Process: 498/2017-T

Date: May 23, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 498/2017-T) concerns a Portuguese company's challenge to its 2013 Corporate Income Tax (IRC) self-assessment that excluded €32,792.14 in Net Job Creation Tax Benefits under Article 19 of the Tax Benefits Statute (EBF). The claimant submitted its IRC declaration without claiming the benefit, later determining it qualified for the tax incentive for hiring young workers on permanent contracts. After the deadline for submitting a substitute declaration passed, the company filed an administrative appeal (reclamação graciosa), which was denied by the Lisbon Finance Directorate. The Tax Authority questioned whether sufficient evidence existed to prove compliance with Article 19 requirements, particularly regarding permanent employment contracts. The company argued it submitted Social Security registration documents, payroll records, and personnel rosters demonstrating permanent employment relationships, asserting that neither labor nor tax law requires formal written employment contracts. The dispute centers on evidentiary requirements for the tax benefit: proof of permanent contracts, compliance with non-duplication rules (ensuring workers weren't previously counted for the benefit by related entities under Article 63 IRC), absence of other employment incentives, and exclusion of family members. The company sought a declaration of illegality of the self-assessment act and reimbursement of amounts unduly paid plus compensatory interest. The case illustrates the procedural pathway for IRC disputes—from self-assessment to administrative appeal to CAAD arbitration—and highlights evidentiary challenges taxpayers face when claiming employment-related tax benefits in Portugal.

Full Decision

Arbitral Decision

I - Report

  1. A..., S.A., a legal entity no. ..., with registered office at ... – Rue ..., ..., ...-... ..., (hereinafter referred to as the "Claimant") submitted, on 06-09-2017, a request for arbitral determination, under article 2, no. 1, paragraph a) and article 10, nos. 1 and 2 of the Legal Regime for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LRTA") and articles 1 and 2 of Administrative Order no. 112-A/2011, of 22 March.

  2. The Claimant seeks an arbitral determination to declare the illegality of the self-assessed Corporate Income Tax (IRC) act relating to the tax year 2013, in the part where it does not consider the amount of € 32,792.14 (thirty-two thousand seven hundred and ninety-two euros and fourteen cents) relating to the Tax Benefit for Net Job Creation, as well as the Dispatch of the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, issued pursuant to Delegation of Powers on 05-06-2017, which dismissed the administrative appeal regarding the aforementioned tax act and consequently the reimbursement of the amount unduly paid plus compensatory interest calculated at the legal rate.

  3. The Tax and Customs Authority (hereinafter referred to as the "Respondent") is the respondent.

  4. 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 22-09-2017.

  5. Pursuant to paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LRTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Board of CAAD appointed as arbitrator of the sole arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable deadline, communicated acceptance of the appointment.

  6. The Claimant was notified, on 08-11-2017, of the arbitrator's appointment and did not express any intention to challenge the appointment, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the LRTA and articles 6 and 7 of the Code of Ethics.

  7. In accordance with the provisions of paragraph c) of no. 1 of article 11 of the LRTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 28-11-2017.

  8. The Respondent, duly notified through the arbitral dispatch of 05-12-2017, submitted its Response on 22-01-2018 and remitted the Administrative Procedure File.

  9. The Arbitral Tribunal, by dispatch of 25-01-2018, requested that the Claimant indicate the facts upon which it intended to examine the witness listed in the request for arbitral determination. The Claimant, on 06-02-2018, indicated the facts contained in the initial petition upon which it intended to examine the witness.

  10. The Arbitral Tribunal, by dispatch of 05-04-2018, determined: (i) Given that the articles of the initial petition that the Claimant indicates for the examination of the sole listed witness correspond to factual matters already supported by documentary evidence (articles 27, 63, 64, 65 and 66 of the initial petition), factual matters lacking documentary evidence (articles 20, 23 and 25 of the initial petition) and legal matters (article 28 of the initial petition), the request for production of testimonial evidence is dismissed; (ii) to dispense with the holding of the meeting provided for in article 18 of the LRTA, pursuant to the principle of the Tribunal's autonomy in case management and in order to promote the speed, simplification and informality thereof (articles 19 and 29, no. 2, of the LRTA), given that no exceptional matters were invoked nor were any questions raised that would prevent the examination of the merits of the claim; (iii) if the parties wish to submit written arguments, these shall be produced within a period of 15 days, counted from the date of the testimonial evidence hearing, granting the Respondent the option of, if it so wishes, submitting its arguments in succession to those submitted by the Claimant; (iv) set 18 May 2018 as the deadline for the issuance of the arbitral decision.

  11. The Claimant and the Respondent did not submit any arguments.

  12. The Arbitral Tribunal, by dispatch of 17-05-2018, extended the deadline for the issuance of the arbitral decision to 23 May 2018.

  13. The Claimant's position, in accordance with the provisions contained in the request for constitution of the Arbitral Tribunal, is, in summary, as follows:

13.1. On 27 May 2014, the Claimant submitted its Corporate Income Tax Declaration – Form 22 and did not declare and, thus, did not self-assess, any amount relating to the tax benefit arising from net job creation, provided for in article 19 of the Tax Benefit Statute.

13.2. Subsequently, the Claimant concluded that, in the tax year 2013, it met all the requirements to benefit from the aforementioned tax benefit, having computed the same at € 32,792.14. As it was no longer possible for the self-assessment to be corrected through the submission of a Substitute Declaration, the Claimant made the appropriate administrative appeal.

13.3. In the course of the examination of the administrative appeal, a draft decision was issued, in accordance with which the Administrative Justice Division considered that the Claimant had not provided sufficient proof of the satisfaction of the requirements for deduction of the amount requested as a benefit for net job creation. The Claimant exercised its right to be heard on the draft decision of the administrative appeal, having argued that all the requirements for deduction of the amount of the tax benefit calculated had been satisfied. Similarly, the Claimant submitted additional evidentiary documents from which it clearly results that the requirements for application of the tax benefit inherent in job creation are satisfied.

13.4. None of the employees selected for the calculation of the tax benefit for net job creation benefited, within the Claimant's organization, from any of the incentives provided for in the previously referenced dispatch, or from another of identical nature to that tax benefit, or from any other employment support incentives provided for in other legislation. In view of the above, the Claimant considers that it has complied with the provisions of no. 5 of article 19 of the Tax Benefit Statute (TBS).

13.5. The Claimant declares that none of the employees selected for calculation of the benefit in question was previously considered for the purposes of calculating the tax benefit for net job creation within the Claimant's organization or within another entity related, in accordance with article 63 of the Corporate Income Tax Code. In view of the foregoing, the Claimant also complies with the provisions of no. 6 of article 19 of the TBS in the calculation of the tax benefit in question.

13.6. Likewise, the Claimant declares that none of the employees considered in the calculation of the tax benefit are part of the family unit of the employing entity, this requirement also being met.

13.7. The first requirement upon which the eligibility of the Claimant's workers for the purposes of calculating the tax benefit for job creation for young persons depends is the existence of a permanent employment contract between the employing entity and the workers in question. Thus, the non-submission of an employment contract by reference to the workers should not be questioned by the Tax Authority in the sense of requiring a document that neither labor law nor tax law imposes.

13.8. The Claimant submitted to the administrative procedure the documents of registration of the workers in question with the Social Security Institute and, likewise, payroll maps, personnel roster maps and individual registration records, from which the existence of a permanent contract emerges.

13.9. The Claimant also submitted to the procedure the first and last Social Security declarations relating to 2013 for workers nos. 105, 110 and 118 for the employees hired or terminated (with permanent contracts) in the year 2008, and in accordance with the provisions of the Law, only those who, at the date of hiring into the company's staff, had an age greater than 16 years and less than 30 years were considered eligible, with the exception of those who were less than 23 years of age, who were only considered eligible if they had completed or were attending secondary education or equivalent.

13.10. Employees hired or terminated (with permanent contracts) after the effective date of Law no. 10/2009, of 10 March (i.e., after 1 January 2009) were considered eligible, both for entries and exits, employees who, at the date of hiring into the company's staff, had an age greater than 16 years and less than or equal to 35 years, with the exception of those who were less than 23 years of age, who were only considered eligible if they had completed or were attending secondary education or equivalent.

13.11. The Claimant proceeded with the identification of employees eligible for the purposes of calculating net job creation, taking into account the provisions provided for in no. 5 of the aforementioned article 19 of the TBS, according to which the increase in the costs relating to the selected employees may be made for a period of five years counted from the date of the permanent hiring of such employees.

13.12. In this sense, for the calculation of the aforementioned benefit, in the tax year 2013, net job creation may be considered, under the conditions outlined above, from 2008 to 2013. In this manner, three employees were selected by reference to the tax year 2010, one employee by reference to the tax year 2011 and one employee by reference to the tax year 2012.

13.13. In order to prove the eligibility of the selected employees, the Claimant attached the communications made by it to Social Security, where it is possible to prove the permanent hiring date of the said employees, as well as attaching, as an example, an employment contract for one of such employees.

13.14. Finally, the Claimant calculated the tax benefit relating to net job creation for young persons and long-term unemployed, applicable to the tax year 2013. In this sense, the costs borne by the Claimant with the employees were considered as fixed remuneration and, likewise, their respective social security contributions borne by the employing entity in that year. At the end, the Claimant proceeded with the respective increase.

13.15. In view of the arguments set forth above, the Claimant considers that it has fully demonstrated that its taxable profit for the tax year 2013 should take into account the tax benefit relating to net job creation for young persons and long-term unemployed, and the error in the self-assessment is evident, so it should be declared illegal and annulled in the contested part. In this manner, there should be a change to the taxable profit declared by the Claimant, from € 1,060,227.36, to € 1,027,435.23. In this sense, the aforementioned change will have effects on the amount of Corporate Income Tax owed by the Claimant in the tax year 2013, from which it results that the amount of Corporate Income Tax to be paid would be only € 69,057.15, having overpaid € 8,689.92, which should be reimbursed to the Claimant plus compensatory interest calculated at the legal rate.

  1. The Respondent's position, expressed in its response and written arguments, may be summarized as follows:

14.1. It follows from the legal regime that the requirements for application of the tax benefit for net job creation for young persons consist of having been hired on a permanent employment contract, workers with an age less than 35 years (and greater than 16 years, with the exception of those under 23 years of age who have not completed secondary education and are not demonstrably improving their level of education) or long-term unemployed (within the meaning of paragraph b) of no. 2 of article 19 of the TBS) and that such hiring resulted in net job creation, that is, that such hiring promoted an increase in the total number of workers of the company (in those conditions).

14.2. The Claimant alleges that there was an error in the self-assessment of Corporate Income Tax, relating to the year 2013, because, in determining taxable profit, it did not take into account net job creation relating to five workers, requesting, for this purpose, in the administrative appeal, a correction to taxable profit, so as to include five hires that, allegedly, generate net job creation. However, the Claimant does not demonstrate that such hirings meet the requirements for application of article 19 of the TBS.

14.3. Indeed, the Claimant did not submit the permanent employment contracts for which it requested eligibility for the grant of the tax benefit and the declarations of the workers do not have the effect of meeting the requirement of permanent hiring.

14.4. Indeed, such declarations by the workers have the effect of demonstrating the ineligibility of the respective employment contracts. If the Claimant states that permanent employment contracts were not reduced to writing because, perhaps, they are conversions of fixed-term employment contracts, then it is demonstrated that the permanent labor relationships, attested in such declarations by the workers, are nothing more than a continuation of an already existing labor relationship – which eliminates "net job creation," since there was no increase in the number of workers.

14.5. The conversion of fixed-term contracts into contracts of indefinite duration does not generate net job creation. The legal condition of "net job creation" requires the verification of an actual increase in the total number of workers hired by the company, in a given tax year and on a permanent employment contract.

14.6. In truth, the Claimant seeks to demonstrate the existence of permanent employment contracts, eligible for the purposes of article 19 of the TBS, through declarations by its employees in which they state that they have with the Claimant "a permanent full-time employment contract," which is manifestly insufficient.

14.7. On the other hand, and in a somewhat unclear manner, the Claimant did not peremptorily assert the non-reduction to writing of permanent employment contracts, instead stating "it is not possible for the appellant, at least on the present date, to submit permanent contracts in written form…"

14.8. Furthermore, in the administrative appeal proceeding, the Claimant never submitted such contracts, and it continues not to do so now, in the arbitration proceedings.

14.9. Moreover, the Claimant did not present any other evidence that would allow for the conclusion that the requirements for the grant of the tax benefit provided for in article 19 of the TBS have been met. The declarations by the workers in question do not demonstrate the existence of the type of employment contract entered into with the Claimant, the extract of the payroll declarations to Social Security likewise does not have this effect. The same applies to the payroll maps, the personnel roster maps and individual registration records, also submitted by the Claimant.

14.10. It is true that the Claimant identified in the administrative appeal the employees eligible for the purposes of calculating net job creation. However, it did not manage to demonstrate that such employees met the legal requirements for the purposes of the tax benefit provided for in article 19 of the TBS.

14.11. The Claimant did not submit the permanent employment contracts entered into with the respective workers and, not having allegedly such contracts been entered into in writing, did not provide sufficient proof of the existence of an employment relationship arising from a fixed-term employment contract.

14.12. Moreover, it is the Claimant itself that states that some (or, perhaps, all) of the employment contracts in question resulted from the conversion of fixed-term employment contracts – a fact that does not generate net job creation.

14.13. The Claimant did not provide proof of such alleged fixed-term contracts, those which, yes, are necessarily subject to written form, but also the remaining documentation presented, such as the extracts of the payroll maps sent to social security say nothing about, nor prove, the type of relationship of the workers contained therein. The Claimant contented itself with submitting one permanent employment contract, entered into on 12/4/2010 with the employee B..., which, however, did not generate net job creation, because in the same year, according to the Claimant, an eligible exit also occurred.

14.14. It is not insignificant to note that the Claimant has a hesitant position regarding the existence or non-existence of permanent employment contracts, starting by saying (in the administrative appeal) that it is not in a position to submit, at that moment, the contracts reduced to writing and that the same may even have resulted from fixed-term contracts, to then (in the arbitration proceedings, art. 63 of the i.p.) cite, by way of example, a permanent employment contract reduced to writing.

14.15. Based on the foregoing, it is therefore to be concluded that the net job creation alleged by the Claimant has not been verified, and the decision rendered on the administrative appeal that is the subject of these proceedings deserves no criticism.

II - Clarification

  1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (articles 4 and 10, no. 2, of the LRTA and article 1 of Administrative Order no. 112-A/2011, of 22 March).

The tribunal is competent and has been properly constituted.

The case is not vitiated by nullities.

No exceptions have been raised.

There are no other circumstances that would prevent examination of the merits of the case.

In these terms, the Arbitral Tribunal is properly constituted to examine and decide the subject matter of the case.

III - Merits

III.1. Matter of Fact

16. Established Facts

16.1. With relevance for the examination and decision of the issues raised, the following facts are established and proven:

  • The Claimant submitted, on 27 May 2014, a Corporate Income Tax Declaration – Form 22, relating to the tax year 2013 (as per Document no. 1 attached to the request for arbitral determination and which is hereby fully reproduced for all legal purposes).

  • The Claimant calculated a taxable profit in the amount of € 1,060,227.36 (declared in field 778 of Table 07 of the Corporate Income Tax Declaration – Form 22) and a tax collection in the amount of € 265,056.84 (declared in Field 351 of Table 10 of the Corporate Income Tax Declaration – Form 22) to which corresponded a total amount of Corporate Income Tax to be paid in the amount of € 77,747.07 (contained in Field 367 of Table 10 of the Corporate Income Tax Declaration – Form 22) (see Document no. 1 attached to the request for arbitral determination).

  • On 25 May 2016, the Claimant submitted an administrative appeal, addressed to the District Finance Director of Lisbon, which received no. ...2016..., against an error in the self-assessment made in the Corporate Income Tax for the tax year 2013, for not declaring any amount relating to the tax benefit arising from net job creation, provided for in article 19 of the TBS (as per Document no. 3 attached to the request for arbitral determination).

  • The Claimant in the administrative appeal, identified in the previous paragraph, calculated, for the tax year 2013, a tax benefit for net job creation for young persons and long-term unemployed in the amount of € 32,792.14, an amount that it intends to record in field 401 of Table 04 of Annex D of the Corporate Income Tax Declaration – Form 22, relating to the tax year 2013, as an increase for job creation, resulting in the Claimant's taxable profit, after this correction, in € 1,027,435.23. The tax benefit for net job creation for young persons and long-term unemployed, for the tax year 2013, in the amount of € 32,792.14, was calculated by the Claimant considering net job creation from the year 2008 to the year 2013, identifying the employees eligible for the purposes of calculating the tax benefit (as per document at pages 22 to 25 of the Administrative Procedure File).

  • The Administrative Justice Division of the Finance Directorate of Lisbon, through notice no. ..., of 07-03-2017, in order to continue the examination of the Administrative Appeal, identified in paragraph C), requested from the present Claimant: "1 - (…) copies of the permanent employment contracts of workers nos. 73, 92, 93, 105, 106, 110, 117 and 118 mentioned in the tables attached to the appeal with the designation Admissions/Eligibility/Yes. 2 – Regarding workers nos. 105, 110 and 118, mentioned in the table for calculating the tax benefit, please send copies of the first and last Social Security declarations relating to 2013 where the amounts of costs borne by the company appear." (see page 42 of the Administrative Procedure File).

  • In response to the notice, identified in the previous paragraph, the Claimant, on 21 March 2017, submitted a request and attached two documents, namely: (i) documents of registration of the workers, eligible for the calculation of the tax benefit, with the Social Security Institute, and likewise, payroll maps, personnel roster maps and individual registration records; (ii) first and last Social Security declarations relating to 2013 of workers nos. 105, 110 and 118 (see pages 45 to 97 of the Administrative Procedure File).

  • The Administrative Justice Division of the Finance Directorate of Lisbon, on 26 April 2017, notified the Claimant to exercise, if it so wished, the right of participation in the decision in the form of prior hearing on the draft decision (see page 101 of the Administrative Procedure File).

  • The Claimant exercised, on 17 May 2017, its right to prior hearing and submitted six documents allegedly proving the date of hiring into the staff of A... of the employees identified with nos. 93, 105, 106, 110, 117 and 118 (as per pages 103 to 107 and pages 113 to 149 of the Administrative Procedure File).

  • The employees eligible for the purposes of calculating the tax benefit, in accordance with the document submitted by the Claimant and identified in paragraph D), are:

    • B..., employee no. 94, hired by the company on 12-04-2010, through a permanent employment contract, at page 33 of the Administrative Procedure File.

    • C..., employee no. 93, hired by the company on 04-01-2010, through a permanent employment contract, in accordance with a declaration signed by the employee herself, on 11-05-2017, asserting the existence of a permanent employment contract – full-time with the company, since 04-01-2010, at page 113 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of January 2010 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of December 2009 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 114 to 116 of the Administrative Procedure File.

    • D..., employee no. 105, hired by the company on 01-10-2010, through a permanent employment contract, in accordance with a declaration signed by the employee himself, on 11-05-2017, asserting the existence of a permanent employment contract – full-time with the company, since 01-10-2010, at page 118 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of October 2010 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of September 2010 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 119 to 122 of the Administrative Procedure File.

    • E..., employee no. 106, hired by the company on 02-11-2010, through a permanent employment contract, in accordance with a Notification of Employee Hiring issued by Social Security, on 02-11-2010, at page 123 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of November 2010 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of October 2010 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 124 to 127 of the Administrative Procedure File.

    • F..., employee no. 110, hired by the company on 01-10-2011, through a permanent employment contract, in accordance with a Notification of Employee Hiring issued by Social Security, on 30-09-2011, at page 129 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of October 2011 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of September 2010 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 130 to 133 of the Administrative Procedure File.

    • G..., employee no. 118, hired by the company on 01-12-2012, through a permanent employment contract, in accordance with a Notification of Employee Hiring issued by Social Security, on 30-11-2012, at page 142 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of December 2012 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of November 2012 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 143 to 146 of the Administrative Procedure File.

    • H..., employee no. 117, hired by the company on 01-12-2012, in accordance with a declaration signed by the employee himself, on 11-05-2017, asserting the existence of a permanent employment contract – full-time with the company, since 01-12-2012, at page 134 of the Administrative Procedure File, and Extracts of Payroll Declarations issued by Social Security, relating to the month of December 2012 (the month of the employee's hiring into the company whose name appears on the listing) and to the month of November 2012 (the month immediately prior to the employee's hiring into the company and whose name does not appear on the listing), contained at pages 135 to 141 of the Administrative Procedure File.

  • In the years 2008 and 2009, no net job creation was calculated, in accordance with article 19 of the TBS, as the Tax and Customs Authority recognizes, at page 112 of the Administrative Procedure File, without prejudice to the fact that in the hirings into the company's staff, presented by the Claimant, at pages 22 to 25 of the Administrative Procedure File, the following eligible employees are indicated, in the years 2008 and 2009: i) I..., employee no. 73, hired by the company, in accordance with an Extract of a Payroll Declaration issued by Social Security, relating to the month of March 2008, at page 51 of the Administrative Procedure File; ii) J..., employee no. 92, hired by the company, in accordance with an Extract of a Payroll Declaration issued by Social Security, relating to the month of July 2009, at page 53 of the Administrative Procedure File.

  • Through a notice by the Administrative Justice Division of the Finance Directorate of Lisbon, dated 6 June 2017, the Claimant was notified of the dispatch, dated 5 June 2017, by the Head of the Administrative Justice Division of the Finance Directorate of Lisbon, issued pursuant to Delegation of Powers, dismissing the administrative appeal, identified in paragraph C) (as per pages 149 to 153 of the Administrative Procedure File, documents which are hereby fully reproduced for all legal purposes).

16.2. There are no other facts with relevance for examination of the merits of the case that have not been proven.

16.3. Reasoning for the Matter of Fact

As to the matter of fact given as proven, the Arbitral Tribunal's conviction was based on free evaluation of the documentary evidence submitted to the proceedings, whose authenticity was not challenged, as well as on analysis of the administrative procedure file remitted by the Respondent.

The documents presented by the Claimant (see no. 16.1., paragraph I) i), ii), iii), iv), v), vi), vii) and paragraph J) i) and ii) above) constitute adequate proof as to the date of hiring of the workers and as to the type of labor relationship established. Thus, given the matter under examination in these proceedings, the Tribunal found it clearly irrelevant to examine the sole witness listed by the Claimant, as was appropriately decided (see no. 10 above).

III.2. Matter of Law

  1. The issue raised in these arbitration proceedings consists of determining whether all the legal requirements for the grant of the tax benefit inherent in job creation, provided for in article 19 of the TBS, have been met. More specifically, it is important to determine whether the Claimant, through the means of proof presented, demonstrates that the employees eligible for calculation of the aforementioned tax benefit had a permanent employment contract, despite the fact that such written contracts were not exhibited.

Examination of this matter is necessary.

17.1. Law no. 72/98, of 3 November, created the incentive for job creation for young persons, having added article 48-A to the TBS, which underwent various amendments over time. The legal norms relevant to the present case are no. 1 of article 19 of the TBS which states "For the determination of taxable profit of corporate income tax taxpayers and individual income tax taxpayers with organized accounting, the costs corresponding to net job creation for young persons and for long-term unemployed, hired through a permanent employment contract, are considered at 150% of their respective amount, accounted for as an expense of the fiscal year." (emphasis ours) [1]. And in paragraph d) of no. 2 of the same article it states "the following are considered: (…) 'Net job creation' the positive difference, in a given fiscal year, between the number of eligible hirings in accordance with no. 1 and the number of departures of workers who, at the date of their hiring, were in the same conditions."

17.2. Article 19 of the TBS creates a tax benefit which consists, within the scope of Corporate Income Tax, in accounting as an expense of the fiscal year, at 150% of their respective amount, the costs corresponding to net job creation for young persons and for long-term unemployed, hired through a permanent employment contract.

17.3. From reading the norm above reproduced it follows that we are faced with a tax benefit. In accordance with article 2, no. 1, of the TBS, tax benefits are considered to be measures of an exceptional character. In this regard, we entirely agree with CASALTA NABAIS when he states that the exceptional nature should not be accepted of the legal norms that provide for tax benefits "(…) since, although tax benefits are tax expenditures (which are by their very nature, passive expenditures) that are part of a legal framework derogating from the ordinary framework of the respective tax, revealing a regime more favorable for the taxpayer than that implied in its ordinary treatment and expression of a promotional function, they constitute a normal instrument of contemporary social state economic and social policy and not an exceptional instrument in the manner of the understanding peculiar to the liberal state." (see Tax Law, 10th ed., Almedina, 2017, pp. 402). However, it is important to underscore that the specificity of the legal situation that underlies the creation of the tax benefit imposes on the interpreter special care in preserving the legislative intent. Indeed, with respect to the interpretation of norms establishing tax benefits, in accordance with the provisions of article 10 of the TBS, analogical integration is prohibited, although extensive interpretation is admissible.

17.4. The Respondent alleges that the prerequisites for recognition of the right to the tax benefit for job creation, provided for in article 19 of the TBS, have not been met because the Claimant did not demonstrate that the employees eligible for calculation of the aforementioned tax benefit had a permanent employment contract. Indeed, the Claimant did not present the permanent employment contracts of the eligible employees for the purposes of calculating the tax benefit, except in one case.

17.5. With regard to the remaining prerequisites of this tax benefit, the Respondent does not contest their satisfaction. Thus, it does not challenge compliance with the provisions of no. 5 of article 19 of the TBS, that is, that none of the workers selected for the calculation of the tax benefit for net job creation benefited, within the Claimant's organization, from any other benefit of the same nature or from any employment support incentives provided for in other legislation. Nor does it raise reservations regarding compliance with the provisions of no. 6 of article 19 of the TBS, in the sense that none of the workers selected for calculation of the benefit in question was previously considered for the purposes of calculating the tax benefit for net job creation within the Claimant's organization or within another entity related, in accordance with article 63 of the Corporate Income Tax Code. Likewise, the Respondent does not contest that the workers considered in the calculation of the tax benefit do not form part of the family unit of the employing entity.

17.6. The concept of "permanent employment contract," contained in no. 1 of article 19 of the TBS, and its respective formal requirements are not established in that statute nor in other fiscal legislation. Consequently, having regard to the provisions of article 11, no. 2, of the General Tax Law, the interpreter should resort, in the present case, to the provisions of labor law on these matters.

17.7. Indeed, in the field of employment contracts, the principle of freedom of form prevails, except in cases where the law provides otherwise. Thus, as a rule, written form is not required for the conclusion of an employment contract. In that case, proof of the existence of the employment contract is made through witness testimony or any means of proof, in accordance with the provisions respectively of articles 392 and 376 of the Civil Code. (see Pedro Romano Martinez, Labor Law, Almedina, 8th ed., 2017.)

17.8. In the years 2008 and 2009, no net job creation was calculated, in accordance with article 19 of the TBS, as the Respondent acknowledges, at page 112 of the Administrative Procedure File, without prejudice to the fact that in the hirings into the company's staff, presented by the Claimant at pages 22 to 25 of the Administrative Procedure File, two eligible employees are indicated, in the years 2008 and 2009.

17.9. For the years 2010, 2011 and 2012, the eligible employees, in accordance with the document presented by the Claimant and identified in paragraph D) of no. 16.1. above, have permanent employment contracts.

With regard to one employee (no. 94), the Claimant presented in the proceedings, at page 33 of the Administrative Procedure File, the permanent employment contract reduced to written form.

For three employees (nos. 93, 105, 117), the Claimant submitted to the proceedings declarations signed by the employees themselves asserting the existence of a "permanent employment contract – full-time" with the company. It is important to note that as to the probative force of documents signed by their author, when genuine, they make full proof as to the statements attributed to their author (see articles 374, no. 1, and 376, no. 1, of the Civil Code).

For the remaining three employees (nos. 106, 110, 118), the Claimant presented Notifications of Employee Hiring issued by Social Security.

With respect to all the employees, the Claimant, to prove the dates of hiring, submitted to the proceedings Extracts of Payroll Declarations issued by Social Security, relating to the month of the employee's hiring into the company (whose name appears on the listing) and to the month immediately prior to the employee's hiring into the company (whose name does not appear on the listing).

17.10. Given the foregoing, the documents presented by the Claimant, described in no. 16.1., paragraph I) i), ii), iii), iv), v), vi), vii) and paragraph J) i) and ii) above, constitute adequate proof as to the type of labor relationship established, that is, a permanent employment contract, and as to the date of hiring of the workers (see no. 16.3. above).

In these terms, the eligibility of the employees selected by the Claimant for calculation of the tax benefit, provided for in article 19 of the TBS, is established. As a result, the tax benefit associated with net job creation for young persons and long-term unemployed must be considered in the Claimant's Corporate Income Tax Declaration relating to the tax year 2013 (recorded in field 401 of Table 04 of Annex D).

  1. It now remains to examine the Claimant's request, made in the Request for Arbitral Determination, for payment of compensatory interest.

Based on article 24, no. 5, of the LRTA, it has been understood that recognition of the right to compensatory interest is possible in arbitration proceedings.

In accordance with article 43, no. 1, of the General Tax Law, compensatory interest is due when it is determined, in an administrative appeal or judicial challenge, that there has been an error attributable to the services from which overpayment of the tax debt results in an amount greater than legally owed.

The necessary condition for the award of compensatory interest consists of demonstrating the existence of an error regarding the factual or legal premises attributable to the services of the Tax Administration.

In situations in which the execution of the act that defines the tax debt falls to the taxpayer, in the case of these arbitration proceedings, the submission by the Claimant of the Corporate Income Tax Declaration – Form 22, the error will only become attributable to the Tax Administration after the rejection of the claim made by the taxpayer, that is, from the moment when, for the first time, the Tax Administration takes a position regarding the taxpayer's situation with the necessary elements to issue a decision with correct premises. (see Jorge Lopes de Sousa, Code of Tax Procedure and Process, vol. I, 6th ed., 2011, pp. 537).

Thus, in the present case, the error of the Tax Administration occurs only with the dismissal of the administrative appeal, so compensatory interest only begins to accrue from that date.

IV - Decision

Based on the foregoing, this Tribunal decides:

  • To find the request for arbitral determination well-founded, determining the partial annulment of the self-assessed Corporate Income Tax act, identified above, with all legal effects arising therefrom, and the consequent reimbursement of the amounts unduly paid;

  • To order the Respondent, in accordance with articles 43, no. 1 of the General Tax Law and 61 of the Code of Tax Procedure and Process, to pay compensatory interest, accrued from the date of notification of the dispatch dismissing the administrative appeal.

V - Value of the Case

Given the provisions of articles 32 of the Administrative Procedure Code, 306, no. 2, of the Code of Civil Procedure and 97-A of the Code of Tax Procedure and Process, applicable by virtue of the provisions of article 29, no. 1, paragraphs a) and b), of the LRTA, and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the case is fixed at € 32,792.14 (thirty-two thousand seven hundred and ninety-two euros and fourteen cents).

VI - Costs

Costs to be borne by the Respondent, in the amount of € 1,836.00 (one thousand eight hundred and thirty-six euros), in accordance with Table I of the RCPAT, in compliance with the provisions of articles 12, no. 2, and 22, no. 4, both of the LRTA, as well as the provisions of article 4, no. 4, of the RCPAT.

Let notice be given.

Lisbon, Administrative Arbitration Center, 23 May 2018

The Arbitrator

Olívio Mota Amador

[1] Note that prior to the republication of the TBS, operated by Decree-Law no. 108/2008, of 26 June, the norm above referred to was contained in article 17.

Frequently Asked Questions

Automatically Created

What is the Net Job Creation Tax Benefit under Article 19 of the Portuguese Tax Benefits Statute (EBF)?
The Net Job Creation Tax Benefit under Article 19 of the Portuguese Tax Benefits Statute (EBF) is a corporate income tax incentive designed to encourage employment of young workers through permanent contracts. Companies can deduct a specified amount from their IRC liability for each eligible employee hired on an indefinite-term contract, subject to strict conditions: the worker must not have been previously counted for this benefit by the same company or related entities (per Article 63 of the IRC Code), cannot be receiving other employment support incentives, must not be a family member of the employer, and must be employed under a permanent contract. The benefit promotes job stability and youth employment by providing direct tax relief proportional to net increases in the workforce meeting these criteria.
Can a company challenge an IRC self-assessment that excludes the job creation tax benefit through tax arbitration at CAAD?
Yes, a company can challenge an IRC self-assessment that excludes the job creation tax benefit through tax arbitration at CAAD (Centro de Arbitragem Administrativa). The procedural pathway requires first filing an administrative appeal (reclamação graciosa) with the Tax Authority. If this gracious complaint is denied, the taxpayer may then request arbitration under the Legal Regime for Tax Arbitration (RJAT - Decree-Law 10/2011). CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, offering faster resolution. The arbitration can address both the substantive tax issue (whether requirements for the benefit are met) and procedural matters, including claims for reimbursement of amounts unduly paid plus compensatory interest if the self-assessment is declared illegal.
What are the requirements for permanent employment contracts to qualify for the Article 19 EBF tax benefit in Portugal?
For permanent employment contracts to qualify for the Article 19 EBF tax benefit in Portugal, several requirements must be met: (1) the contract must be for an indefinite term (contrato por tempo indeterminado), not fixed-term; (2) the worker cannot have previously been counted for this tax benefit by the same employer or related entities under Article 63 of the IRC Code; (3) the employee cannot simultaneously benefit from other employment support incentives or subsidies of identical nature; (4) the worker cannot be part of the employer's family unit. Importantly, Portuguese tax and labor law does not mandate submission of formal written employment contracts as proof. Taxpayers can demonstrate permanent employment relationships through alternative documentation including Social Security registration records, payroll maps (mapas de remunerações), personnel rosters, and individual employee registration records that collectively establish the indefinite nature of the employment relationship.
How does the gracious complaint (reclamação graciosa) process work before filing a CAAD arbitration request for IRC disputes?
The gracious complaint (reclamação graciosa) is an administrative pre-litigation procedure that Portuguese taxpayers must exhaust before accessing CAAD arbitration for IRC disputes. After identifying an error in a self-assessment or receiving an unfavorable tax decision, the taxpayer files a written complaint with the competent Tax Authority division (typically the Administrative Justice Division of the relevant Finance Directorate). The Tax Authority examines the claim and issues a draft decision, after which the taxpayer exercises the right to be heard (direito de audiência prévia), submitting additional arguments and evidence. The Tax Authority then issues a final decision through a formal dispatch. If the gracious complaint is denied, the taxpayer may challenge this decision through CAAD arbitration within the statutory deadline, as occurred in this case where the Lisbon Finance Directorate's denial on 05-06-2017 was challenged through arbitration requested on 06-09-2017.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when an IRC self-assessment is declared illegal by CAAD?
Yes, a taxpayer is entitled to compensatory interest (juros indemnizatórios) when an IRC self-assessment is declared illegal by CAAD, provided the taxpayer overpaid tax as a result of the illegal assessment. Compensatory interest serves to compensate taxpayers for the financial loss caused by the State's retention of amounts not legally due. The interest is calculated at the legal rate (taxa legal) from the date of undue payment until reimbursement. In this case, the claimant specifically requested reimbursement of €32,792.14 plus compensatory interest calculated at the legal rate. This remedy recognizes that when tax authorities improperly deny legitimate tax benefits or credits, taxpayers suffer economic harm from being deprived of funds rightfully theirs, and compensation through interest is required to restore the taxpayer to the proper financial position consistent with principles of fiscal justice and protection of legitimate taxpayer expectations.