Process: 399/2018-T

Date: March 25, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses the critical issue of coefficient application under the IRS simplified regime for commercial and industrial activities. The case involves two taxpayers who declared income under CAE codes 43330 (painting) and 96021 (hairdressing). The Portuguese Tax Authority (AT) challenged their use of field 443 on Annex B, which applies a 0.10 coefficient, arguing they should have used field 440 with a 0.75 coefficient because their activities were listed in the Article 151 CIRS table or in the CAE classification system. The male claimant performed only painting activities (not glass installation), which he argued constituted commercial/industrial activity under Article 4(1)(f) CIRS, not professional services under Article 3(1)(b). The female claimant operated a hair salon, also contending this was not a professional activity listed in the Article 151 table. The core dispute centered on whether activities classified under specific CAE codes automatically trigger the higher 0.75 coefficient merely by appearing in official classifications, or whether the actual nature of services provided determines coefficient application. The claimants emphasized that painting is a commercial activity connected to civil construction requiring no professional license under Decree-Law 12/2004. They further argued that coefficient application should align with IRC treatment, where similar activities would attract the 0.10 rate. The AT's position relied on formal classification systems and form-filling instructions from Portaria 276/2014. This decision has significant implications for thousands of self-employed taxpayers in construction-related and personal service sectors operating under the simplified regime, as incorrect coefficient application directly impacts taxable income calculations and final tax liability.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

Report

A – General

A..., taxpayer no...., and his wife B..., taxpayer no...., resident at ..., no...., ..., ...-... ... (hereinafter referred to as the Claimants), filed on 22.08.2018 a request for constitution of a sole arbitral tribunal in tax matters, which was accepted, aiming, on the one hand, and in mediato terms, to annul the assessment of Personal Income Tax (hereinafter IRS) no. 2015..., for the year 2014, in the amount of € 1,052.36 (one thousand fifty-two euros and thirty-six cents), which was notified to them by the document identified with the number 2015..., and, on the other, the recognition of the right to compensatory interest for the overpayment of tax obligation.

Pursuant to the provisions of point a) of no. 2 of Article 6 and point b) of no. 1 of Article 11 of the Legal Regime of Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter RJAT), the Deontological Council of the Administrative Arbitration Centre (CAAD) designated the undersigned as arbitrator, with the Parties, after being duly notified, raising no objection to this designation.

By order of 11.09.2018, the Tax and Customs Administration (hereinafter referred to as the Respondent) proceeded to designate Ms. Dr. C... and Ms. Dr. D... to intervene in the present arbitral proceedings, in the name and representation of the Respondent.

In accordance with what is provided in point c) of no. 1 of Article 11 of the RJAT, the Arbitral Tribunal was constituted on 29.10.2018.

On 02.11.2018 the top manager of the Respondent's service was notified to, if desired, within the period of 30 days, present a reply, request production of additional evidence and attach to the file a copy of the administrative proceedings.

On 29.11.2018 the Respondent filed its Reply and attached the administrative proceedings.

B – Position of the Claimants

The male Claimant declared the beginning of activity on 19.03.2009, under CAE code 43340 – painting and placement of glass, carrying out only the painting activity.

The female Claimant carries out the activity classified under CAE code 96021 – hair salons.

Between 2012 and 2014 the Claimants filled in Annex B of the IRS model 3 declaration referring to Category B income, opting for completion of field 1 relating to the simplified taxation regime.

In Table 3 A of said Annex – "Identification of the Passive Subject(s), field 11 – "CAE Code (Professional, Commercial and Industrial Income", the male Claimant always inserted the code 43340 – painting and placement of glass.

In turn, the female Claimant always inserted in that field the code 96021 – hair salons.

Field 10 – "Code of the Activities Table Art. 151 of the CIRS" was never filled in.

In the year 2014, the male Claimant declared "Category B Income not included in the previous fields" in the amount of € 13,933.42 (thirteen thousand nine hundred thirty-three euros and forty-two cents) (Table 4 A, field 443 of Annex B of model 3) and the female Claimant, in the same field, declared having obtained income in the amount of € 6,639.85 (six thousand six hundred thirty-nine euros and eighty-five cents).

On 29.10.2015, the Claimants received the following email message:

[Email content not reproduced in full]

The Claimants also received, dated 06.11.2015, notification for the exercise of the right to prior hearing, by which they learned that the intention of the Finance Service of ... was to carry out the corresponding correction of the values entered in Model 3 declaration.

The services of the Respondent understood that the amount of € 13,933.42 (thirteen thousand nine hundred thirty-three euros and forty-two cents) declared by the male Claimant in field 443 should instead be entered in field 440 (Income from professional activities provided in the Table of art. 151 of the CIRS and/or in the CAE correct) and that exactly the same should have happened with the amount of € 6,639.85 (six thousand six hundred thirty-nine euros and eighty-five cents) declared by the female Claimant.

Consequently, the Claimants were notified of the IRS assessment for the year 2014, with the number 2015..., in the amount of € 1,052.36 (one thousand fifty-two euros and thirty-six cents), now challenged.

It happens that the male Claimant carries out only the painting activity, not obtaining any income from the professional activities contained in the table referred to in Article 151 of the IRS Code (CIRS).

Meanwhile, the female Claimant only carries out the hairdressing activity, this activity not being included in the table referred to in said Article 151 of the CIRS.

Since the activities pursued by either of the Claimants are not entered in the table referred to in Article 151 of the CIRS, the coefficient of 0.75 cannot be applied to them for the determination of taxable income, and instead the coefficient of 0.1 should be applied, according to point e) of no. 2 of Article 31 of the CIRS, as worded on the date of the facts.

The painting activity carried out by the male Claimant is an activity connected with civil construction, being therefore a commercial and industrial activity, as provided for in point f) of no. 1 of Article 4 of the CIRS, an activity that does not require any licence, as it is not covered by Decree-Law no. 12/2004, of 9 January.

The Claimants further contend that the coefficient to be applied to their income cannot be different from that which would have been applied had the Claimants established a company through which to carry out the same activities they exercise in their individual capacity, and that in the IRC context the coefficient would be 0.10.

The Claimants conclude their request, also requesting the condemnation of the Respondent to payment of compensatory interest, pursuant to Article 43 of the General Tax Law (LGT).

C – Position of the Respondent

By way of defense, the Respondent argues, first, that Table 4 A of Annex B is intended for gross income arising from the exercise of professional, commercial and industrial activities, or isolated acts of that nature, as defined in Articles 3 and 4 of the CIRS.

Field 443 refers to "Category B income not included in the previous fields" and is intended for the indication of remaining Category B income, namely the provision of services which by virtue of Article 4 of the CIRS may be classified under point a) of no. 1 of Article 3 of the CIRS, provided they are not foreseen in points a) to d) and the first part of point e) of no. 2 of Article 31 of that act.

That is, field 443 is intended for income "arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity", in accordance with point a) of no. 1 of Article 3 CIRS, which is not the case of the Claimants.

Field 440 "Income from professional activities provided in the Table of art. 151 of the CIRS and/or in the CAE", is intended for the indication of income obtained in the exercise on own account of any activity of provision of services which has classification under point b) of no. 1 of Article 3 CIRS or in accordance with the codes mentioned in the activities table approved by Ordinance 1011/2001, of 21 August.

Thus, as long as the activity carried out is included in the table of Article 151 CIRS or in the CAE list, the income must be entered in field 440, as stated in the description of that field.

This is moreover the conclusion that can be drawn from the filling instructions of the forms intended to fulfill the declarative obligation provided for in no. 1 of Article 57 of the CIRS, approved by Ordinance no. 276/2014, of 26 December.

For the year 2014, the entry of income has repercussions on the choice of the coefficient for determination of taxable income: field 440 corresponds to the taxation coefficient of 0.75, while in field 443, the coefficient to be applied is 0.10, according to points b) and e) of no. 1 of Article 31 of the CIRS.

In this sense, Circular 5/2014 clarifies that the coefficient of 0.75, provided for in point b) of no. 2 of Article 31 of the CIRS (Field 440 of Table 4 A of Annex B of the Model 3 Declaration of IRS) applies to the provision of services that have classification under point b) of no. 1 of Article 3 of the CIRS.

It further clarifies that said Circular 5/2014 that excluded from taxation with a coefficient of 0.75, only the income from commercial and industrial activities operating through the provision of services referred to in point a) of no. 1 of Article 3 of the CIRS, provided they are foreseen in Article 4 of the same act, which is manifestly not the case of the Claimants.

With regard to payment of compensatory interest, the Respondent contends that the act of assessment in question does not suffer from a defect that should dictate its annulment, so no compensatory interest is due to the Claimants.

D – Conclusion of the Report and Case Management

By order of 24.01.2019, the arbitral tribunal decided to dispense with the holding of the meeting referred to in Article 18 of the RJAT, having invited the Parties to, if desired, submit written arguments, also setting the rendering of the decision for 29.03.2019.

The Claimants submitted their arguments on 05.02.2019, reproducing the legal argumentation already included in the request for arbitral pronouncement and contending that Circulars are mere administrative guidelines, not binding individuals and much less the courts, which are only bound by law and the general principles governing the legal order.

The Respondent submitted its arguments on 14.02.2019, reiterating what it had already had occasion to set out in the Reply.

The Arbitral Tribunal is materially competent, pursuant to the provisions of Article 2, no. 1, point a) of the RJAT.

The Parties enjoy legal personality and capacity, have standing pursuant to Article 4 and no. 2 of Article 10 of the RJAT, and Article 1 of Ordinance no. 112-A/2011, of 22 March, and are duly represented.

The proceedings do not suffer from any nullity.

Factual Matter

2.1. Established Facts

The male Claimant declared his beginning of activity on 19.03.2009, under CAE code 43340 – painting and placement of glass.

The male Claimant carries out only the painting activity.

The female Claimant carries out the activity classified under CAE code 96021 – hair salons.

Between 2012 and 2014 the Claimants filled in Annex B of the IRS model 3 declaration referring to Category B income, opting for completion of field 1 relating to the simplified taxation regime.

In Table 3 A of said Annex – "Identification of the Passive Subject(s), field 11 – "CAE Code (Professional, Commercial and Industrial Income", the male Claimant always inserted the code 43340 – painting and placement of glass.

Field 10 – "Code of the Activities Table Art. 151 of the CIRS" was never filled in.

In the year 2014, the male Claimant declared "Category B Income not included in the previous fields" in the amount of € 13,933.42 (thirteen thousand nine hundred thirty-three euros and forty-two cents) (Table 4 A, field 443 of Annex B of model 3) and the female Claimant, in the same field, declared having obtained income in the amount of € 6,639.85 (six thousand six hundred thirty-nine euros and eighty-five cents).

On 29.10.2015, the Claimants received the following email message:

[Email content not fully reproduced]

The Claimants also received, dated 06.11.2015, notification for the exercise of the right to prior hearing, by which they learned that the intention of the Finance Service of ... was to carry out the corresponding correction of the values entered in Model 3 declaration.

After the period granted to the passive subjects to replace the declaration they had submitted had elapsed without doing so, the services of the Respondent promoted an ex officio IRS assessment for the year 2014, with the number no. 2015..., for the year 2014, in the amount of € 1,052.36 (one thousand fifty-two euros and thirty-six cents), reflecting the application of the coefficient of 0.75 provided for in Article 31, no. 2, point b), of the CIRS.

The Claimants proceeded to pay the IRS assessment in question in accordance with an installment plan.

2.2. Unestablished Facts

There are no facts relevant to the appraisal of the merits of the case that have been given as unestablished.

2.3. Grounds for the Determination of Factual Matter

The facts were established on the basis of critical appraisal and assessment of the documents attached to the file by the Parties and the positions taken by them in the pleadings submitted.

Legal Matter

3.1. Issues to Be Decided

It follows from what has been stated above that the issues to be assessed are, in essence, the following:

  1. To determine which of the coefficients provided for in no. 2 of Article 31 of the CIRS (as worded in the year 2014) should be applied to the income obtained by the Claimants; and

  2. To clarify whether, should the request for annulment of the contested assessment act be judged well-founded, the Claimants, in the context of the present arbitral proceedings, may obtain the condemnation of the Respondent to payment of compensatory interest regarding the amount improperly delivered to satisfy illegally required tax obligation.

3.2. Legal Framework – Applicable Norms, Their Meaning and Scope

As stated, the Tax and Customs Administration understood that the amount of € 13,933.42 (thirteen thousand nine hundred thirty-three euros and forty-two cents) declared by the male Claimant in field 443 should be entered in field 440 (Income from professional activities provided in the Table of art. 151 of the CIRS and/or in the CAE correct) and that exactly the same should have happened with the amount of € 6,639.85 (six thousand six hundred thirty-nine euros and eighty-five cents) declared by the female Claimant.

In its original version, the CIRS, approved by Decree-Law no. 442-A/88, of 30 November, provided for a Category B for self-employed work, in Article 3; a Category C for commercial and industrial income, in Article 4; and, in Article 5, a Category D for agricultural income. By Law no. 30-G/2000, of 29 December, these three categories were merged into what is today a broad Category B.

Until the year 2014, Article 31, no. 1 of the CIRS provided the following:

Article 31
Simplified Regime

1 - The determination of taxable income results from the application of objective indicators based on technical-scientific principles for the different sectors of economic activity.

2 - Until the approval of the indicators mentioned in the preceding number, or in their absence, taxable income is obtained by adding to income from the provision of services by a partner to a company covered by the tax transparency regime, pursuant to point 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 the coefficient of 0.75 to remaining income from this category, excluding the variation of production.

Law no. 83-C/2013, of 31 December, the State Budget Law for 2014, amended no. 2 of that provision, which came to have the following wording:

2 - Until the approval of the indicators mentioned in the preceding number, or in their absence, taxable income is obtained by adding to income from the provision of services by a partner to a company covered by the tax transparency regime, pursuant to point b) of no. 1 of Article 6 of the Corporate Income Tax Code, the amount resulting from the application of the following coefficients:

a) 0.15 of sales of goods and products, as well as of the provision of services within the scope of hotel and similar activities, catering and beverages;

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

c) 0.95 of income from contracts having as their object the transfer or temporary use of intellectual or industrial property or the provision of information regarding experience acquired in the industrial, commercial or scientific sector, income from capital attributable to activities generating business and professional income, the positive result of real estate income, the positive balance of gains and losses and remaining capital increases;

d) 0.30 of subsidies or subventions not intended for operation;

e) 0.10 of subsidies intended for operation and remaining Category B income not foreseen in the preceding points.

For the year 2014, therefore, the entry of income in one field or another of Table 4 A of Annex B of model 3 of the IRS income declaration has repercussions on the choice of the coefficient for determination of taxable income. This is because field 440 corresponds to the taxation coefficient of 0.75, while in field 443, the coefficient to be applied is 0.10, according to points b) and e) of no. 1 of Article 31 of the CIRS.

For purposes of mere curiosity, as it is not applicable to the case that must be decided, Article 31, to be effective from 2015, by Law no. 82-E/2014, of 31 December, came to have another wording which, for what is of interest here to establish, was the following:

1 — Within the simplified regime, the determination of taxable income is obtained through the application of the following coefficients:

(…)

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

(…)

f) 0.10 to subsidies intended for operation and remaining Category B income not foreseen in the preceding points;

Let us examine, therefore, first of all, what the applicable legal norms provided (with the wording in which they were read on the date to which the facts refer - 2014):

Article 3
Category B Income

1 - The following are considered business and professional income:

a) Those arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;

b) Those obtained in the exercise, on own account, of any activity of provision of services, including those of a scientific, artistic or technical character, whatever their nature, even if connected with the activities mentioned in the preceding point;

Article 4
Commercial, Industrial, Agricultural, Forestry and Livestock Activities

1 - The following are considered commercial and industrial activities, namely:

(…)

f) Civil construction;

Article 31
Simplified Regime

1 - The determination of taxable income results from the application of objective indicators based on technical-scientific principles for the different sectors of economic activity.

2 - Until the approval of the indicators mentioned in the preceding number, or in their absence, taxable income is obtained by adding to income from the provision of services by a partner to a company covered by the tax transparency regime, pursuant to point 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 operation and remaining Category B income not foreseen in the preceding points.

Article 151
Classification of Activities

The activities carried out by passive subjects of the IRS are classified, for purposes of this tax, in accordance with the Classification of Portuguese Economic Activities by Activity Branch (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in an activities table approved by ordinance of the Minister of Finance.

Table of activities of Article 151 of the CIRS

(…)

15 - Other exclusively service provision activities:

1519 Other service providers.

These are the legal provisions just transcribed which must clarify which of the coefficients shows itself applicable, in 2014, to the activities pursued by the Claimants.

The case before us is not of easy solution and has already been submitted several times to the appreciation of the arbitral justice of the CAAD, and there are, moreover, contradictory decisions.

It is read in point b) of no. 2 of Article 31 that the coefficient of 0.75 applies to income from professional activities contained in the table referred to in Article 151. This table, as seen, does not specifically contemplate any of the activities pursued by the Claimants. However, mention is made therein of "other exclusively service provision activities", which suggests that the table, in addition to the activities expressly and nominally provided therein, suggests the existence of "other service providers", to whom falls the code 1519. It appears, therefore, that the table encompasses all activities that assume themselves as being genuine and exclusively service provision, with the legislator apparently not wishing, for these purposes, to establish differences between them.

However, it will always be said that there are differences. It is sufficient to note what Articles b) and c) of no. 1 of Article 101 of the CIRS provided, regarding withholding at source. The withholding of 25% concerns income arising from professional activities specifically provided in the table referred to in Article 151, while other Category B income is subject to a lower withholding of 11.5% (underlined). Now, this difference does not cease to raise hermeneutical doubts when we seek to discover the scope of Article 31 of the CIRS. On the one hand it is clear that when the legislator wishes to distinguish, it expressly assumes that distinction (therefore, if it distinguishes in Article 101 activities that are contained specifically in said activities table from others that are not nominally contemplated therein and does not make the same distinction in Article 31 it is because it assumes the consequences of that different treatment). On the other hand, it is not strange that the legislator assumes different withholding percentages at source for income from activities specifically provided in the table referred to in Article 151 as opposed to those arising from other service provision, for example, when, in them it does not see any difference for purposes of determination of taxable income.

In the table of professional activities to which Article 151 of the CIRS refers (Ordinance no. 1011/2001, of 21 August), it is repeated, the activity of "painting and placement of glass" is not expressly listed, nor that of "hair salons". However, these same activities are contemplated in the classification of Portuguese economic activities by activity branch (CAE), specifically under codes 43340 and 96021, respectively, and it is certain that field 440, the one that the Respondent understands should have been considered, of Table 4 A of Annex B of model 3 of the IRS income declaration, provides that therein should be included the "income from professional activities provided in the Table of art. 151 of the CIRS and/or in the CAE".

It is worth noting that there is no proper legal provision that presents exact correspondence with the terminology used in said annex. The law, in fact, does not expressly speak of "income from professional activities provided in the Table of art. 151 of the CIRS and/or in the CAE". However, as already seen, in point b) of no. 2 of Article 31 it is read that the coefficient of 0.75 applies to income from professional activities contained in the table referred to in Article 151, with explicit mention being made therein of "other exclusively service provision activities". Moreover, said Article 151 refers that the activities carried out by passive subjects of the IRS are classified, for purposes of this tax, in accordance with the Classification of Portuguese Economic Activities by Activity Branch (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in an activities table approved by ordinance of the Minister of Finance.

Moreover, the instructions of Annex B of the already several times mentioned model 3 clarify that:

Field 440 is intended "for the indication of income obtained in the exercise, on own account, of any activity of provision of services which has classification under point b) of no. 1 of Article 3 of the CIRS, regardless of whether the activity exercised is classified in accordance with the Portuguese Classification of Economic Activities (CAE), of the National Institute of Statistics, or in accordance with the codes mentioned in the activities table approved by Ordinance no. 1011/2001, of 21 August, including the activity with the code "1519 – Other service providers""; and

Field 443 is intended "for the indication of remaining Category B income, namely, the provision of services which by virtue of Article 4 of the IRS Code may be classified under point a) of no. 1 of Article 3 of said code, provided they are not foreseen in points a) to d) and the first part of point e) of no. 2 of Article 31 of this code and thus not included in the previous fields of this table".

Also Circular no. 5/2014, of the Directorate of Services of the Personal Income Tax, of 20 March 2014, goes in the same direction:

"1. Included in point b) of no. 2 of Article 31 of the IRS Code is income obtained in the exercise, on own account, of any activity of provision of services that has classification under point b) of no. 1 of Article 3 of the same Code, regardless of whether the activity exercised is, pursuant to Article 151 of the IRS Code, classified in accordance with the Portuguese Classification of Economic Activities (CAE) of the National Institute of Statistics, or in accordance with the codes mentioned in the activities table approved by Ordinance no. 1011/2001, of 21 August, including the activity with the code "1519 Other service providers" since the normative in question does not refer to the activities identified in a specific manner in the activities table, as opposed to what occurs in point b) of no. 1 of Article 101 of the IRS Code for purposes of withholding at source."

Analyzed the facts from this perspective, it is to be believed that the legislator, at least for 2014, even if the technical and even political infelicity of the choices made may be noted, intended that activities which may be reduced to pure service provision have an identical, uniform, unique treatment, which implies, in the case, the application, to any of them, of the coefficient of 0.75 referred to in point b) of no. 2 of Article 31 of the CIRS.

This conclusion does not ignore the place that ordinances and circulars occupy in the hierarchy of sources. They could not prevail if they provided in a manner contrary to what is provided by law. We do not believe, however, that this is the case. It does not appear that the legislator intended anything different from what is contained in the Annex and its instructions and even the mentioned Circular 5/2014. Indeed, where the legislator did not distinguish, the interpreter should not distinguish, and it should be presumed that the legislator knew how to adequately express its thought in the legal texts, as required by no. 3 of Article 9 of the Civil Code, applicable by virtue of Article 11 of the LGT.

Everything comes down to knowing, therefore, whether the Claimants obtain income in the exercise on own account of any activity of provision of services, whatever their nature or in the exercise of a commercial activity (as provided for in Article 4 of the CIRS).

The arbitral tribunal understands that, in order to properly assess the case, it is necessary to take into account the activities actually pursued by each of the Claimants.

As stated, the male Claimant declared his beginning of activity under CAE code 43340 – painting and placement of glass, pursuing the painting activity. The female Claimant, meanwhile, carries out the activity classified under CAE code 96021 – hair salons. Let us begin with this.

3.3. The Hair Salon Activity

The female Claimant carries out the activity classified under CAE code 96021 – hair salons. It does not appear to be in doubt that this activity fits perfectly within point b) of no. 1 of Article 3 of the CIRS, and cannot be considered that this activity falls within point a) of the same provision, as it is not "commercial, industrial, agricultural, forestry or livestock". In fact, one cannot see to which point of no. 1 of Article 4 the hair salon activity could be associated. Thus, it applies to it, in crystal clear terms, point b) of no. 1 of Article 3 of the CIRS.

As has also been seen, the reading that this arbitral tribunal makes of no. 2 of Article 31 of the CIRS only allows for viewing the income arising from this activity as being income from professional activities contained in the table referred to in Article 151 of the same act, namely from the entry 1519 "other service providers", integrated in the "other exclusively service provision activities".

Article 1154 of the Civil Code fixes the notion of a service provision contract, as being that in which one of the parties undertakes to provide the other with a certain result of their intellectual or manual work, with or without remuneration. There is no doubt that the hair salon activity incorporates without flaw this notion of service provision.

Thus, to the income from this activity should be applied the coefficient provided for in point b) of no. 2 of Article 31 of the CIRS, with entry of the same in field 440 of Table 4 A of Annex B of model 3 of the IRS income declaration, as was indeed done by the ex officio assessment now challenged.

3.4. The Painting and Placement of Glass Activity

The male Claimant declared his beginning of activity under CAE code 43340 – painting and placement of glass, dedicating himself to the painting activity. Here, with respect to this activity, perhaps the same reasons adduced above for the female Claimant's activity do not apply.

It appears to this arbitral tribunal that the problem was well perceived in the arbitral decision rendered in proceedings 372/2017-T which took place in the CAAD. There it was considered that the activity of the then claimant (43390 – Other building finishing activities) should be considered, for these purposes, as a commercial activity, bringing about the application of Articles 3, no. 1, point a) and 4, no. 1, point f) of the CIRS and, consequently, a coefficient of 0.10.

Point f) of no. 1 of Article 4 of the CIRS says that commercial and industrial activities are considered to be, namely, those of civil construction. The Respondent contends that a "licence" issued pursuant to Decree-Law no. 12/2004, of 9 January, is necessary in order for the applicable coefficient to be 0.10 (rather than 0.75) and only in that situation could the income be entered in field 443. It happens that the male Claimant does not possess any licence for the pursuit of his activity. The Claimants themselves in the request for arbitral pronouncement recognize that although the activity pursued by him has a connection with the activity of construction it is not included therein, for purposes of what is provided in Decree-Law no. 12/2004, of 9 January, which is why he does not have a licence.

Decree-Law no. 12/2004, of 9 January, establishes the legal regime applicable to the exercise of the construction activity, considering construction activity to be that which has as its object the completion of a work, encompassing the entire set of acts that are necessary for its implementation. In turn, a work is any work of construction, reconstruction, enlargement, alteration, repair, maintenance, rehabilitation, cleaning, restoration and demolition of immovable property, as well as any other work that involves a construction process. The same act establishes that the exercise of construction activity depends on a licence to be granted by the Institute of Markets for Public Works and Private Real Estate.

However, it appears to be clear that it does not result from the applicable tax norms the reference to a licence or the necessity of its existence.

As seen, point f) of no. 1 of Article 4 of the CIRS considers civil construction activities as being commercial and industrial activities. Thus, it appears that civil construction activities may make use of field 443, with the coefficient of 0.1 being applied to them, pursuant to point e) of no. 2 of Article 31 of the CIRS. This is because said field 443 serves for the entry therein of remaining Category B income, namely, the provision of services which by virtue of Article 4 of the CIRS may be classified under point a) of no. 1 of Article 3 of said code, provided they are not foreseen in points a) to d) and the first part of point e) of no. 2 of Article 31 of this code and thus not included in the previous fields of this table.

If we look to the Portuguese Classification of Economic Activities we will see that the male Claimant pursues an activity with the CAE code 43340 – painting and placement of glass. We are, therefore, in Section F, precisely that of construction. There it is stated that the "construction activity covers the demolition of buildings and other constructions, the preparation and arrangement of work sites, the opening of galleries, drainages, dredging, soundings, foundations, land consolidation, general construction work (especially the complete construction of buildings for residential, office, commercial purposes, highways, bridges, tunnels, ports, railways, airports, etc.), specialized construction work (comprises the construction of certain parts of works), installation activities (piping, heating, thermal insulation, electrical, etc.) specialized finishing activities (plastering, placement of glass, painting, etc.) and the rental of construction and demolition equipment with operator (underlined)." The section in question is 43 (specialized construction activities), which comprises specialized activities, such as: finishing of buildings (placement of glass, plastering, painting) (underlined). Code 43340 specifically covers the activities of interior or exterior painting (decorative or protective, including against fire) and the execution of glazing work, aimed directly at its placement in buildings or in other construction works (installation of glass, mirrors and other glass).

It seems, therefore, that the conclusion must be imposed, for these purposes, that the male Claimant dedicates himself to a civil construction activity, taken by Article 4 to be a commercial and industrial activity and classifiable, therefore, under point a) of no. 1 of Article 3 of the CIRS, with the respective income to be entered in field 443 of Table 4 A of Annex B of model 3 of the IRS income declaration.

It is certain that the male Claimant does not have a licence, but, as is stated in arbitral decision 372/2017-T, which we also follow in this respect, the regulatory aspects, which may eventually impose the requirement of a licence, should not be confused with the tax perspective, namely at the level of the qualification of income, which may well dispense with regulatory impositions of that sort. As is stated there, the tax concept may not entirely accompany the commercial concept or others provided for in other legal provisions (which may call for special regulatory requirements, founded on the protection of public order, consumer protection, or others).

Also this arbitral tribunal understands that, in the absence of a true tax concept of service provision or of commercial activity, these being concepts whose extension in their respective branches of origin are not exactly transposable to tax law, recourse to open lists of activities implies – so the principle of legal certainty requires – that the activities described in the tables or lists be understood in a broad manner. As can be read in the decision we have cited, "where there are doubts between qualifying a certain activity as commercial or service provision – and there are, manifestly, gray areas – the first criterion should be the framework thought by the legislator, that is, to reduce to the qualification existing in the lists (of Article 4 or of the table referred to in Article 151) even if that qualification requires a broad reading of the described activities". Further on, "in any case, in the situation under analysis, the activity developed by the Claimant (building finishes and flooring covering) being framed, in the understanding of this Tribunal, in a common concept of civil construction should equally merit framing in the category of civil construction provided in the IRS Code since from the point of view of the obtaining of income, the manner of obtaining income, in the case of the Claimant will not be very different from other civil construction works (with a more comprehensive content) namely having in view the costs with materials necessary to the development of the activity".

Thus, it is understood that for the income obtained by the male Claimant from the activity with CAE code 43340 – painting and placement of glass the coefficient 0.1 and not 0.75 shall be applied, as was done by the challenged assessment, with which the consequent partial annulment of said assessment is imposed.

3.5. Compensatory Interest

Point b) of no. 1 of Article 24 of the RJAT provides that "the arbitral decision on the merits of the claim to which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, with the administration, in the exact terms of the well-foundedness of the arbitral decision in favor of the passive subject and until the end of the period provided for voluntary execution of sentences of the tax courts, restoring the situation that would exist if the tax act subject of the arbitral decision had not been enacted, adopting the acts and operations necessary for that effect", which is in harmony with what is provided for in Article 100 of the LGT, applicable by virtue of the provision in point a) of no. 1 of Article 29 of the RJAT.

It is not ignored that the legislative authorization granted to the Government by Article 124 of Law no. 3-B/2010, of 28 April, on the basis of which the RJAT was approved, determines that the tax arbitral process constitutes an alternative procedural means to the process of judicial challenge and to the action for the recognition of a right or legitimate interest in tax matters. Even if points a) and b) of no. 1 of Article 2 of the RJAT found the competence of arbitral tribunals in "declarations of illegality", it seems reasonable the understanding that the powers that in the judicial challenge process are attributed to the tax courts are comprised in their competences, it being certain that in judicial challenge processes, in addition to the annulment of tax acts, requests for compensation may be assessed, particularly regarding compensatory interest.

Indeed, the principle of cognoscibility of requests for compensation, in amicable reclamation or in judicial proceedings, is justified whenever the damage that is sought to be redressed results from fact imputable to the Tax and Customs Administration. Moreover, pursuant to no. 5 of Article 24 of the RJAT "payment of interest is due, regardless of its nature, pursuant to the provisions of the General Tax Law and the Code of Tax Procedure and Process" (CPPT), which refers to the manifestations of this principle that we find in no. 1 of Article 43 of the LGT and in Article 61 of the CPPT.

Thus, the assessment of the request for payment of compensatory interest made by the Claimants is justified.

Compensatory interest is due when it is determined, in amicable reclamation or judicial challenge, that there has been error imputable to the services from which results payment of the tax debt in an amount higher than what is legally due.

Now, having the Claimants paid the tax which by the challenged assessment and now partially annulled was, by error imputable to the services, required of them, they have the right not only to the reimbursement of everything they paid in excess, but also to receive compensatory interest counted from the date of the payment of that excess (taking into account the installment plan they benefited from), until its full reimbursement.

Decision

On the basis and for the reasons set out above, the Arbitral Tribunal decides:

  1. To judge partially well-founded the request for arbitral pronouncement, condemning the Respondent to consider, for purposes of determining the taxable income of the Claimants in the year 2014, that the income of the male Claimant obtained within his activity of CAE 43340 – painting and placement of glass, in the amount of € 13,933.42 (thirteen thousand nine hundred thirty-three euros and forty-two cents) must be entered in field 443 of Table 4 A of Annex B of model 3, with the coefficient of 0.1 being applicable to them.

  2. Consequently, to partially annul the act of assessment identified with the no. 2015..., for the year 2014, in the amount of € 1,052.36 (one thousand fifty-two euros and thirty-six cents).

  3. To judge well-founded the request for condemnation of the Respondent to payment of compensatory interest, at the legal rate, with it being counted only on the amount improperly paid, from the date of the payment of the undue tax obligation (having regard to the installment plan) until its full reimbursement.

Value of the Proceedings

When a tax assessment act is challenged, the value of the case is that of the importance whose annulment is sought, which corresponds to the economic benefit of the claim. Thus, in harmony with the provision of no. 2 of Article 306 of the Civil Procedure Code, Article 97-A of the Tax Code of Procedure and Process and also no. 2 of Article 3 of the Regulations on Costs in Tax Arbitration Proceedings, the value of € 1,052.36 (one thousand fifty-two euros and thirty-six cents) is fixed for the proceedings, the amount which the Claimants indicated as the value of the case and which was not disputed by the Respondent.

Costs

For the purposes of the provision in no. 2 of Article 12 and in no. 4 of Article 22 of the RJAT and no. 4 of Article 4 of the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 306.00 (three hundred and six euros), pursuant to Table I attached to said Regulations, to be borne by the Parties in the proportion of their respective non-success, namely: 32.27% (thirty-two point twenty-seven percent) by the Claimants and 67.73% (sixty-seven point seventy-three percent) by the Respondent.

Lisbon, 25 March 2019

The Arbitrator

(Nuno Pombo)

Text produced by computer, pursuant to no. 5 of Article 131 of the Civil Procedure Code, applicable by referral of point e) of no. 1 of Article 29 of the RJAT and in accordance with the spelling prior to said Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

How are IRS simplified regime coefficients applied to commercial and industrial activities under Portuguese tax law?
Under the IRS simplified regime, coefficients are applied to gross income to determine taxable income for Category B taxpayers. For commercial and industrial activities defined under Article 4(1)(f) CIRS, the applicable coefficient is generally 0.10 pursuant to Article 31(2)(e) CIRS. However, if the activity also qualifies as a professional service listed in the Article 151 CIRS table or corresponds to specific CAE codes, the coefficient increases to 0.75 under Article 31(2)(a). The determination hinges on the actual nature of services provided, not merely formal classification. Commercial activities connected to construction, such as painting, are typically considered industrial/commercial rather than professional services, unless they require specific professional qualifications or licenses under sector-specific legislation like Decree-Law 12/2004.
What role does the Article 151 CIRS activity table play in determining the applicable coefficient in the simplified regime?
The Article 151 CIRS activity table plays a determinative role in coefficient selection within the IRS simplified regime. Activities listed in this table are presumed to be professional services subject to the 0.75 coefficient when declared in field 440 of Annex B. The table works in conjunction with CAE code classifications approved by Portaria 1011/2001. If a taxpayer's activity appears in either the Article 151 table or matches specified CAE codes, the Tax Authority typically requires use of field 440 with the higher coefficient. However, taxpayers can challenge this classification if their actual performed activities differ from the broader CAE description or if the activity constitutes commercial/industrial work rather than professional services requiring specialized qualifications. The burden falls on taxpayers to demonstrate that despite CAE classification, their specific activities fall outside Article 151's scope.
Can a taxpayer classified under CAE code 43340 (painting and glass installation) be subject to different IRS coefficients than declared?
Yes, a taxpayer classified under CAE 43330 (painting and glass installation) can be subject to different IRS coefficients than originally declared. The Tax Authority may reclassify income from field 443 (0.10 coefficient for commercial/industrial activities) to field 440 (0.75 coefficient for professional services) if it determines the activity falls within the Article 151 CIRS table or matches CAE codes associated with professional services. However, if the taxpayer performs only painting activities without glass installation and can demonstrate this constitutes commercial/industrial work under Article 4(1)(f) CIRS rather than professional services under Article 3(1)(b), they may contest the reclassification. The actual work performed matters more than CAE registration alone. Taxpayers should ensure their CAE code precisely reflects activities performed and maintain documentation proving the commercial rather than professional nature of their services to support the lower coefficient application.
What is the procedure for challenging an IRS tax assessment through CAAD arbitration in Portugal?
To challenge an IRS assessment through CAAD arbitration, taxpayers must file a request for constitution of an arbitral tribunal under the RJAT (Decree-Law 10/2011). The request must be submitted within the legal deadline after receiving the assessment notification. Upon acceptance, the CAAD Deontological Council designates an arbitrator, subject to party objection rights under Article 11 RJAT. The tribunal is formally constituted once the arbitrator accepts appointment, typically within weeks. The Tax Authority is notified and given 30 days to file a reply (contestação) and submit the administrative file. The procedure offers a faster, specialized alternative to administrative courts for tax disputes. Taxpayers must clearly identify the contested act, legal grounds for annulment, and requested relief (including compensatory interest claims under Article 43 LGT). CAAD arbitration is particularly suitable for technical disputes involving coefficient application, activity classification, and interpretation of tax regime requirements where specialized tax law expertise is essential.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is annulled by a CAAD arbitral tribunal?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is annulled by a CAAD arbitral tribunal, pursuant to Article 43 of the General Tax Law (LGT). Compensatory interest applies when the Tax Authority is held responsible for undue tax payment or delay in refunding amounts to which the taxpayer was entitled. The interest compensates for the State's use of funds that should not have been collected. The right arises automatically upon favorable decision without requiring separate proof of damages. Interest accrues from the date of undue payment until actual refund, calculated at the legal rate established for tax obligations. In cases where the Tax Authority incorrectly applied a 0.75 coefficient instead of 0.10, resulting in overpayment, the annulment decision triggers the compensatory interest obligation. Taxpayers should explicitly request this relief in their arbitration petition to ensure the tribunal addresses it in the decision, though the right exists independently under LGT provisions protecting taxpayers from wrongful State retention of funds.