creation, by A..., was considered for the purposes of calculating the tax benefit on net job creation in another company, in particular in the sphere of B...".

Notwithstanding, from the hierarchical appeal onwards, and continuing in the present arbitral action, the Claimant states, more than once, for example, that "the tax benefit acquired in B... relating to the employees it hired on an indefinite-term basis and who were subsequently transferred to the sphere of A..., via a simple spin-off operation that benefited from the fiscal neutrality regime under IRC, should, naturally, transfer to the beneficiary company."[3], thereby recognizing that the tax benefit relating to the employees in question had been acquired in the sphere of B... .

Frequently Asked Questions

Automatically Created

What is the net job creation tax benefit (Criação Líquida de Empregos) under Article 19 of the Portuguese Tax Benefits Statute (EBF)?
The net job creation tax benefit (Criação Líquida de Empregos - CLE) under Article 19 of the Portuguese Tax Benefits Statute (EBF) is an IRC tax incentive designed to encourage employment growth, particularly for young people and long-term unemployed individuals. The benefit allows companies to deduct a portion of employment costs from their corporate income tax liability when they demonstrate genuine net increases in their workforce. To qualify, companies must hire eligible workers under specific conditions, maintaining certain employment levels and meeting statutory requirements. The benefit calculation considers factors such as employee age, contract type, employment duration, and the net increase in headcount compared to previous periods. This incentive aims to stimulate job creation by reducing the tax burden on companies that expand their workforce with priority demographic groups.
How does a corporate demerger (cisão) affect the eligibility for IRC tax benefits related to net job creation in Portugal?
A corporate demerger (cisão) affects eligibility for IRC tax benefits related to net job creation through the application of the fiscal neutrality regime under Articles 73 and following of the IRC Code. When a demerger occurs under this regime, assets, liabilities, and employees are transferred from the predecessor company to the successor entity. The critical issue is whether employees transferred in this process can be considered 'new hires' for purposes of the CLE benefit. Portuguese tax authorities typically argue that transferred employees represent continuity of existing employment relationships rather than genuine job creation, since the workers were already employed within the economic group. The predecessor company may have already claimed CLE benefits for these employees in prior years. Consequently, allowing the successor company to claim the same benefit would potentially result in double taxation relief for the same employment relationship, contrary to the benefit's purpose of incentivizing actual increases in employment levels.
Can a company claim the net job creation tax benefit in its IRC self-assessment after a demerger operation?
Whether a company can claim the net job creation tax benefit in its IRC self-assessment after a demerger operation depends on demonstrating genuine new job creation beyond merely transferring existing employees. If the company hires additional workers who were not previously employed by the predecessor entity, these new positions may qualify for the CLE benefit, subject to meeting all statutory requirements under Article 19 of the EBF. However, simply receiving transferred employees through the demerger process typically does not constitute 'net job creation' for benefit purposes. The fiscal neutrality regime applicable to demergers aims to prevent taxation of corporate reorganizations but does not automatically extend to multiplying tax benefits for the same underlying economic reality. Companies must carefully distinguish between: (1) employees transferred as part of the demerger, who generally cannot be counted for new CLE claims by the successor entity; and (2) genuinely new hires made after the demerger, who may qualify if all benefit conditions are satisfied and the company can demonstrate a net increase in employment levels.
What is the procedure for challenging an IRC self-assessment error through a hierarchical appeal (Recurso Hierárquico) in Portugal?
The procedure for challenging an IRC self-assessment error through a hierarchical appeal (Recurso Hierárquico) in Portugal involves several stages. First, the taxpayer must typically file a gracious claim (reclamação graciosa) with the tax authority that issued or processed the contested assessment, identifying the specific errors and requesting corrections. This claim must be filed within specific statutory deadlines, generally within two years of the assessment or payment. The tax authority reviews the claim, often requesting technical opinions from inspection services, and issues a draft decision, after which the taxpayer has the right to a prior hearing (direito de audição prévia) to present additional arguments. Following the final decision on the gracious claim, if it is wholly or partially rejected, the taxpayer can file a hierarchical appeal with the superior tax authority, challenging the decision's legal and factual basis. If the hierarchical appeal is unsuccessful, the taxpayer retains the right to seek judicial review through either administrative courts or, as in this case, through arbitration at CAAD (Centro de Arbitragem Administrativa), which offers a faster alternative dispute resolution mechanism for tax matters under the RJAT (Legal Regime of Arbitration in Tax Matters).
How does CAAD arbitral tribunal handle disputes over partial deferrals of tax reclamation claims involving IRC benefits?
CAAD arbitral tribunals handle disputes over partial deferrals of tax reclamation claims involving IRC benefits by conducting a comprehensive legal and factual analysis under the RJAT framework. When a taxpayer challenges a partially denied gracious claim, as occurred in this case, the tribunal first verifies its jurisdiction, the parties' legitimacy, and procedural regularity. The tribunal then examines the established facts, reviewing documentation including original and replacement tax declarations, inspection reports, administrative decisions, and the taxpayer's arguments. For IRC benefit disputes, the tribunal analyzes whether the taxpayer satisfied all statutory requirements for claiming the benefit, interpreting relevant provisions of the IRC Code and EBF. The tribunal considers the tax authority's reasoning for partial denial, evaluates the taxpayer's counterarguments presented during prior hearings and hierarchical appeals, and applies relevant case law and legal doctrine. The arbitration process under RJAT typically involves written submissions without oral hearings unless requested, and the tribunal must issue its decision within statutory deadlines. The tribunal's decision addresses each contested element separately, potentially upholding some aspects of the tax authority's position while ruling in favor of the taxpayer on others, providing detailed legal reasoning for its conclusions.