Process: 40/2017-T

Date: July 28, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision addresses whether taxpayers under the IRS simplified regime can deduct mandatory social protection contributions when they also earn employment income. The claimant, a lawyer, earned both employment income (€19,894.76) and self-employment income (€21,096) in 2015. He declared €5,151 in contributions to the Lawyers and Legal Representatives Provident Fund on Annex B but the Tax Authority rejected this deduction, arguing that since he benefited from the social security deduction under article 25(1)(a) for his employment income, he could not also deduct contributions on his self-employment income. The Tax Authority interpreted article 31(2) of the IRS Code restrictively, claiming the deduction is personal and limited to employment income. The tribunal analyzed article 31(2), which allows simplified regime taxpayers to deduct mandatory social protection contributions exceeding 10% of gross income 'when they have not been deducted under another heading.' The arbitrator found the provision's wording clear and direct, suggesting the deduction should apply to contributions specifically connected to the self-employment activity, separate from employment-related deductions. The case establishes important precedent for mixed-income taxpayers under the simplified regime, clarifying that social protection contributions attributable to different income categories can be treated independently for deduction purposes.

Full Decision

ARBITRAL DECISION

I – REPORT

1. A…, with NIF … (hereinafter referred to only as the Claimant), domiciled for tax purposes at Rua …, no. …, …, in Porto, filed on 13-01-2017 a request for constitution of the arbitral tribunal, pursuant to the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in conjunction with article 102 of the TCPT, in which the Tax and Customs Authority is required (hereinafter referred to only as the Respondent).

2. The claimant seeks, with its request, the declaration of illegality of the income tax assessment no. 2016…, relating to the year 2015 and the act refusing the administrative claim related to it, with the consequent reimbursement of the tax paid, as well as the recognition of the right to compensatory interest.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-01-2017.

3.1. The respondent did not proceed to appoint an arbitrator, whereby, under the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LFATM, the President of the Deontological Council appointed the undersigned as arbitrator of the arbitral tribunal, who communicated acceptance of the appointment within the legal period.

3.2. On 06-03-2017 the parties were notified of the appointment of the arbitrator, and no impediment was raised.

3.3. In accordance with the provisions of paragraph c) of no. 1 of article 11 of the LFATM, the arbitral tribunal was constituted on 21-03-2017.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to assess and decide the object of the proceedings.

4. To substantiate the request for arbitral pronouncement, the claimant alleges, in summary, the following:

To have earned, in the year 2015, income from dependent labour and professional income, the latter relating to the exercise of professional activity provided for in the IRT table and to other provision of services.

Having submitted an income declaration, he consequently inserted, with respect to independent work, in Annex B to Model 3, €17,500.00 in field 403 and €3,598.06 in field 04.

Simultaneously he declared in field 701 of the same Annex B, the sum of €5,151.00 relating to contributions to the Lawyers and Legal Representatives Provident Fund.

This deduction not having been accepted by the Tax and Customs Administration, he filed an administrative claim of the income tax assessment notified to him, with a view to the acceptance of that deduction and consequent rectification of the net amount of income earned as an independent worker.

He does not accept the refusal order issued in that administrative claim.

Therefore, the claimant concludes that the assessment that is the object of the arbitral request is illegal, as is the aforementioned refusal order.

5. The Tax and Customs Authority submitted a response, having argued in summary:

The possibility of deduction of mandatory contributions to social protection schemes may only occur if those have not been deducted under another heading.

As the claimant benefited, because he obtained income from dependent labour, from the deduction for social protection schemes under article 25 of the IRT, the specific deduction is prejudiced.

The possibility of deduction of mandatory contributions to a social protection scheme are personal and for income from labour.

Therefore, the respondent concludes that the assessment act contested by the claimant is legal and should, thus, be maintained.

6. By order of 01-06-2017, the meeting of article 18 of the LFATM was waived and, with the consent of the parties, the submission of arguments.

II – SANATION

7.1. The tribunal is competent and regularly constituted.

7.2. The parties have legal standing and capacity, show themselves to be legitimate and are regularly represented (articles 4 and 10, no. 2, of the LFATM and article 1 of Ordinance no. 112-A/2011, of 22 March).

7.3. The proceedings do not suffer from nullities.

III – MATTERS OF FACT AND LAW

III.1. Matters of Fact

8. Matters of Fact

8.1. Having regard to the positions assumed by the parties and to the documentary evidence attached to the file, the following facts are considered proven, relevant to the assessment and decision of the issues raised:

a) The claimant submitted an income declaration relating to the year 2015, having declared, through Model 3, income from dependent labour and business income;

b) He declared in Annex A, as income from dependent labour, €19,894.76;

c) And, in field 403 of Annex B, the sum of €17,500.00 relating to income from the exercise of activity provided for in the table of article 151 of the IRT, with code 6010, that is, lawyer;

d) And the sum of €3,596.00, in field 404 of the same Annex, relating to income from other services provided, included in CAE 69101, legal activities;

e) He inserted in the same Annex, in field 701, the amount of €5,151.00 relating to contributions to the Lawyers and Legal Representatives Provident Fund;

f) The claimant filed an administrative claim of the income tax assessment resulting from that declaration, which resulted in a refusal order that was notified to him electronically, on 10-01-2017;

g) The tax is paid, as a result of withholdings at source made.

8.2. Substantiation of the Matters of Fact:

The matters of fact given as proven are based on the critical examination of the documentary evidence attached to the file, which is reproduced herein.

There are no other facts of relevance to the assessment of the merits of the proceedings that have not been proven.

III.2. Matters of Law

As results from the arbitral request, the sole issue submitted to the tribunal's assessment consists in determining whether, and under what conditions, the deduction of mandatory contributions to social protection schemes is admissible for taxpayers who earn professional income covered by the simplified tax regime for income tax, pursuant to article 31 of the respective code.

The claimant argues that such deduction is admissible, whereas the respondent considers that, given the fact that he also earned income from dependent labour and, by virtue of that, benefited from the specific deduction provided for in article 25, no. 1, paragraph a) of the IRT, such possibility is barred for him.

Let us then examine:

According to the provisions of the IRT, the determination of professional income of taxpayers who, in the exercise of their activity, have not exceeded in the immediately preceding tax period an annual gross amount of income of that category of €200,000.00, are subject, unless they opt for the determination of income on the basis of organized accounting, to the rules arising from the simplified regime (article 28, nos. 1 and 2).

The claimant was covered, in the year 2015, by the simplified taxation regime.

Therefore, the business income he obtained was determined by application of the coefficient of 0.75, for income earned as a lawyer, and 0.35 for the remaining (article 31, no. 1, b and c) of the IRT).

According to no. 2 of the same provision, taxpayers who obtain the income provided for in those two paragraphs, after applying those coefficients "…may deduce, up to the amount of the net income of this category, the amounts verifiably incurred with mandatory contributions to social protection systems, connected with the activity in question, in the part in which they exceed 10% of gross income, when they have not been deducted under another heading".

The reading of this article, with clear and direct wording, raises no interpretative doubt on our part, in the sense of the immediate application, within the limits defined there, of the aforementioned deduction.

It raises, however, by the respondent the doubt as to the interpretation of the expression "when they have not been deducted under another heading", to conclude that deduction under another heading occurs when the taxpayer earns income from dependent labour and there already benefits from the deduction provided for in article 25 of the IRT, which occurred with the claimant.

Let it be said, from the outset, that such conclusion lacks manifest foundation, both because it does not result from the law, and because the reasons underlying such deductions are different.

Indeed, the mandatory contributions to social protection schemes provided for in no. 2 of article 31 of the IRT, are only those which, as stated there, are connected with the activities in question.

From this it follows that the deductions for social protection schemes provided for in no. 2 of article 25 of the IRT and those which, having mandatory character, are contemplated in no. 2 of article 31, have different origin and treatment.

Indeed, what is provided here are the contributions to which the self-employed worker is obliged to make in order to be able to carry out the respective professional activity. Which, as is clearly evident, have nothing to do with those incurred by the dependent worker, even if he has - as occurs with the claimant - simultaneously income of a professional nature.

This is what occurs with the contributions paid by the claimant as a lawyer, in view of the provisions of no. 1 of article 29 of the Regulation of the Lawyers and Legal Representatives Provident Fund (CPAS) - approved by Decree-Law 119/2015, of 29 June - when it provides that "are registered mandatorily as ordinary beneficiaries all lawyers and trainee lawyers registered in the Bar Association and all members and trainee members registered in the Chamber of Solicitors".

Thus, the claimant, by virtue of exercising the activity of lawyer, had to make mandatory contributions to the CPAS, which are undoubtedly connected with that activity, there being, therefore, no impediment to deducting the amount incurred with them, within the legal limits.

This is not the case, however, with respect to the other income attributed to undifferentiated legal activities, classifiable in CAE 69101, because the connection between the contributions paid to the CPAS and the obtaining of this income has not been demonstrated.

It will, therefore, be appropriate to grant the claimant's request with respect to the admissibility of the deduction of contributions made to the CPAS from the net income of his activity as a lawyer, but not with respect to the income included in field 404 of Annex B of Model 3 submitted, whereby the claimant's request proceeds partially.

COMPENSATORY INTEREST

Beyond the reimbursement of the tax, the claimant seeks that the right to the payment of compensatory interest be declared.

Such right is enshrined in article 43 of the General Tax Law, which has as a prerequisite that it be ascertained, in an administrative claim or judicial challenge - or in tax arbitration – that there was an error attributable to the services from which results payment of the debt in an amount greater than legally due.

The recognition of the right to compensatory interest in the arbitral proceedings results from the provisions of article 24, no. 5 of the LFATM, when it provides that "payment of interest is due, regardless of its nature, under the terms provided for in the general tax law and the Tax Procedure and Process Code".

In the case in question, it is manifest that there was, in fact, an error attributable to the Tax Authority in the assessment in dispute which it performed on its own initiative without legal support.

Therefore, the claimant has the right to the requested payment of compensatory interest relative to that tax.

IV. DECISION

Therefore, in this Arbitral Tribunal we decide as follows:

a) To declare partially upheld the arbitral request filed and, consequently, to declare the illegality of the income tax assessment no. 2016…, relating to the year 2015, as well as the act refusing the administrative claim filed, and to admit the deduction of mandatory contributions to social protection schemes included in field 701 of Annex B of Model 3 of income tax for 2015, only with reference to the professional income declared in field 403 of the same declaration.

b) To order the Tax and Customs Administration to reimburse the claimant for the amount of the corresponding tax relative to the aforementioned assessment, increased by the respective compensatory interest.

c) To order both parties to pay the costs of the proceedings, in the proportion of 90% by the respondent and 10% by the claimant.

V. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €1,250.00, under the terms of article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the Legal Framework for Tax Arbitration and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The value of the arbitration fee is fixed at €306.00, under the terms of Table I of the Regulation of Costs in Tax Arbitration Proceedings, under the terms of articles 12, no. 2, and 22, no. 4, both of the Legal Framework for Tax Arbitration, and article 4, no. 4, of the aforesaid Regulation.

Let notification be made.

Lisbon, 28 July 2017

The Arbitrator

(António Alberto Franco)

Frequently Asked Questions

Automatically Created

Can social protection contributions be deducted under the simplified IRS regime in Portugal?
Yes, social protection contributions can be deducted under the simplified IRS regime in Portugal. Article 31(2) of the IRS Code allows taxpayers taxed under the simplified regime to deduct amounts verifiably incurred with mandatory contributions to social protection systems connected with their self-employment activity, in the part exceeding 10% of gross income, provided they have not been deducted under another heading. This deduction is available after applying the simplified regime coefficients (0.75 for activities in the IRS table, 0.35 for other services) and is limited to the net income of the business/professional category.
What are the rules for deducting contributions to the Lawyers and Solicitors Pension Fund (CPAS) in IRS?
Contributions to the Lawyers and Solicitors Pension Fund (Caixa de Previdência dos Advogados e Solicitadores - CPAS) are deductible in IRS under specific conditions. For lawyers taxed under the simplified regime, these contributions can be deducted under article 31(2) if they exceed 10% of gross professional income and haven't been deducted elsewhere. The deduction is declared in field 701 of Annex B (Schedule B) of Model 3. The key requirement is that the contributions must be mandatory and verifiably connected to the legal activity. When a taxpayer has both employment and self-employment income, contributions related to each activity are treated separately for deduction purposes.
How does the simplified regime under Portuguese IRS treat professional income and allowable deductions?
The simplified regime under Portuguese IRS (articles 28 and 31) applies to taxpayers whose gross professional income did not exceed €200,000 in the prior year. Professional income is determined by applying coefficients to gross income: 0.75 for activities listed in the IRS table (like lawyers), and 0.35 for other service provision. After applying these coefficients, taxpayers may deduct mandatory social protection contributions exceeding 10% of gross income, up to the net income of the category. The regime does not require organized accounting, making it administratively simpler, but limits deductible expenses compared to the organized accounting regime.
What is the procedure for filing a tax arbitration claim with CAAD against an IRS tax assessment?
To file a tax arbitration claim with CAAD (Centro de Arbitragem Administrativa) against an IRS assessment, taxpayers must first file an administrative claim (reclamação graciosa) with the Tax Authority. If the claim is refused or not decided within the legal deadline, the taxpayer can request constitution of an arbitral tribunal under Decree-Law 10/2011 (RJAT). The request must be filed within the deadline established in article 10 of RJAT, identifying the contested act and grounds for illegality. CAAD notifies the Tax Authority, and if it doesn't appoint an arbitrator, the President of the Deontological Council appoints one. The tribunal is then constituted and proceeds to analyze the case, with potential waiver of hearings by mutual consent.
Can taxpayers with both employment and self-employment income deduct social security contributions on Schedule B (Anexo B)?
Yes, taxpayers with both employment and self-employment income can deduct social security contributions on Schedule B (Anexo B), but the contributions must be specifically related to the self-employment activity and meet statutory requirements. Under article 31(2) of the IRS Code, mandatory social protection contributions connected to professional/business activity can be deducted in the portion exceeding 10% of gross income, provided they haven't been deducted under another heading. The phrase 'under another heading' refers to avoiding double deduction of the same contribution, not prohibiting deductions of different contributions related to different income sources. Contributions to professional provident funds (like CPAS for lawyers) declared in field 701 of Annex B are separate from employment-related social security deductions under article 25.