Process: 372/2017-T

Date: April 20, 2018

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD arbitration (Process 372/2017-T) addresses the classification of construction finishing activity income under Portugal's IRS simplified taxation regime for 2014. The taxpayer, operating under CAE 43390 (other finishing activities in buildings), declared €17,480 in field 443 of Annex B (Category B income not included in previous fields), expecting application of the 0.10 coefficient per Article 31(2)(e) of the IRS Code. The Portuguese Tax Authority (AT) reclassified this amount to field 440 (professional activities income), applying the higher 0.75 coefficient under Article 31(2)(b), resulting in an additional tax liability of €2,112.27. The core dispute centers on whether construction finishing constitutes a professional activity listed in Article 151's table, triggering the 0.75 coefficient, or falls under residual Category B income subject to the 0.10 coefficient. The taxpayer argued their activity isn't specifically enumerated in Article 151, citing CAAD precedent (Case 107/2016-T) and constitutional equality principles, noting IRC (corporate tax) applies 0.10 to similar activities. AT maintained that construction services, regardless of specific CAE code, qualify as professional services under Article 151 when read with Article 3(1)(b) and Article 31(1)(b). The decision highlights the critical importance of proper income classification in Portugal's simplified regime, where coefficient application directly impacts tax liability. This case demonstrates ongoing interpretative challenges regarding which construction-related activities constitute 'professional services' versus general commercial income, with significant financial consequences for individual entrepreneurs in the construction sector.

Full Decision

ARBITRAL DECISION

REPORT

A..., Tax Identification Number... (the "Claimant") and his wife B..., Tax Identification Number..., both with domicile at..., no...,...,...-...... (jointly, "Claimants"), came, under the terms and for the purposes of Articles 2, No. 1, subsection a) and 10, No. 1, subsection a) of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters ("RJAT"), to request the constitution of an Arbitral Tribunal, with the intervention of a single arbitrator, against the Tax and Customs Authority (the "Respondent" or "AT"), with a view to annulling the decision refusing the gracious complaint No. ...2016..., and, indirectly, the declaration of illegality and consequent annulment of the assessment of Personal Income Tax ("IRS") No. 2016..., relating to the tax year 2014, which results in an amount payable of €2,112.27.

The Claimants argue, in summary, that:

  • The Claimant declared the commencement of activity on 23/05/2010 with the main Economic Activity Code (CAE) 43390 – other finishing activities in buildings – and secondary CAE 43330 – covering floors and walls;

  • In 2012, the Claimant completed Annex B of the IRS Model 3 declaration, relating to his Category B income, opting for completion of field 1 – Simplified Taxation Regime:

  • In completing said declaration, specifically in section 3 A of the Annex – "Identification of the Passive Subject(s)" – field 11 in the CAE Code he inserted CAE 43390 – other finishing activities in buildings;

  • Field 10 "Code of the Table of Activities Art. 151 of the IRS Code" – was not completed; and

  • In field 401 of section 4 A he declared €5,471 relating to sales of goods effected and in field 403 he declared €5,810 relating to other service provisions and other income.

  • In 2013, the Claimant again completed the aforementioned Annex B – "Category B Income", specifically field 1 of the "Simplified Taxation Regime" and in section 3 A he inserted CAE 43390, in field 424 he declared €11,096, in field 424 €1,620 relating to operating subsidies and in field 403 the value of €6,883.56;

  • In 2014, the Claimant again completed the aforementioned Annex B of the IRS Model 3 declaration, completing, once again, field 1 – "Simplified Taxation Regime", field 11 – "CAE Code" with the number 43390, field 10 – "Code of the Table of Activities Art. 151 of the IRS Code" was not completed, in field 401 he declared the value of €3,119, in field 424 €3,888 and in field 443 €17,480;

  • Subsequently, by dispatch dated 18/02/2016, the Claimant was notified that AT proposed to alter the declared elements relating to Category B income for the year 2014;

  • The alteration consisted of removing from field 443 the declared income and including it in field 440, since the income resulted from service provisions framed in Article 3, No. 1, subsection b), read together with Article 31, No. 1, subsection b), both of the IRS Code;

  • On 12/07/2016, they were notified of the final decision to alter Category B income from field 443 to field 440;

  • Finally, they were notified of the IRS assessment No. 2016... in the amount of €2,112.27;

  • The said assessment was based on the fact that AT considered that the amount of €17,480 declared in field 443 – "Category B Income not included in the previous fields" – should have been declared in field 440 – "Income from professional activities provided for in the Table of Art. 151 of the IRS Code and/or in the CAE";

  • They filed a gracious complaint relating to the above-mentioned assessment because they understood that the Claimant's activity is based on finishing in buildings and covering floors and walls whereby he does not obtain income, individually, from the professional activities listed in the table referred to in Article 151 of the IRS Code;

  • From Article 31, No. 2 of the IRS Code (in the wording given by Law No. 83-C/2013, of 31 December, which entered into force on 01/01/2014) it results that the application of the coefficient of 0.75, when the income results from professional activities provided for in the table referred to in Article 151 of the IRS Code, and of 0.10 for other income from Category B (Article 31, No. 1 subsections b) and e) of the IRS Code);

  • To the values declared in field 443 of Annex B the coefficient of 0.10 is applied, in accordance with the provision of Article 31, No. 2, subsection e) of the IRS Code (in the wording in force in 2014);

  • From the IRS Code in the wording given by Law No. 83-C/2013, of 31 December, "(…) taxable income is obtained by adding to the income (…) the amount resulting from the application of the following coefficients: (…) e) 0.10 of subsidies intended for exploitation and remaining Category B income not provided for in the previous subsections.";

  • Whereas to the values indicated in field 440 of Annex B the coefficient 0.75 would be applied relating to income from professional activities provided for in the Table of Article 151 of the IRS Code;

  • Thus, the Claimants understand that since the Claimant's activity is not provided for in the table of Article 151 of the IRS Code, the coefficient to be applied will be 0.10 for the determination of taxable income according to the provision of Article 31, No. 2, subsection e) of the said Code, and not 0.75 as advocated by AT;

  • This has also been the understanding of CAAD, expressed in case No. 107/2016-T, in which the request for declaration of illegality of the IRS assessment of 2014 was judged precedent, determining the annulment thereof and its replacement by another in which income from service provisions obtained in 2014 would be determined on the basis of the coefficient (0.10) provided for in subsection e) and in subsection b) (0.75) of No. 2 of Article 31 of the IRS Code;

  • The coefficient to be applied to their income could not be different from the coefficient that would be applied had the Claimant established a company and exercised his activity through it, given that the coefficient under Corporate Income Tax (IRC) is 0.10;

  • Taking into account the teleological element of interpretation, the legislator's intention was not to discriminate individual entrepreneurs from companies, applying to them 0.75 and to these 0.10;

  • The legislator intended to prevent IRS taxpayers from fleeing to IRC structures that do not have a true business structure;

  • There is an error in the qualification, by application of the wrong coefficient, as well as a defect in the quantification in so far as the application of the coefficient of 0.75 determines an excessive value of taxable matter and, consequently, of tax owed;

  • The retroactive correction of the applicable coefficient is unlawful;

  • In light of the foregoing, the assessment in question should be replaced by another that applies the coefficient of 0.10 to Category B income earned in 2014 by the Claimant.

For its part, AT contends that:

  • Following the submission, on 26/06/2015, electronically, of the IRS Model 3 income declaration for the year 2014 composed of Annexes A (Dependent Work), B (Business/Professional Income) and H (Tax Benefits and Deductions), it verified the existence of an inaccuracy consisting in section 4-A of Annex B, with the Claimant registered for the purposes of exercising activities on his own account, with CAE 43390 – "OTHER FINISHING ACTIVITIES IN BUILDINGS" and CAE 47523 – "COM. RET. MAT. DIY, EQUIP. SANIT. HARDWARE MAT. SIM, EST. ESP", indicating in field 401 - €3,119.00 and in field 443 - €17,480.00;

  • Faced with the inaccuracy, it notified the taxpayer through Dispatch No. GIC –..., from the IRS Services Division to correct the declaration submitted, however, the Claimant did not do so, informing through the tax authority portal that:

"[w]ith the entry into force of Law No. 83-C/2013, of 31-12, Article 31 of the IRS Code provides the following: No. 2 b) 0.75 professional activities list Art. 151, No. 2 e) -0.10 Category B income not provided for in the List of Art. 151 IRS. There is no doubt about the application of the coefficient 0.10 in 2014, to activities related to civil construction, the legislator's position having been clarified and reinforced in 2015";

  • Despite being notified for that purpose, the Claimant remained silent;

  • Article 31, No. 2 of the IRS Code was amended by Law No. 83-C/2013, of 31 December (State Budget Law for 2014), providing for new coefficients to determine taxable income when the determination of business and professional income (Category B) is based on the simplified taxation regime;

  • From Article 31, No. 2, subsection b) are covered income obtained in the exercise, on his own account, of any service provision activity that falls within subsection b) of No. 1 of Article 3 of the IRS Code, regardless of whether the activity is classified according to CAE under Article 151 of the said Code;

  • A different interpretation results from Article 101, No. 2, subsection b) of the IRS Code which expressly refers to activities "specifically provided for in the table referred to in Article 151";

  • However, with Law No. 82-E/2014, of 31 December, Article 31, No. 1, subsection b) of the IRS Code is amended to provide the term "specifically";

  • Although this Law has harmonized the texts, the amendment in question does not have an interpretative character, coming into force from 01/01/2015;

  • Until 31/12/2014, the coefficient of 0.75 was applicable to income earned, on his own account, from any service provision activity, which falls within Article 3, No. 1, subsection b) of the IRS Code, whether or not the activity is classified according to CAE, whether in accordance with the codes mentioned in the table of activities approved by Regulation No. 1011/2001, of 21/08/2001, and whether or not it is specifically or not specifically provided, given that the provision does not refer to activities identified specifically in the table of activities;

  • Thus, it is with the publication of Law No. 82-E/2014, of 31 December, that Article 31 of the IRS Code came to have the current wording, that is to say, an alteration subsequent to the date of the facts in the case before us;

  • When completing the Model 3 IRS, the Claimants inserted the data in field 4 A, field 443 – gross income resulting from the exercise of professional, commercial and industrial activities, however, this field corresponds to Category B income not included in the previous fields, namely service provisions that by application of Article 4 of the IRS Code are classifiable under Article 3, No. 1, subsection a) and provided that they are not provided for in subsections a) to d) and Article 31, No. 2, first part of subsection e);

  • The situation of the Claimants does not correspond to Category B income not included in the previous fields, but rather to a service provision at the date of the facts;

  • The Claimants should have completed field 440 – "Income from professional activities provided for in the Table of Art. 151 of the IRS Code and/or in the CAE" which aims at income obtained in the exercise on his own account of any service provision activity that is classifiable under Article 3, No. 1, subsection b) of the IRS Code or in accordance with the codes mentioned in the table of activities approved by Regulation No. 1011/2001, of 21 August;

  • The forms are accompanied by completion instructions that clarify the type of income to be classified in each of the fields of Annex B, and with respect to field 440 it is clarified that "[i]t is intended for the indication of income obtained in the exercise, on his own account, of any service provision activity that has a frame in subsection b) of No. 1 of Art. 3 of the IRS Code, regardless of whether the activity exercised is classified according to the Portuguese Classification of Economic Activities (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in the table of activities approved by Regulation No. 1011/2011, of 21 August, including the activity with the code '1519-Other service providers.'";

  • That it complied with the legal regulations relating to taxation based on the simplified regime and that its conduct does not discriminate individual entrepreneurs in relation to companies, since AT merely complies with the principle of legality and since the Claimant did not establish a commercial company, the norms of the Corporate Income Tax Code cannot be applied to him also because for that to occur it would be necessary for the Claimant to have organized accounting, furthermore the scope of application of IRS and IRC are distinct;

  • For the Claimant's activity to be considered a civil construction service it would be necessary for it to have a license issued by the Institute of Public Markets for Real Estate and Construction under Article 3 of Decree-Law No. 158/2012, of 23 July, and not having it, the application of the coefficient of 0.10 is denied to him;

  • Finally, AT invokes an arbitral decision that pronounces for the non-admission of the request presented (case No. 183/2016-T).

STATEMENT OF FACTS

A.1. Facts Proven

The Claimant is an IRS taxpayer registered for the purposes of exercising activities on his own account, with main CAE 43390 – Other activities of finishing buildings, and secondary CAE 47523 – Com. Ret. Mat. DIY, Equip. Sanit. Hardware Mat. Sim, Est. Esp.

The Claimant is a taxpayer framed in the simplified taxation regime of IRS.

In the year 2014, the Claimant completed Annex B of the IRS Model 3 declaration – "Category B Income", having completed field 1 relating to the "Simplified Taxation Regime" and in section 3 A of the Annex – "Identification of the Passive Subject(s)", in field 11 – "CAE Code (Professional, Commercial and Industrial Income", the Claimant entered CAE 43390 and field 10 – "Code of the Table of Activities Art. 151 of the IRS Code" was not completed.

A.2. Facts Not Proven

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

A.3. Justification of the Proven and Unproven Statement of Facts

With respect to the statement of facts the Tribunal does not need to pronounce itself on everything alleged by the parties, instead it is the duty to select the facts that matter for the decision and discriminate the proven matter from the unproven (See Article 123, No. 2, of the Code of Tax Procedure and Process (hereinafter, "CPPT") and Article 607, No. 3 of the Code of Civil Procedure (hereinafter, "CPC"), applicable ex vi Article 29, No. 1, subsections a) and e) of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated according to their legal relevance, which is established in light of the various plausible solutions of the legal questions.

Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the CPPT, the documentary evidence and the Administrative Process attached to the file it was considered proven, with relevance for the decision, the facts listed above.

THEMA DECIDENDUM

The issue intended to be resolved in this dispute is, in the final analysis, to determine whether the coefficient applicable to the Claimant for purposes of the simplified regime (IRS) is 0.75 or 0.10.

It is necessary, in any case, so that the applicable coefficient can be determined, to take a position on two issues:

  1. Whether the activities provided for in item 1519 – Other service providers should be traced back, for purposes of determining the coefficient provided for in Article 31 of the IRS Code (in the wording in force on the date of the facts), to "income from professional activities contained in the table referred to in Article 151", to which a coefficient of 0.75 corresponds, in accordance with Article 31, No. 2, subsection b) or to "Remaining Category B income not provided for in the previous subsections" to which a coefficient of 0.10 corresponds, in accordance with Article 31, No. 2, subsection e), both of the IRS Code; and

  2. Whether the activity developed by the Claimant should be traced back to a "service provision activity", classifiable under Article 3, No. 1, subsection b) of the IRS Code or to a "commercial activity" classifiable under Article 3, No. 1, subsection a) of the same Code.

Although from a logical point of view the answer to the second issue is prior, since qualification as a commercial activity renders unnecessary the analysis of the concrete framework under service provision, given that the focus of the Parties in the administrative file was essentially (though not exclusively) on the first issue, we will begin our analysis with the first listed issue.

JUSTIFICATION

On the legislative evolution and applicable law

In its original version, the IRS Code, approved by Decree-Law No. 442-A/88, of 30 November, provided in Article 3 (Category B) self-employment; in Article 4 (Category C) commercial and industrial income; and in Article 5 (Category D) agricultural income.

These categories were, however, merged, through Law No. 30-G/2000, of 29 December.

José Guilherme Xavier de Basto notes in this regard that "[t]he differentiated treatment of liberal professions in relation to business activities was in some way a tradition of Portuguese taxation. Already in the reform of the 1960s, and even before, their respective income was taxed by two different taxes: the 'Professional Tax' and the 'Industrial Contribution'. And when it was created, at the end of the eighties, the single tax on the income of natural persons – the IRS – the income of liberal professionals and that of individual entrepreneurs constituted two different categories of income: Category B, for income from self-employment and Category C for commercial and industrial income.", adding that "[t]he merger thus determined that, for the first time in Portuguese fiscal history, independent professional activities (doctors, lawyers, engineers, consultants...) began to be considered on the same level as commercial and industrial activities exercised by individuals." (José Guilherme Xavier de Basto, IRS - Real Incidence and Determination of Net Income, Coimbra: Coimbra Editora, 2007, pp. 153 and 154).

The forms of determination of net income of the current Category B are: the application of the simplified regime, under Article 31 of the IRS Code, or accounting as provided in Article 32 of the said Code.

Until the 2014 tax year, Article 31, No. 1 of the IRS Code provided that "[t]he determination of taxable income results from the application of objective technical-scientific indicators for different sectors of economic activity.", with No. 2 of the same article adding that "[u]ntil the approval of the indicators mentioned in the previous number, or in their absence, taxable income is obtained by adding to income resulting from service provisions made by the partner to a company covered by the transparent tax regime, under subsection b) of No. 1 of Article 6 of the Corporate Income Tax Code, the amount resulting from the application of the coefficient of 0.20 to the value of sales of goods and products and of the coefficient of 0.75 to the remaining income from this category, excluding the variation of production".

The norm was, however, amended in 2014, taking on the following wording (by virtue of the entry into force of Law No. 83-C/2013, of 31 December - State Budget Law for 2014):

"2 - Until the approval of the indicators mentioned in the previous number, or in their absence, taxable income is obtained by adding to income resulting from service provisions made by the partner to a company covered by the transparent tax regime, under subsection b) of No. 1 of Article 6 of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

(…)

b) 0.75 of income from professional activities contained in the table referred to in Article 151;

(…)

e) 0.10 of subsidies intended for exploitation and remaining Category B income not provided for in the previous subsections." (bold and underlined ours).

Taking into account that the 2014 tax year is at issue, the norm relevant for the present analysis will be the one transcribed in the previous point.

From 2015 on, the wording of the norm came to have a different wording:

"2- Under the simplified regime, the determination of taxable income is obtained by applying the following coefficients:

b) 0.75 to income from professional activities specifically provided for in the table referred to in Article 151;

"e) 0.10 of subsidies intended for exploitation and remaining Category B income not provided for in the previous subsections." (bold and underlined ours).

On the interpretation of Article 31 of the IRS Code

This Tribunal considers that the coefficient of 0.75 provided for in Article 31, No. 2 subsection b) of the IRS Code, in the wording in force on the date of the facts, applies to all service provisions, including those not nominally identified in the table, to which Item 1519 – Other service providers applies.

Acknowledging that, in the concrete situation, the legal-tax system is susceptible to more than one interpretation, the positions defended by both parties indeed reflect the most probable interpretative results.

In this respect, it is noted that there are interpretative divides, including in this Arbitration Centre, as is clearly evident, for example, by the decision in favor of the application of a coefficient of 0.75 in case 183/2016-T and in favor of the application of a coefficient of 0.10 in case 107/2016-T.

In any case, the application of the coefficient of 0.75 to all service provisions, without prejudice to the legislative technique not appearing ideal, seems to result from:

  • The legislator making no distinction between types of service provisions nominally provided for in the list and provisions to which Item 1519 applies;

  • The IRS Code, when it intends to correspond a differentiated regime to service provisions nominally provided for in the table referred to in Article 151, does so with clarity (even before the amendment that entered into force in 2015);

  • Not being able to anticipate substantial differences from the point of view of income generation between the activities listed and the remaining ones;

  • The legislator not updating the table frequently creating, thereby - the application of different coefficients - problems of equality justified only by creativity in the qualification of the service or modernity thereof. This element justifies, at least, greater clarity from the legislative point of view.

Indeed, if the legislator had wanted to refer, in Article 31, No. 2, subsection b) of the IRS Code, only to service provisions nominally provided for in the table referred to in Article 151, it could have done so.

In fact, it resulted from Article 101, No. 1 of the IRS Code that: "1 - Entities that have or must have organized accounting are obliged to withhold tax, by applying, to the net income of which they are debtors and without prejudice to the provisions in the following numbers, the following rates:

a) 16.5%, in the case of income from Category B referred to in subsection c) of No. 1 of Article 3, of income from Category E or of capital gains provided for in subsections b) and c) of No. 1 of Article 9;

b) 25%, in the case of income from professional activities specifically provided for in the table referred to in Article 151." (bold and underlined ours).

Thus, the formula used to distinguish service provisions nominally provided for in the table and not provided for in the table is known to the legislator and was contained on the date of the facts in the IRS Code.

Manuel Faustino notes that "[c]onsidering that the said list has a residual item, that enshrined in its No. 15 – 'Other service provisions', in fact this item does not refer to specific professional activities, but to 'other service providers'. Personally, I would have preferred the legislator to have used the term 'nominally', but I have no difficulty accepting the aforementioned interpretation." (Manuel Faustino, The Duty to Withhold at Source – and Other Autonomous Duties of Cooperation in IRS, Lisbon: Áreas Editora, 2003, p. 101).

This was, moreover, the legal formulation that the legislator adopted for the 2015 and subsequent tax years.

Thus, the interpreter must presume that the legislator knew how to reflect his thought in law (cf. the provision of Article 9, No. 3 of the Civil Code applicable ex vi Article 11 of the General Tax Law).

Where the law does not distinguish, it is not incumbent upon the interpreter to distinguish, especially taking into account the above context.

Furthermore, as maintained by Rui Duarte Morais - although with respect to withholding at source - "many other forms of self-employment, translated into the exercise of activities not contained in such a list, also originate professional income. The fact that an activity is or is not expressly provided for in the said list gives rise to a different withholding obligation at source. This gives rise to a relative injustice, result of a merely formal element, the inclusion or not of a particular profession in a listing." (Rui Duarte Morais, On the IRS, Coimbra: Almedina, 3rd ed., 2016, p. 76) (bold and underlined).

Thus, there were already, before the entry into force of the 2014 wording, voices pronouncing on the injustice of having two different regimes depending on whether a recasting of an activity to the table was nominal or merely residual.

This context makes it impossible to discard, without further ado, the application of the coefficient of 0.75 to all service provisions, anchoring the interpretation, for the most part, in the lack of clarity and/or systematic coherence on the part of the legislator. Indeed, there were reasons for the treatment to not, in fact, be differentiated.

It can always be said, further, that it is not possible to make a perfect transposition between the coefficients provided for IRS and IRC purposes, not least because there is not in this case a residual subsection applicable to other business and professional income.

On the boundary between service provision and commercial activity

Without prejudice to what is stated above, this Tribunal considers that the activity developed by the Claimant should be traced back to a commercial activity, for the purposes of Article 3, No. 1, subsection a) and 4, No. 1, subsection f) of the IRS Code, to which, on the date of the facts, a coefficient of 0.10 would be applicable.

Note that the Claimants request that the assessment be "replaced by another that contemplates the application of the coefficient of 0.10 to Category B income obtained in 2014 by the Claimant husband", ultimately requesting that the IRS assessment in question be annulled.

Now, as results from what is stated above, the coefficient of 0.10 will equally be applicable to commercial activities, so it is necessary to also analyze whether the activity developed by the Claimant can be traced back to a commercial activity.

Indeed, although the aforesaid merger of categories B, C and D occurred, making the task of qualification and framing of income simpler, the need to distinguish the source of the various types of Category B income was maintained, namely for purposes of determining the withholding tax rate and, as in the concrete case, for determining the applicable coefficient under the simplified regime.

Thus, the still somewhat sectoral (semi-sectoral) bias of IRS continued to make some of its effects felt even after the merger of the said categories.

In any case, the IRS Code does not conceptually define service provision or commercial activities, instead resorting to lists (provided for in Article 4 and in Regulation No. 1011/2001, of 21 August).

Both lists are exemplary and neither assumes a residual character in relation to the other.

Thus, in case of doubt, the recast of one activity or another - a task which, as we have already mentioned, has great importance, namely for purposes of determining the applicable coefficient under the simplified regime and withholding at source – assumes particular complexities.

In this sense, AT notes that "[p]reviously there was a List Attached to the Code, which was exhaustive, and together with service provisions, which did not form part of Categories C or D, they constituted the income to be taxed as professional income. Currently that List has been replaced by Regulation 1011/2001, of 21 August, referred to in Article 151 of the IRS Code and the nature of the income covered has been widely expanded with Category B now including service provisions:

  • Resulting from the exercise of any activity of an artistic, scientific or technical nature, whether or not included in the Regulation referred to,

  • Earned on his own account in the exercise of any service provision activity;

  • Any service provision even if connected with a commercial, industrial or agricultural activity, which will have an Economic Activity Code (CAE)." (Ministry of Finance and Public Administration, General Directorate of Taxes, Training Center, IRS – Manual of Personal Income Tax, 2007, pp. 42 and 43).

In this context, André Salgado Matos states that "[j]ust as the concept of dependent work for purposes of Category A is based on the individual employment contract, the concept of self-employment is essentially based on service provision (Arts. 1154-1156 CC). But just as happened with the previous category, the overlap is not complete, allowing for some expansions and restrictions." (André Salgado Matos, Personal Income Tax Code (IRS) Annotated, Coimbra: Higher Institute of Management, 1999, p. 96).

Under Article 1154 of the Civil Code "[a] service provision contract is one in which one party undertakes to provide the other with certain result of his intellectual or manual work, with or without compensation.".

José Guilherme Xavier de Basto also notes that "[t]he boundary with professional income ultimately comes to be resolved on the basis of the criterion of the predominance of intellectual activity, which characterizes professional income." (José Guilherme Xavier de Basto, IRS - Real Incidence and Determination of Net Income, Coimbra: Coimbra Editora, 2007, p. 155).

It is noted that, for purposes of Article 151 of the IRS Code, "[a]ctivities exercised by IRS taxpayers are classified, for purposes of this tax, according to the Classification of Portuguese Economic Activities by Branch of Activity (CAE), of the National Institute of Statistics, or according to the codes mentioned in a table of activities approved by regulation of the Minister of Finance.".

With respect to the concept of commercial activity for IRS purposes, André Salgado Matos emphasizes that "[t]he IRS Code thus appears to have clearly departed from a purely legal notion of commerce and industry. Thus it intimates the disappearance of the reference to commercial or industrial nature, but also other details. On the one hand, in current Portuguese law, industrial activities are considered as commercial (Art. 230, 1 Commercial Code); if the chosen criterion were legal, it would not make sense to separate the two concepts. On the other, in the exemplary enumeration of activities considered commercial or industrial there are some which, according to commercial law and doctrine, are not considered commercial or industrial, or are so only in certain circumstances; this is at least the case of fishing [No. 1, a)], mining operations and extractive industries in general [No. 1, b)] and craftsmanship [No. 1, h)] (cf. Art. 230 Commercial Code; D 20667, 28/12/1931), with there being some doctrinal doubts regarding some others." (André Salgado Matos, Personal Income Tax Code (IRS) Annotated, Coimbra: Higher Institute of Management, 1999, p. 107).

Thus, the concept of commercial activity used by the IRS Code departs from commercial law, but is not exactly superimposable.

In any case, André Salgado Matos contends that "(…) the legislator, although not wanting to commit to purely legal notions of commerce and industry, did not dispense with them completely. In a sense, he presupposed them, and then any activity that is commercial or industrial (…) for Commercial Law is also, in principle, commercial or industrial for IRS purposes (…)." (André Salgado Matos, Personal Income Tax Code (IRS) Annotated, Coimbra: Higher Institute of Management, 1999, p. 108).

Without prejudice to AT having been defending (since Circular 5/2001) that the framing in the subsection relating to Civil Construction implies the existence of a certificate/license, this Tribunal has great difficulty accepting that qualification depends on a merely formal element. All the more so that, in the final analysis, under Article 1 of the IRS Code and Article 10 of the General Tax Law income from unlawful acts are also taxed that are subsumable "in a legal framework" (Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, Annotated and Commented, 4th edition, 2012, pp. 118-119).

That is, for regulatory purposes, qualification of income should be prior (or even detached from) compliance with all regulatory requirements.

Further, it is noted merely by way of example that the Claimant's activity could be traced back to the list of civil construction activities provided for in Annex XI of the Public Contracts Code approved by Decree-Law No. 18/2008, of 29 January, or to a CAE from the Chapter on Construction and the Group of specialized construction activities (which, moreover, does not contemplate a specific item for civil construction instead describing, in the Chapter on Construction various activities of real estate promotion, building construction, civil engineering, and specialized construction activities).

But this element, the recast to a notion of civil construction coming from another branch of law, in the concrete case, will not be decisive.

In fact, it should be reiterated that the fiscal concept may not fully accompany the commercial concept or others provided for in other legal provisions (in relation to which regulatory reasons, public order protection, consumer defense, or others may preside).

Thus, the extent of the concept will be different for IRS purposes since the concerns underlying the differentiation of commercial activities and service provisions are different from those which preside over the delimitation of the concept in other branches of law.

The concerns are essentially with the form of income generation and the methodology to follow for the determination of net income, out of respect for the principle of contributive capacity.

As Manuel Faustino notes "[f]or much that is affirmed to the contrary, Category B may be the only category, but it is not a single category. And it is not, merely at the formal level, but also at the substantive level." (Manuel Faustino, IRS Reform After Reform, Lisbon: Áreas Editora, 2003, p. 580).

In the same sense, André Salgado Matos argues, by way of example, that "[t]ransport is already considered a commercial activity by Art. 366 Commercial Code, but in somewhat restrictive terms, especially in that it is required that this activity be developed in the form that the law of its creation prescribes or, in its absence, in the form of a commercial company. The DGCI has interpreted this provision extensively: thus, it already considered that income earned in the activity of transporting bank documents is covered by subsection a) (DDGI 27/2/89). In the same way, income earned in the transport of goods, intended or not for commercial activities, of other property (for example, transport of removals), values and persons (for example, the activity developed by taxi drivers) will be covered." (André Salgado Matos, Personal Income Tax Code (IRS) Annotated, Coimbra: Higher Institute of Management, 1999, pp. 110 and 111).

Thus, presiding over the segmentation – within Category B – between commercial, industrial, agricultural, forestry or livestock income and service provision activities, is at least in part the same concern that exists in the analytical part of IRS: the need to impose different forms of determination of net income for each category, since the form (namely the costs) of income generation are differentiated, depending on the type of activity that is developed.

Now, in this respect, this Tribunal understands that, in the absence of a true concept of service provision or commercial activity, being concepts whose extent in their respective branches of origin are not exactly transposable to tax law, recourse to open lists of activities implies – as required by the principle of legal certainty – that the activities described in the table be understood in a broad manner.

Where there are doubts between qualifying a particular activity as commercial or service provision – and there are, manifestly, gray areas – the first criterion should be the framing envisaged by the legislator, that is, to recast the qualification existing in the lists (of Article 4 or the table referred to in Article 151) even if this qualification requires a broad reading of the activities described.

Now, the activity of civil construction is specifically provided for in Article 4, No. 1, subsection f) of the IRS Code.

On the other hand, this broad reading will still be a requirement of the principle of equality and contributive capacity, which will require similar treatment for activities in which income generation obeys similar parameters, as occurs in the concrete case between the activity developed by the Claimant and an activity of construction – from the ground up – of real property undoubtedly recasting to civil construction for IRS Code purposes.

It is further noted that the application of a coefficient, of a general order, does not imply verification, case by case, of the costs actually existing. The analysis to be conducted will be of a more general nature.

In commercial activities, to confine ourselves to the situation at issue in the concrete case, the substrate tending more to the entrepreneurial and less to the personal tends to impose more costs on income generation, which justifies differentiated treatment within Category B itself. We say tendentially since, naturally, even service provisions have structures markedly more entrepreneurial leading to greater difficulties in qualification.

In any case, in the situation under analysis, the activity developed by the Claimant (finishing in buildings and covering floors and walls) framing itself, in the understanding of this Tribunal, in a common concept of civil construction will also merit framing in the category of civil construction provided for in the IRS Code since from the point of view of income generation, the form of income generation, in the case of the Claimant will not be very different from other civil construction works (with a more comprehensive content) namely with a view to the costs with materials necessary to the development of the activity.

A final note to note that it is also not considered that the activity in question can be traced back to an activity connected with civil construction under Article 3, No. 1, subsection b) of the IRS Code, since the Claimant's activity is not provided in complement, in the context or in connection with the civil construction activity, it being an activity of civil construction in itself.

DECISION

We hereby decide, in this Arbitral Tribunal, to judge the arbitral opinion request formulated to be admissible and, in consequence:

  • Annul the income tax assessment deed Personal Income Tax No. 2016..., relating to the tax year 2014, of which results an amount of €2,112.27;

  • Annul the dispatch refusing the gracious complaint No. ...2016...;

  • Condemn the Respondent in the costs of the process.

D. Value of the Process

The value of the process is fixed at €2,112.27, under Article 97-A, No. 1, subsection a), of the CPPT, applicable by virtue of subsections a) and b) of No. 1 of Article 29 of the RJAT and of No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Processes.

E. Costs

The amount of the arbitration fee is fixed at €612.00 under Table I of the Regulation of Costs in Tax Arbitration Processes, to be paid by the Respondent, under Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the aforementioned Regulation.

Notify accordingly.

Lisbon, 20 April 2018

The Arbitrator

(Leonardo Marques dos Santos)

Frequently Asked Questions

Automatically Created

How are construction activity revenues classified under the IRS simplified taxation regime in Portugal?
Construction activity revenues under the IRS simplified regime are classified based on whether they constitute professional activities listed in Article 151 of the IRS Code or general commercial/service income. If the activity qualifies as a professional service per Article 151, income is declared in field 440 of Annex B with a 0.75 coefficient applied. Construction finishing and similar activities not explicitly listed in Article 151 should theoretically be declared in field 443 with a 0.10 coefficient. However, the Portuguese Tax Authority may interpret construction services broadly as professional activities, triggering the higher coefficient. The CAE code alone doesn't determine classification—the actual nature of services provided and their alignment with Article 151's professional activities table is determinative for simplified regime coefficient application.
What is the difference between field 443 and field 440 in the IRS Model 3 Annex B declaration for Category B income?
Field 443 and field 440 in IRS Model 3 Annex B represent fundamentally different income categories with distinct tax treatment. Field 440 captures income from professional activities specifically enumerated in Article 151's table, subject to a 0.75 coefficient under the simplified regime per Article 31(2)(b). Field 443 records residual Category B income not covered by previous fields, including commercial sales and non-listed service income, with a favorable 0.10 coefficient per Article 31(2)(e). The distinction is critical: declaring €17,480 in field 443 versus field 440 changes the taxable base from €1,748 to €13,110 (difference of €11,362), significantly impacting final tax liability. Taxpayers must carefully assess whether their activities constitute Article 151 professional services or general business income to ensure correct field completion and coefficient application.
Can the Portuguese Tax Authority reclassify declared income from commercial activities to service provision under the simplified regime?
Yes, the Portuguese Tax Authority can and does reclassify declared income from commercial activities to service provision under the simplified regime through audit and correction procedures. As demonstrated in this case, AT issued a preliminary notification proposing reclassification from field 443 to field 440, followed by a final decision after the taxpayer's response. This reclassification authority stems from AT's interpretation of Articles 3(1)(b) and 31(1)(b) of the IRS Code, which define professional service income. When AT identifies what it considers misclassification—such as construction services declared as residual income rather than professional services—it can administratively correct the declaration, applying the 0.75 coefficient instead of 0.10. Taxpayers may challenge such reclassifications through gracious complaints and CAAD arbitration, but AT maintains broad interpretative authority over income characterization, particularly regarding whether activities fall within Article 151's professional services scope.
How do CAE codes affect the application of simplified regime coefficients for IRS purposes in Portugal?
CAE codes serve as indicative classification tools but don't definitively determine simplified regime coefficient application for IRS purposes in Portugal. While taxpayers declare their CAE code in field 11 of Annex B (such as CAE 43390 for construction finishing), the critical determination is whether the activity constitutes a professional service under Article 151's table, not the CAE designation itself. Article 151 references specific professional activities (lawyers, doctors, engineers, etc.), and construction-related services may or may not qualify depending on their nature. The Tax Authority examines the substantive activity performed, not merely the registered CAE code. In this case, despite CAE 43390 registration, AT reclassified income as professional services subject to 0.75 coefficient. Field 10 ('Code of the Table of Activities Art. 151') was left blank by the taxpayer, suggesting they believed their CAE activity didn't correspond to Article 151 professional services, yet AT disagreed, demonstrating that CAE codes are secondary to functional activity analysis.
What are the tax implications of misclassifying service income as commercial sales under Article 31 of the Portuguese IRS Code?
Misclassifying service income as commercial sales under Article 31 of the Portuguese IRS Code creates significant adverse tax implications under the simplified regime. When service provision income that qualifies as professional activities (Article 151) is incorrectly declared in field 443 (residual income with 0.10 coefficient) instead of field 440 (professional services with 0.75 coefficient), the taxable income base is substantially understated. In this case, the €17,480 misclassification resulted in €2,112.27 additional tax liability. Beyond immediate tax shortfall, consequences include: (1) AT-initiated corrections with retroactive application of the correct 0.75 coefficient; (2) potential interest charges on underpaid amounts; (3) possible penalties for inaccurate declarations if deemed negligent; (4) administrative burden of gracious complaints and arbitration proceedings; and (5) legal uncertainty requiring professional tax advice. The classification difference between 0.10 and 0.75 coefficients represents a 650% increase in taxable base calculation, making proper initial classification essential for compliance and avoiding costly corrections.