Process: 484/2017-T

Date: March 27, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 484/2017-T) addresses a critical issue regarding the automatic reclassification of taxpayers between IRS income determination regimes. The taxpayers challenged an IRS assessment of €37,879.16 for 2015 after the Tax Authority (AT) automatically enrolled them in the simplified regime (regime simplificado) without notification, despite having maintained organized accounting (contabilidade organizada) since 1996. The core legal dispute centered on Article 28 of the CIRS, which governs the choice between income determination methods for Category B business income. The taxpayers argued that organized accounting is the fundamental regime under Portuguese tax law, aligned with constitutional principles of tax capacity, while the simplified regime constitutes an optional alternative requiring explicit taxpayer consent. They contended that AT's unilateral reclassification violated statutory requirements, as Article 28(5) CIRS stipulates that regime options remain valid until taxpayers file a declaration of alterations. The taxpayers were never notified of the reclassification and only discovered it when the electronic filing system prevented submission of Annex C (organized accounting) for their 2015 declaration, forcing them to file Annex B (simplified regime) instead. The decision cited Supreme Administrative Court jurisprudence emphasizing that the simplified regime is non-binding and valid only for those who have not opted for organized accounting. Previous CAAD case 266/2013-T established that taxpayers meeting simplified regime requirements are only subject to it if they actively choose it. The Law 82-E/2014 amendment eliminated the three-year minimum permanence requirement, meaning regime options continue indefinitely until the taxpayer communicates a change. The arbitral tribunal's analysis would determine whether AT's automatic reclassification without notification and without the taxpayer's express option constituted a violation of law justifying annulment of the assessment.

Full Decision

ARBITRAL DECISION

I – REPORT

Request

A..., taxpayer no..., and B..., taxpayer no..., married, residents at Rua..., ... Hab..., ...-... PORTO, hereinafter referred to as Requesters, presented, on 29-08-2017, pursuant to the provisions of article (a) of no. 1 of article 2º and article 10º of Decree-Law no. 10/2011, of 20 January, which approves the Legal Framework for Arbitration in Tax Matters (RJAT), a request for arbitral pronouncement, in which the Requested party is the AT - Tax and Customs Authority, with a view to:

  • The annulment, based on violation of law, of the decision of implicit dismissal of the administrative appeal filed against the assessment of Personal Income Tax no. 2016..., in the amount of €37,879.16, relating to IRS for the year 2015.

  • The annulment of the assessment of Personal Income Tax no. 2016..., in the amount of €37,879.16, relating to IRS for the year 2015.

Basis of the Request

In support of their request, the Requesters allege, in summary:

  • The Requester husband, hereinafter the Requester, commenced his activity on 01.10.75 and, on 26.12.96, filed a declaration of alterations, opting for the organized accounting regime, which he has maintained until now.

  • Intending to maintain himself in this regime, he did not file any further declaration to reaffirm the option for the organized accounting regime.

  • However, when he intended to file the Form 3 Declaration relating to the year 2015, he was surprised by the impossibility of filing Annex C, relating to organized accounting, as a result of an alleged reclassification made by the AT into the simplified regime, as of 01.01.2015, of which he was never notified.

  • In this context, it was not possible for him to file the Form 3 Declaration with Annex C, relating to organized accounting, which is attached as Doc. 2, having been compelled, in order to comply with the declarative obligation, in view of the existing computer validations, to file Annex B for taxation under the simplified regime.

  • The disputed question is thus limited to verifying whether it is mandatory to determine business income based on the application of the rules arising from the simplified regime, as the Tax Authority contends, given the reclassification made.

  • Pursuant to no. 1 of article 28º of the CIRS, the determination of business and professional income is made based on the application of the rules arising from the simplified regime or based on accounting.

  • According to the provisions of no. 2 of said article, the option for the simplified regime must be formulated by taxpayers:

    • In the declaration of commencement of activity;
    • By the end of March of the year in which they intend to alter the form of income determination, by means of filing a declaration of alterations.

  • Pursuant to no. 5 of article 28º of the CIRS, the option referred to in no. 3 remains valid until the taxpayer files a declaration of alterations, which takes effect from the year it is filed, provided it is filed by the end of March.

  • Now, as emphasized in the Judgment of the STA, of 17.03.2010, in Case no. 56/10, "the simplified regime, created with the 2000 tax reform, constitutes a non-binding regime, valid only for those who have not opted for the organized accounting regime.

  • The simplified regime always has as its prerequisite an option by the taxpayer who waives their subjective right to be taxed based on accounting, being one of the situations in which the law attributes relevance to their will and in which they can opt for the regime they consider most favorable.

  • This means that the basic rule as to the taxation of income from category B of IRS is the regime of taxation based on accounting.

  • As emphasized in the arbitral decision handed down in CAAD, in Case no. 266/2013 - T: "In fact, even if meeting all the requirements to be taxed under the simplified regime, the taxpayer only comes within its scope if they make that choice. The opposite is not true. If the taxpayer exceeds the limits established for the simplified regime, they cannot, even if they wish, be taxed under the simplified regime."

  • With the wording given by Law no. 53-A/2006, of 29 December, to no. 5 of article 28º of the CIRS, the minimum period of permanence in any of the regimes was three years, renewable for equal periods, except if the taxpayer communicated, pursuant to subparagraph b) of no. 4), the alteration of the regime to which they were subject.

  • With the wording given by Law no. 82-E/2014, of 31 December, the option for the determination of income based on accounting became valid until the taxpayer filed a declaration of alterations, thus ceasing to have a minimum period of permanence in the regime.

  • The Requester was not notified of the grounds for their inclusion in the simplified regime, nor do the validations existing in the declaration filing program clarify the reason for their reclassification into said regime.

  • Therefore, the Requester can only presume that their reclassification might, possibly, have resulted from the fact of not having "renewed" the option for the simplified regime on a three-yearly basis, particularly in the year 2015.

  • If this is the case, it is manifest that the Tax Authority is not correct.

  • Indeed, in determining the meaning and scope of law, the interpreter should presume that the legislator established the most correct solutions and knew how to express their thinking in adequate terms.

  • It is worth recalling the previous wording of no. 5 of article 28º of the CIRS: "The minimum period of permanence in any of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, pursuant to subparagraph b) of the previous number, the alteration of the regime to which they are subject."

  • In this context, there will be no extension of the organized accounting regime only if the taxpayer so wishes, communicating the alteration of the regime to which they are subject.

  • In these terms, since the Requester was always classified under the organized accounting regime, they should have remained in said regime, given that there is an automatic extension, as expressly follows from the law: "The minimum period of permanence in any of the regimes (...) is three years, renewable for equal periods, except if the taxpayer communicates (...) the alteration of the regime to which they are subject."

  • And it is well understood that this is the case, since the regime that meets the constitutional principle of tax capacity is the organized accounting regime, and not the opposite, as that is the basic rule, just as direct assessment must prevail over indirect assessment, as the latter is subsidiary to the former.

  • Not having made any option for the simplified regime, the Requester should be taxed under the same regime in 2015, which only did not happen by imposition of the Tax and Customs Authority which, given the computer limitations of electronic declaration filing, did not allow the Requester to present Annex C, corresponding to the organized accounting regime.

  • Moreover, this was the position assumed by DSIRS, regarding the correction of error C70, in IRS declarations relating to 2012, as follows from the transcription below of the instructions then circulated:

"Having raised doubts in the interpretation of the provisions of article 28º of the IRS Code, regarding taxpayers who, having exercised the option for the organized accounting regime, were reclassified by the services into a different regime, it was, by order of the legal substitute of the Director-General, of 2014.01.31, sanctioned the understanding, in summary, that once the option for the organized accounting regime is made, that option is valid and is maintained during the three-year period, which is renewable for equal periods, so that the taxpayer will only have to return to the simplified regime by their own initiative, pursuant to no. 5 of article 28º of the IRS Code, thus not being relevant, for purposes of reclassification, variations in the amount of annual net income of category B that may have occurred in the meantime."

  • In the event that the Requester was included by the AT in the simplified regime for being classified in the organized accounting regime by legal requirement, and not by their express option, it must be questioned, as follows from Circular no. 5/2007, of 13.03, whether to taxpayers classified in the organized accounting regime by legal requirement the minimum period of 3 years of permanence in the regime and its automatic extension do not apply, implying that, in this case, the taxation regime may be altered without their express option.

  • What results from the law in force at the time of the facts (no. 5 of article 28º) is the obligation of permanence for three years in any of the regimes - simplified, or organized accounting - having never, at any moment, been established that permanence in the organized accounting regime for three years would only be mandatory if it resulted from the taxpayer's option."

Response

In its Response, the Requested party AT – Tax and Customs Authority alleges, in summary:

  • Speaking to the amendments introduced by the State Budget/2007, regarding the form of determining income from category B (article 28º of the CIRS), Circular no. 5/2007, of 2007-03-13, of DSIRS clarified, in its point 1, that "to taxpayers who are covered by the system for determining business and professional income based on accounting because they do not meet the requirements provided for in no. 2 of article 28º of the CIRS, the minimum period of permanence, provided for in no. 5 of the same article, is not applied, since their reclassification does not result from an option."

  • Thus, to taxpayers who are covered by the accounting regime by legal requirement, the minimum period of permanence in the regime does not apply, because such taxation did not result from an express manifestation of will by opting for the organized accounting regime.

  • The Requester commenced activity in 1975, having been classified in the organized accounting regime for the year 2001, by requirement, by virtue of having exceeded in the previous taxation period (year 2000) the annual amount of service provision of €99,759.58, provided for in article 28º no. 2 of the CIRS (wording at the date of the facts), a situation that remained until the year 2014.

  • In 2014, the Requester obtained annual net income below the limit established in article 28º no. 2 of the CIRS (€200,000.00), but without having exercised the option for taxation under the organized accounting regime by the end of March 2015, by means of filing a declaration of alterations, which is why they came to be covered, and properly so, by the simplified taxation regime in the year 2015.

  • On the other hand, the order of the legal substitute of the Director General, dated 2014-01-31 (in which the understanding was sanctioned, in summary, that once the option for the organized accounting regime is made, that option is valid and is maintained during the three-year period, which is renewable for equal periods) does not apply to the case at hand, because the reclassification into the organized accounting regime did not result from an option, and the option for the organized accounting regime is only to be maintained in situations in which the legislator permitted renewal for an equal period.

  • If the requester intended to remain in the organized accounting regime when, in 2014, they obtained income below the legal limit, it was up to the taxpayer to make the alteration to the organized accounting regime, by option.

  • The requester did not file the said declaration of alterations, by means of which they could alter the form of income determination for 2015, which is why they came to be automatically classified in the simplified regime.

  • As regards the year 2015, and because they are within the 3-year permanence period for the simplified regime, the requester should have used the faculty granted by the transitional provision established in no. 2 of article 15º of Law 82-E/2014, of 21 December (State Budget 2015), which provides that "by the end of March 2015, taxpayers subject to IRS classified under the simplified regime of category B may opt for the organized accounting regime" (being that with this norm the legislator intended to implement, immediately, the repeal of the minimum period of permanence of 3 years, in the regime of determination of income, provided for in article 28º no. 5 of the CIRS, in the wording prior to that given by Law 82-E/2014, of 31 December.).

Meeting Provided for in Article 18º of the RJAT and Submissions

With the agreement of the Parties, the Court determined dispensation with the holding of the meeting provided for in article 18º of the RJAT, with the Parties being invited to file successive written submissions.

Submissions

In their submissions, the Requesters argue:

  • When the simplified regime came into force, those excluded from it, pursuant to article (a) of no. 3 of article 31º of the CIRS, were taxpayers who, by legal requirement, were obliged to have organized accounting.

  • The option for the organized accounting regime should be made, pursuant to article (b) of no. 4 of the same provision, by the end of March of the year in which they intend to use organized accounting.

  • Having the Requester made the option for the organized accounting regime and not meeting the requirements to be covered by the simplified regime, they did not have to make any option.

  • The legislator did not require taxpayers who were in the accounting regime by option to "revalidate that option" and whoever was obliged to have organized accounting was excluded from the simplified regime, which is why they were released from having to make any option.

  • The transitional norm of no. 2 of article 15º of Law no. 82-E/2014 did not apply to the Requester because they were never in the simplified regime.

In their submissions, considering that nothing new had been alleged by the Requesters, the Requested party limited itself to reiterating its position.

II. SANATION

The singular Arbitral Court was regularly constituted on 23-11-2017, with the Arbitrator appointed by the Deontological Council of CAAD, all respective legal and regulatory formalities having been complied with (articles 11º, no. 1, subparagraphs a) and b) of the RJAT and 6º and 7º of the Deontological Code of CAAD), and is competent ratione materiae, in accordance with article 2º of the RJAT.

The Parties have legal personality and capacity and are regularly represented.

No nullities were identified in the proceedings.

III. QUESTIONS TO BE DECIDED

The main question to be examined and decided is whether the Requester husband, subject to Personal Income Tax classified in category B, could, in the year 2015, be officially classified in the simplified taxation regime, provided for in article 28º of the CIRS.

IV – PROVEN FACTS

The following are the proven facts considered relevant to the decision of the case:

1º) The Requester husband filed on 26.12.96 a declaration of alterations, opting for the organized accounting regime of IRS.

2º) Upon filing the income declaration for the year 2015, he was not permitted to file it in accordance with the organized accounting regime.

3º) The Requester filed the income declaration for 2015 through annex B, relating to the simplified taxation regime.

4º) The Tax and Customs Authority issued and notified the Requesters of assessment no. 2016..., in the amount of €37,879.16, with payment deadline on 2016.08.31, relating to Personal Income Tax of the Requesters on income from 2015, in accordance with the simplified taxation regime.

5º) On 22 December 2016 the Requesters filed an administrative appeal of the assessment.

6º) The Requesters were not notified, until the date of filing the arbitral request, of a decision on the administrative appeal.

The proven facts were established based on documents attached to the proceedings.

There are no other facts given as proven or not proven with relevance to the decision of the case.

V – REASONING

The simplified taxation regime for independent work income was instituted by Law no. 30-G/2000, of 29 December.

Previously, article 27º of the CIRS provided two modes of taxation of such income: taxation "based on the accounting of the taxpayer, when they have it" (subparagraph a)); and taxation "based on the books of records of services provided and expenses, recorded in accordance with the provisions of article 108º, when the taxpayer is not obliged to have accounting" (subparagraph b)).

The law was quite clear as to the conditions under which the taxpayer, holder of independent work income, fell into one or the other of these taxation regimes.

If the taxpayer was obliged to have organized accounting, in accordance with that established in article 109º, no. 1, subparagraph a), they were compulsorily taxed based on accounting. Taxpayers were obliged to have organized accounting when they reached an average annual income of three consecutive years, excluding remuneration paid to collaborators, exceeding twenty times the annual value of the highest national minimum wage.

If the taxpayer, not being obliged to have organized accounting, opted to have organized accounting, pursuant to subparagraph c) of no. 1 of article 109º, an option that was entirely free, they were also compulsorily taxed based on accounting.

If the taxpayer neither had nor was obliged to have organized accounting, then they were compulsorily taxed based on the regime of subparagraph b) of article 27º, which could be designated "simplified accounting."

In turn, the option for organized accounting could be made:

  • In the declaration of commencement of activity;
  • In the declaration "referred to in article 57º," being that this declaration referred to in article 57º of that time was the annual income declaration.

Therefore, the taxpayer, not being obliged to have organized accounting, could, in the declaration of commencement of activity or in the income declaration, communicate to the tax administration the option to have organized accounting. And upon making this option to have organized accounting, they were automatically opting to be taxed based on accounting, by the combined effect of articles 27º, subparagraph a) and 109º, no. 1, subparagraph c) of the CIRS.

Making this option by the taxpayer, the taxpayer could not, for a period of three years, cease to be taxed based on accounting.

Nothing was said regarding its automatic renewal.

The Requester exercised this option, to have organized accounting and, consequently, to be taxed based on accounting, in 1996, in accordance with the proven facts, thus beginning, from that year, to be taxed based on accounting, by their option.

Meanwhile, the normative framework was to be altered, in 2000, with the aforementioned Law no. 30-G/2000, which reformed income taxation and introduced the simplified taxation regime for income from category B.

The new legal framework left practically unchanged the modality of taxation based on accounting, as to what it consists of – calculation of taxable profit based on the accounting result determined in accordance with the norms of commercial accounting – as to the conditions under which taxpayers avail themselves of that mode of taxation, and also as to the conditions under which it ceases to be applied to a given taxpayer.

The taxpayer whose income exceeds a limit – a limit that, initially, consisted of a sales volume of €30,000,000.00 and a net value of other income from category B of €20,000,000.00 and which currently consists of an annual net amount of income of €200,000 – is compulsorily subject to the general taxation regime (based on the accounting result).

The taxpayer whose income does not exceed that limit may opt between the general regime and the simplified regime, and in the absence of exercise of the option, they will be classified in the simplified regime.

With respect to a key point for the question at hand, which is the effects of the option for the general regime (or taxation based on accounting) in periods subsequent to that in which it was exercised, the legal norm has undergone successive amendments.

In the current wording (introduced by Law no. 82-E/2014, of 31 December), no. 5 of article 28º provides:

"The option referred to in no. 3 remains valid until the taxpayer files a declaration of alterations, which takes effect from the year it is filed, provided it is filed by the end of March."

Therefore, currently, the option for the organized accounting regime in a given period produces effects in all subsequent years.

In the previous wording (introduced by Law 53-A/2006 of 29/12), the same provision said:

"The minimum period of permanence in any of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, pursuant to subparagraph b) of the previous number, the alteration of the regime to which they are subject."

Therefore, also here, between 2006 and 2014, the taxpayer's option for taxation based on accounting remained valid until they themselves communicated their wish to opt for the simplified regime.

The previously applicable norm – no. 5 of article 31º in the version of Law 30-G/00, of 29 December and no. 5 of article 28º in the version of Decree-Law 198/2001, of 3 July – said:

"The minimum period of permanence in the simplified regime is three years, automatically renewable for equal periods, except if the taxpayer communicates, pursuant to subparagraph b) of the previous number, the option for the application of the organized accounting regime."

Nothing was said, between 2000 and 2006, regarding the maintenance of the taxation regime based on accounting when the option for the same had been made by the taxpayer.

However, the case law of the higher courts established that, starting from Law 30-G/00, of 29 December, the exercise of the option for the taxation regime based on accounting produced effects in all subsequent periods, until the taxpayer took the initiative to opt for the simplified regime (e.g., judgments of the STA of 27-01-2010, case 906/09 and of 17-03-2010, case no. 56/10).

Let us see how this normative framework is relevant to the question to be decided.

The Requesters argue – in one of their lines of argument – that the option that a taxpayer has made for taxation based on accounting under the primitive article 109º of the CIRS (prior to the institution of the current simplified regime) produces effects for their tax classification in light of the current article 28º.

The Requested party does not pronounce on this part of the Requesters' argument, limiting itself to asserting that the taxpayer never opted for the classification in the taxation regime based on accounting.

But such assertion does not correspond to the facts, given that the Requester husband, in fact, exercised the option for classification in the organized accounting regime in the year 1996.

Being so, it is incumbent on the Court to pronounce on the argument of the Requesters, issuing judgment as to whether the option exercised by the taxpayer in 1996 remains valid or not in light of the current article 28º of the CIRS.

We believe that the question should be answered in two steps:

1º: Did the option that the taxpayer made, under the norm in force prior to Law 30-G/00 (institution of the simplified regime), for taxation based on accounting, produce effects in all subsequent years, until the same taxpayer communicated their option for the simplified regime?

2º: If the answer to the first question is affirmative, did the effect of the option for taxation based on accounting, which the Requester husband made in 1996, cease or end with the institution of the simplified regime by Law 30-G/00, which would require the taxpayer to renew their option?

Let us see.

As to the first question, we believe that the interpretation that the courts subsequently made applies regarding the continuity of the effects of the option for the general regime, under the simplified regime, between 2000 and 2006.

As was shown previously, the norm, with respect to the general regime or taxation based on accounting, that existed until 2000 is, apart from the values of the limits involved, in all respects exactly similar to the norm in force from 2000 onward, which is why the same interpretative arguments must be considered applicable.

This is because, as the option for the general regime is entirely free, that is, independent of any condition that has to be verified year by year (as is the case with the simplified regime), and the law does not expressly impose on taxpayers the burden of renewing that option periodically – which moreover would be a disproportionately burdensome burden – it would not be reasonable to conclude through interpretation that the option for taxation based on accounting had to be renewed periodically.

Being so, it must be concluded that, in 2000, when Law 30-G/00 came into force, the Requester husband was classified in the taxation regime based on accounting, by option.

Let us move to the second question.

In the wording of Law 30-G/00 – which introduced the simplified regime – no. 2 of article 31º of the CIRS said:

"Covered by the simplified regime are taxpayers who, not having opted for the organized accounting regime in the immediately preceding taxation period, have not reached a value exceeding any of the following limits:

a) Sales volume: €30,000,000.00;

b) Net value of other income from this category: €20,000,000.00."

Does this norm mean to say that taxpayers who, not having reached the values of subparagraphs a) and b), did not file in the previous year – year 2000 – the declaration in which they exercised the option for the general regime were automatically classified in the simplified regime in 2001?

Note that we are not here faced with a transitional norm, of specific application on the date the regime came into force, but with a norm intended to remain in force indefinitely.

Therefore, the interpretation of the norm in the indicated sense is not admissible, as that would be equivalent to saying that the option for the general regime had to be exercised every year, which we have already seen is not a valid understanding of the norm, nor is it in accordance with the interpretation that the courts made of it.

Consequently, that provision (no. 2 of article 31º) can only be understood as stipulating that, from the year 2001 onwards – the first year in which the simplified regime was in force – taxpayers who, not exceeding the limits that exclude the application of the same, are not, in the immediately preceding year, classified, by option, in the general regime (or taxation based on accounting).

Now, in the year 2000, the Requester husband was classified, by option, in the taxation regime based on accounting. Therefore, in that year, the Requester would never be classified in the simplified regime, not because they exceeded the respective limits, but because they were, in the immediately preceding year, classified, by option, in the general regime.

Being this our understanding, let us see how it differs from that advocated by the Requested party.

The Requested party argues, in its response, that "the Requester commenced their activity in 1975, and is assessed for the exercise of the activity 'CIRS 9010 – Officially Appointed Auditors,' having been classified in the organized accounting regime for the year 2001, by legal requirement (...) by virtue of having exceeded in the previous year (year 2000) the annual amount of service provision of €99,759.58, provided for in article 28º, no. 2 of the CIRS (wording at the date of the facts)."

The Tax Authority never refers to the fact, clearly alleged by the Requesters in the initial petition, that the Requester husband exercised the option for the organized accounting regime in 1996.

That is, the Tax Authority does not deny that the Requester husband exercised the option for the organized accounting regime in 1996.

Nor does it assert that that option becomes ineffective after the simplified regime came into force, with Law no. 30-G/2000. It merely asserts that in 2001, the Requester came to be covered by the organized accounting regime by legal requirement, because in 2000 they obtained gross income exceeding the limit of the simplified regime.

Now, where a subject of IRS is classified in the organized accounting regime by virtue of having exercised the respective option, the taxpayer does not come to be classified in that regime by legal requirement when they exceed the limit of the simplified regime, because nothing in the law allows one to reach that conclusion. What the law says is that, once the option for the organized accounting regime is exercised, the taxpayer remains in that regime until they themselves, being able to do so, take the initiative to opt for taxation under the simplified regime (see judgments of the STA of 28-11-2012, case no. 709/12; of 04-11-2015, case no. 877/15).

It is thus to be concluded that the assessments challenged suffer from a defect of violation of law, and thus are invalid and should be annulled.

The second line of argument of the Requesters, regarding which there is dissent between the Parties, refers to the period of compulsory permanence of taxpayers in each of the taxation regimes provided for in article 2º CIRS.

This question is, in our view, irrelevant to the judgment of the question to be decided, as the norms in question do not apply to the case.

From 1 January 2007 (with the version put into force by Law 53-A/2006, of 29/12), until the amendment made by Law no. 82-E/2014, of 31 December, no. 5 of article 28º of the CIRS said:

"5 - The minimum period of permanence in any of the regimes referred to in no. 1 is three years, renewable for equal periods, except if the taxpayer communicates, pursuant to subparagraph b) of the previous number, the alteration of the regime to which they are subject. (Wording of Law 53-A/2006-29/12)"

This norm, according to what appears to us to be the only possible understanding, applied only to the taxpayer, limiting their freedom to alter their taxation regime.

The norm never applied to official alterations made by the tax administration. The moment of official alteration from the simplified regime to the organized accounting regime was directly determined by no. 6 of article 28º. Whereas the moment of official alteration from the organized accounting regime to the simplified regime was directly determined by no. 2 of the same provision.

It was only the taxpayer who, having opted for one of the regimes, could not alter it for a period of three years.

Now, what is at issue in the present proceedings is not a change of taxation regime by the taxpayer, so the norm would not apply here.

VI. DECISION

For the reasons stated, the request for annulment of the challenged assessment is judged to be well founded, and consequently it is hereby annulled.

Value of the Economic Usefulness of the Proceedings

The value of the economic usefulness of the proceedings is fixed at €37,879.16.

Costs

Pursuant to article 22º, no. 4, of the RJAT, the amount of costs is fixed at €1,836.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Requested party.

Let this arbitral decision be registered and notified to the Parties.

Lisbon, Center for Administrative Arbitration, 27 March 2018

The Arbitrator

(Nina Aguiar)

Frequently Asked Questions

Automatically Created

What happens when the Portuguese Tax Authority automatically enrolls a taxpayer in the simplified IRS regime without notification?
When the Portuguese Tax Authority automatically enrolls a taxpayer in the simplified IRS regime without notification, it constitutes a potential violation of Article 28 of the CIRS. According to established jurisprudence, including the Supreme Administrative Court ruling of 17.03.2010 (Case 56/10), the simplified regime is optional and non-binding, requiring active taxpayer consent. Taxpayers have the right to challenge such unilateral reclassifications through administrative appeals (reclamação graciosa) or CAAD arbitration. The lack of notification denies taxpayers the opportunity to contest the change before filing obligations arise, potentially forcing incorrect tax declarations through electronic system validations that prevent filing under the previously established regime.
Can a taxpayer challenge the transition from organized accounting to the simplified regime under Article 28 of the CIRS?
Yes, taxpayers can challenge the transition from organized accounting to the simplified regime under Article 28 of the CIRS through multiple legal avenues. Article 28(2) establishes that regime options are exercised either in the commencement of activity declaration or by filing a declaration of alterations by the end of March. Article 28(5) provides that once made, the option remains valid until the taxpayer files an alteration declaration. Since organized accounting is the fundamental regime and simplified taxation is optional, taxpayers who never opted for the simplified regime can challenge automatic reclassifications as violations of law. Challenges can be filed through hierarchical appeals (recurso hierárquico), administrative complaints (reclamação graciosa), or tax arbitration under the RJAT (Decree-Law 10/2011).
What is the procedure for filing a gracious complaint against an IRS tax assessment in Portugal?
The procedure for filing a gracious complaint (reclamação graciosa) against an IRS tax assessment in Portugal is governed by the General Tax Law (LGT) and Tax Procedure Code (CPPT). Taxpayers must file the complaint within 120 days from the notification of the assessment or, if no notification occurred, from when they became aware of the tax act. The complaint is submitted to the same authority that issued the contested act and must specify the legal and factual grounds for contestation. The tax authority has 4 months to decide; failure to respond within this period results in implicit dismissal (indeferimento tácito), which can then be challenged through judicial or arbitral proceedings. The complaint does not suspend the payment deadline unless the taxpayer provides a bank guarantee.
How does CAAD arbitration work for disputes over the simplified tax regime classification?
CAAD (Centro de Arbitragem Administrativa) arbitration for simplified tax regime disputes operates under the RJAT framework (Decree-Law 10/2011). Taxpayers can request arbitration after exhausting or receiving implicit dismissal of administrative remedies. The process begins with filing a request specifying the contested act, legal grounds, and desired relief. For regime classification disputes, taxpayers typically seek annulment of assessments based on violation of Article 28 CIRS. The arbitral tribunal examines whether the Tax Authority properly applied regime classification rules, respecting taxpayer options and notification requirements. Arbitration offers faster resolution than judicial courts, with decisions typically rendered within 6 months. The tribunal can annul illegal assessments and order reassessment under the correct regime, as requested in Process 484/2017-T.
What are the taxpayer's rights regarding the option to maintain organized accounting for business income under Portuguese tax law?
Under Portuguese tax law, taxpayers have fundamental rights regarding the option to maintain organized accounting for business income (Category B) under Article 28 of the CIRS. The organized accounting regime is the basic rule, reflecting constitutional principles of taxation according to actual capacity. Once a taxpayer opts for organized accounting, that option remains valid indefinitely until they file a declaration of alterations choosing the simplified regime (Article 28(5) CIRS as amended by Law 82-E/2014). The Tax Authority cannot unilaterally reclassify taxpayers into the simplified regime without their express consent. Taxpayers have the right to notification of any regime changes and can challenge unauthorized reclassifications. The simplified regime, while available for eligible small businesses, is strictly optional and requires affirmative taxpayer election through proper declarative procedures.