Process: 512/2017-T

Date: February 28, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 512/2017-T addressed a critical dispute regarding IRS taxation of employment termination compensation under Article 2(4) of the CIRS. The taxpayer received €94,158.00 severance from a banking institution in 2013 after working there for 3.86 years. The Portuguese Tax Authority (AT) assessed additional IRS of €41,065.69, considering only the taxpayer's seniority with the final employer for calculating the tax exemption, excluding just €15,832.72 from taxation. The taxpayer contested this, arguing that his total banking sector seniority should count—22.3 years across two banking institutions (1991-2009 at one bank, 2009-2013 at another)—based on the Banking Sector Collective Labor Agreement (Clause 17), which defines seniority as all years worked in Portuguese credit institutions. The central legal question concerned whether 'seniority' under CIRS Article 2(4) refers exclusively to service with the compensating employer or encompasses industry-wide experience when collective agreements so provide. The taxpayer challenged the assessment through gracious and hierarchical appeals before seeking CAAD arbitration. The AT maintained that only employment duration with the entity paying compensation matters for IRS exemption purposes, regardless of collective agreements or previous banking employment. This case highlights the intersection of labor law concepts and tax law interpretation, particularly regarding how compensation exemptions are calculated when workers transition between employers in regulated sectors.

Full Decision

ARBITRAL DECISION

I - REPORT

A - Identification of the Parties

Claimant: A…, with tax identification number … and resident at …, Street …, no. …, … …-… …, hereinafter designated as Claimant or Taxpayer.

Respondent: Tax and Customs Authority, hereinafter designated as Respondent or AT.

The Claimant submitted a request for constitution of an Arbitral Tribunal in tax matters and a request for arbitral pronouncement, in accordance with the provisions of paragraph a) of article 2, subsection 1 and paragraph a) of article 10, subsection 1, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters), hereinafter briefly designated as LRAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of the Administrative Arbitration Center (CAAD), and in accordance with the provision of paragraph c) of article 11, subsection 1 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Tax Authority was notified on 2017-09-15.

The Claimant did not proceed with the appointment of an arbitrator, and therefore, in accordance with the provisions of subsection 1 of article 6 and paragraph b) of article 11, subsection 1 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as Arbitrator Rita Guerra Alves, the appointment having been accepted by her in accordance with legal provisions.

On 2017-11-14, both parties were duly notified of this appointment, and they did not express a wish to refuse the arbitrator's appointment, in accordance with article 11, subsection 1, paragraphs a) and b) of the LRAT and articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal was regularly constituted on 2017-12-06 to assess and decide the object of the present dispute, and the Tax and Customs Authority was automatically notified on 2017-12-06 as recorded in the respective minutes.

Both parties were duly notified and agree to waive the meeting provided for in article 18 of the LRAT and to submit written statements.

B - CLAIM

The Claimant requests that the illegality of the tax assessment act for Income Tax on Natural Persons (IRS) no. 2016…, relating to the year 2013, in the total amount of 41,065.69€ (forty-one thousand, sixty-five euros and sixty-nine cents) be declared.

C - GROUNDS FOR CLAIM

To support its request for arbitral pronouncement, the Claimant alleges, with a view to declaring the illegality of the tax assessment act for Income Tax on Natural Persons (IRS), as already described in point 1 of this decision, the following:

  • The Claimant was subject to an inspection action carried out by the inspection services of the DF of…, which resulted in corrections in respect of IRS for the year 2013, through assessment no. 2016…;

  • The inspection action originated in the context of an inspection action on the entity "B…";

  • Not agreeing with the said assessment, the Claimant filed a gracious appeal, which was assigned the appeal file number …2016…,

  • The gracious appeal was dismissed, the Claimant filed a hierarchical appeal against the same tax assessment, which was assigned the number …2017…;

  • The Claimant was notified of the dismissal of the hierarchical appeal filed against the dismissal of the gracious appeal on 23/06/2017;

  • The Claimant, due to termination of the employment contract with "B…", received in 2013 compensation in the amount of € 94,158.00;

  • The AT considered that, from the compensation received, only the amount of €15,832.72 is not subject to taxation, considering that the remaining amount of €79,925.28 has the nature of income from category A, reason for which it would be subject to taxation;

  • The Claimant contends that he was an employee of the banking institution "C…, SA" between 4 February 1991 until 21 July 2009;

  • And in turn, on 22 July 2009 the Claimant commenced employment at "B…";

  • On 31 May 2013, the Claimant terminated his contractual relationship with "B…", having received as compensation the gross amount of € 94,158.00;

  • The Claimant alleges that for the purposes of applying the IRS rule, it is essentially important to frame the concept of seniority, and what is at issue is whether, in the case of compensation for termination of employment in the banking sector, only the length of service in the last banking entity should be considered, or the entire length of time in all banking entities in which the Claimant has worked;

  • That from tax law no concept of seniority is derived, or in other words, the tax legislator did not define the concept of seniority, namely for the purposes of taxation in respect of IRS;

  • The Claimant was unionized in unions that were signatories to the Collective Labor Agreement, in accordance with the principle of affiliation established in article 496, subsection 1 of the Labor Code, so he is bound by the text of the instrument of collective regulation of labor;

  • Thus, he considers that the Collective Labor Agreement of the banking sector should be analyzed in his specific case, the content of clause 17 of the ACT of the Banking Sector, which provides as follows with respect to the worker's seniority: "1. For all purposes provided for in this Agreement, the worker's seniority shall be determined by counting the length of service provided as follows: a) All years of service, provided in Portugal, in credit institutions with activity in Portuguese territory. ",

  • He alleges that, without doubt, the said clause considers as seniority (of the worker) all years of work provided in credit institutions based in Portugal;

  • The compensation paid to the Claimant in the amount of € 94,158.00 shows that "B…" considered, as compensation for termination of the Employment Contract, all the banking seniority of the worker;

  • The seniority to be considered, in the specific case, is that which corresponds to the totality of the length of service provided by the Claimant A… in credit institutions in Portugal, by virtue of the application of the ACT of the Banking Sector and the individual employment contracts that always considered it expressly;

  • The Claimant further alleges the unconstitutionality of the additional assessment made by the AT for violation of the principle of equality;

  • Furthermore, the Claimant alleges that in accordance with the principle of tax substitution, "B…" S.A. is responsible for the payment of IRS not withheld;

  • The Claimant concludes by sustaining the illegality and voidability of the said assessment act in respect of Income Tax on Natural Persons (IRS) for violation of law.

D - RESPONDENT'S REPLY

The Respondent, duly notified to that effect, timely filed its reply, in which, in brief summary, it alleged the following:

  • The AT considers that the seniority to be counted for the purposes of subsection 4 of article 2 of the CIRS is the seniority with the entity owing the compensation for termination of the employment contract, and it is not appropriate to consider, in the application of the said legal provision, the seniority with a previous employer, even if the worker and the new employing entity have agreed that it be considered in any future "compensations", by employment contract or arising from instruments of collective regulation of labor.

  • Therefore, it was based on the seniority of 3.86 years that the amount of compensation excluded from IRS taxation was determined, since this is the length of service provided with the last employing entity, who bears the duty to pay the compensation.

  • It understands that the concept of seniority – seniority per se, without any qualifier – in labor law does not have a particular scientific density that significantly distances it from the sense of ordinary language: translating, as in other legal contexts, a legally relevant interval, with diverse effects, between a certain starting point and a certain end point.

  • Analyzing the content of the collective labor agreements of the banking sector, which contain that clause 17 (under the heading "Determination of seniority"), it is important to conclude that, apart from the compensation regime for substitution of reinstatement arising from the unlawfulness of dismissal, such instruments do not apply to compensations/indemnifications for contract expiration, dismissal for objective cause, termination of the contract by the worker based on unlawful conduct of the employer or by mutual agreement to revoke/rescind the employment contract – matters which, when properly examined, are therefore excluded from the normative effects arising from such clause 17, simply because they do not form part of "all purposes provided for" in such instruments.

  • Given that "the qualification of the legal transaction made by the parties (…) does not bind the tax administration" according to subsection 4 of article 36 of the General Tax Law – a rule which naturally encompasses, by way of all the more reason, the qualifications by the parties concerning the object of the transaction - the issue must be resolved through complete legal interpretation of all the rules implied by the expression "number of years or fraction of seniority or length of service with the entity owing the compensation", contained in paragraph b) of subsection 4 of article 2 of the IRS Code.

E - FACTUAL FOUNDATION

Prior to addressing the issue raised, it is necessary to present the factual matter relevant to its understanding and the decision to be rendered, based on the facts alleged and the documentary evidence produced in the record.

As relevant factual matters, this Tribunal holds the following facts as established:

  • The Claimant worked at the banking institution "C…, SA" between 4 February 1991 until 21 July 2009.

  • On 22 July 2009 the Claimant commenced employment at "B…";

  • In accordance with the provisions of the employment contract between the Claimant and "B…", the binding to the ACT for the Banking Sector, published in the Official Journal 1st series, no. 42 of 15.11.1994 results.

  • The Claimant terminated his employment contract with "B…" on 31 May 2013 and received in 2013 compensation in the amount of €94,158.00.

  • The compensation was calculated in accordance with article 17 of the ACT of the Banking Sector, based on the Claimant's years of seniority in the banking sector, including the years of service at "C…, SA" and at "B…", as shown in the employment contract termination document.

  • The Claimant was affiliated between February 1991 and November 2001 with the Union of Bankers of the North (SNB), a union that is a signatory to that ACT of the Banking Sector, and from November 2001 to May 2013 was affiliated with the National Union of Banking Executives and Technicians, equally a signatory to that ACT of the Banking Sector.

  • The employment contracts of the Claimant with C…, S.A. and with B… were bound by the ACT of the Banking Sector published in the Official Journal 1st series, no. 42 of 15.11.1994 by their accession to the said ACT.

F - FACTS NOT PROVEN

Of the facts of interest for the decision of the case, contained in the challenge, all subject to concrete analysis, those not contained in the factual matter described above were not proven.

G - ISSUES TO BE DECIDED

Having regard to the positions of the parties, assumed in the arguments presented, the central issues to be decided are the following, which must therefore be assessed and decided:

Alleged by the Claimant:

  • The declaration of illegality of the tax assessment act in respect of Income Tax on Natural Persons (IRS) no. 2016…, relating to the year 2013, in the total amount of 41,065.69€ (forty-one thousand, sixty-five euros and sixty-nine cents).

  • Payment of compensatory interest.

H - MATTER OF LAW

Having regard to the positions of the parties assumed in the documents presented, the central issue to be resolved by this Arbitral Tribunal consists of assessing the legality of the assessment act for Income Tax on Natural Persons (IRS).

The Claimant briefly alleges in its request for arbitral pronouncement that, according to the Collective Labor Agreement that governs the Banking Sector, for the purposes of contract cessation and exemption as provided for in article 2, subsection 4 of the CIRS, the concept of seniority refers to the number of years in the banking sector as provided for in the ACT of the Banking Sector, and not the period relating to the exercise of functions in the last credit institution "B…".

The Respondent counter-argues to the effect that for the purposes of contract cessation and exemption as provided for in article 2, subsection 4 of the CIRS the years of seniority are those of the entity owing the compensation.

Consequently, the central issue on which this tribunal will pronounce itself consists of assessing the issue in light of the principle of substantive truth over form, which is subsumed in the analysis and assessment of the concept to be given to years of seniority for the purposes of article 2 of the CIRS, resorting to applicable legislation, case law and doctrine.

On the relevant legal-fiscal framework for the present case, we transcribe subsection 4 of article 2 of the CIRS:

"4 - When, in any manner, the contracts underlying the situations referred to in paragraphs a), b) and c) of subsection 1 terminate, but without prejudice to the provision of paragraph d) of the same number, as to the payments that continue to be due even if the employment contract does not subsist, or when the cessation of functions of public manager, administrator or manager of a legal entity occurs, as well as of representative of stable establishment of non-resident entity, the amounts received, in any form, are always subject to taxation in the part that exceeds the value corresponding to the average of regular remuneration with the character of compensation subject to tax, received in the last 12 months, multiplied by the number of years or fraction of seniority or length of service with the entity owing the compensation, in other cases, except when within the following 24 months a new professional or business link, regardless of its nature, is created with the same entity, in which case the amounts shall be taxed in full." (our emphasis)

And we likewise transcribe article 17 of the Collective Labor Agreement of the Banking Sector (hereinafter designated as ACT of the Banking Sector), an instrument of collective labor regulation, whose latest amendment was published in the Official Journal, 1st series, no. 20, of 29 May 2011: "1. For all purposes provided for in this Agreement, the worker's seniority shall be determined by counting the length of service provided as follows: a) All years of service, provided in Portugal, in credit institutions with activity in Portuguese territory."

Regarding the interpretation to be given to article 2, subsection 4 of the CIRS, there is extensive case law. We refer to the understanding expressed in arbitral case no. 230/2016-T (in the same sense case 353/2017-T):

"The literal element of the rule is always very relevant, as it delimits the interpretive activity.

The legislator's intent that does not have a minimum of verbal correspondence in the letter of the law, even if imperfectly expressed, cannot, however, be considered by the interpreter. The letter is an irremovable element of interpretation, or a "limit of the search for the spirit".

"An interpretation that does not already fall within the scope of the possible literal meaning is no longer interpretation, but modification of meaning" (Larenz).

"(...) it must be a meaning (a motivation, a set of objectives) that reasonably fits within the literal meaning of the legislator's declaration. On penalty that, if this does not happen, a new rule is being created, instead of interpreting an already existing rule".

The Respondent places the emphasis on the literal element of the rule, as is apparent from reading its position in t) of the report of this decision and from the studies and positions it cites in support of its reading of the law (of Dr. Manuel Faustino and Dr. Filipe Fraústo da Silva and Dr. Cláudia Reis Duarte).

It considers that, as the rule is worded, this segment: "…number of years or fraction of seniority or length of service with the entity owing the compensation, in other cases" should be read as follows:

  • Number of years or fraction of seniority with the entity owing the compensation (employer);

  • Number of years of length of service with the entity owing the compensation (employer).

Although the learned comments contained in the annotation to the Higher Administrative Court judgment on seniority in the banking sector to which we referred above are relevant, it seems to us questionable that one should consider that the legislator, having regard to the manner in which he worded the text of the rule in question, intended that the concept of "seniority" be only that obtained with the employing entity (owing compensation) in the separation.

In the same sense as the reasoning expended by the AT, the rule containing the expression "in other cases" would be emptied of content, as this seems to lead the interpreter to the idea that here two different mechanisms are established to ascertain, determine, the multiplier, leading to differentiated results.

The reading of the law defended by the AT, with the breadth contained in the binding information extracted in case 1818/10 (in situations of entities in a relationship of control or group and in situations of article 285 of the Labor Code), seems to lead, in practical terms, to the multiplier being always the same, whether by the criterion of "seniority", whether by the criterion of years of length of service with the employing entity separating from the employment contract. And thus interpreting the rule we are faced with equal results for cases in which it seems to provide for differentiated mechanisms.

That is, for situations of law and of fact different, it is supposed that different solutions be established. And in this line of thinking it does not seem proper to speak of violation of the principle of material equality (isonomic equality) because it is a matter of establishing different multipliers for differentiated expectations, created on the basis of different legal and factual realities.

This segment of the rule thus seems to intend to consider two distinct realities (with differentiated solutions) to determine the multiplier in question:

  • Number of years or fraction of seniority (understood in general terms, without qualifying the type of seniority); or

  • Number of years or fraction … of length of service with the entity owing the compensation.

It is that the rule adds after the last expression (or length of service with the entity owing the compensation): "in other cases", leading to the perception that it contains two distinct mechanisms to obtain the multiplier, in the alternative, there being therefore, at least, "two" distinct cases, contained in the provision of the rule. Which must lead to different results, with the subjects of the rule following the regime that is concretely more favorable to them.

It thus seems that this reading of the law (considering the one defended by the AT) is also possible, given the literal element of the rule.

Equally, when the above-cited study refers (emphasis ours) "It is not enforceable against the tax administration the language of the ... banking sector that imposes, in the transfer of a worker between credit institutions, the counting of the length of seniority verified in the previous or previous credit institutions where he has been an employee", it seems to us that this is not a matter of enforceability of a rule of contractual source against the AT, but solely and simply a matter of interpreting the term "seniority", expressed in general terms in tax law, through the mechanisms that tax law provides, that is, by virtue of article 11, subsection 2 of the General Tax Law, with the interpreter availing himself of the source of law that best defines that concept, in this case the ACT of the banking sector, by virtue of the labor law regime concretely applicable to the case.

One may not agree with a particular reading of a rule, which its literality accommodates, but we shall be only within the scope of its interpretation and in the effort to search for the most assertive reading.

Finally and in a determining manner, the various decisions cited by the parties from the Higher Administrative Court of the Southern Region are all in this sense (invoking the concept of seniority contained in the ACT of bankers, when dealing with workers in that sector and in separations of employment contracts), so that the Higher Administrative Court of the Southern Region would always have to judge according to "constituted law", and the reading of the law embodied therein should be considered as the most assertive and generating legal certainty for citizens and economic agents.

Having regard to the date of delivery of the decisions of the Higher Administrative Court of the Southern Region in question (2010, 2012 and 2013), if the legislator understood that the reading of the law embodied therein deserved criticism, he would already have proceeded to amend or correct the text of the law."

The said judgment, which pronounced on a question equal to that of the present case, makes an interpretation of article 2, subsection 4 of the CIRS, to the effect that the rule differentiates between "Number of years or fraction of seniority" and "Number of years or fraction … of length of service with the entity owing the compensation."

In that same sense, the case law had already pronounced itself in the same manner in the cases of the Higher Administrative Court of the Southern Region of 11/5/2004 - Case no. 6002/01; of 21/9/2010 - Case no. 3748/10 and of 12/3/2013 - Case no. 5971/12.

We now cite the position assumed in the Higher Administrative Court of the Southern Region of 21/9/2010, case 3748/10:

«For the present case of termination of labor relations by mutual agreement, between the now appealed respondent and his employing entity, this rule of incidence of subsection 4, leaves no doubt that taxation shall be only on the part exceeding one and one-half times the average value of the remuneration received in the last 12 months, multiplied by the number of years or fraction of seniority or length of service with the entity owing the compensation, that is, in this last employing entity with whom agreement was reached for such termination, as in this matter neither the parties themselves dissent, this being the case to ascertain, first of all, the respective seniority of the same, since it is the same that determines, in the first place, the quantitative dimension of that same taxable income and therefore, of that corresponding additional assessment.

And to do so, we must avail ourselves of the concept of worker seniority as it is defined in the respective branch of law, that is in labor law, by virtue now of the provision in art. 11, subsection 2 of the General Tax Law, but which was already understood in this manner previously, whenever terms proper to other branches of law were used, as is well founded in the judgment appealed, since the tax legislator opted not to proceed, himself, with such definition of worker seniority for the purposes of IRS.

But this rule mandates recourse not only to the terms proper to other branches of law, but to the rules of other laws, in which the question would be raised as to whether the banking ACT, in the case applied, could have any relevance here in tax matters, knowing that this is not law (formal), not least by virtue of the provision in article 112 of the Constitution of the Portuguese Republic and article 1 of the Civil Code, not having been issued by any state body, within its objective competence and within the material limits of its subjective competence, but rather rests on an agreement of will formed between the union and employer associations of the sector of activity, and within the domain of the private will of the parties, which the law, however, does not fail to confer legal relevance upon, not least in the rules of articles 405 et seq. of the same Code [here in contrast to what seems to be defended in the matter of conclusion N) of the appealed respondent, defending the terms of such labor agreement only by itself, as if imposing itself on the AT itself], that is, such agreement cannot fail to contain legal rules, binding between the parties, but it does not constitute law in a formal and proper sense, even though by virtue of such rules of labor law it has the same relevance as if it were formal law.

Both at the time when the now appealed respondent commenced his professional activity here in question (1988) and for whose seniority counted from then payments of remuneration were made from which resulted the controversial additional assessment, the Legal Regime of the Individual Employment Contract approved by article 1 of Decree-Law no. 49408, of 24/11/1969, did not itself define what should be understood as worker seniority, although in the provision of its article 12, it defined an order of application of labor regulation instruments, where collective labor conventions appeared as one of the sources of that law, even if in last place, an order which was reversed with the regulation introduced by Decree-Law no. 519-C/79, of 29 December, also designated as the Law on Collective Labor Agreements, in whose article 2 came to place at the head of collective regulation of labor, with special primacy, the respective collective agreements celebrated between union and employer associations, still maintaining the others, such as arbitral decision, agreement of accession and administrative means, the latter with a residual character, that is by administrative order, since certain prerequisites are met, as can be seen in the provision of article 29 of this latter diploma.

And also the current Labor Code approved by article 1 of Law no. 99/2003, of 27 August, does not itself regulate the concept of worker seniority, continuing, however, to place in first place, the instruments of collective regulation, such as the sources of law from which, in the first place, the rules applicable to the employment contract emanate, and defining the forms which these may take, as can be seen from its article 2: collective agreements, collective agreements and company agreements.

And thus, we then have to avail ourselves of the instruments of collective regulation applicable in the banking sector in question, where the term worker seniority is defined and established in labor law, by virtue of those rules of the Regime of Individual Employment Contracts and of the Law on Collective Labor Agreements that attribute such relevance to them, the first, according to this latter diploma, of sources of labor law, where such seniority is shown to be defined, as being that corresponding to that which the worker holds for all the time of service provided in Portugal in credit institutions with activity in Portuguese territory, clauses 16, paragraph a) of the ACT published in the Official Journal, 1st Series no. 28, of 29/7/1986 and 17, of the ACT published in the Official Journal, 1st Series no. 31, of 22/8/1999, as the now appealed respondent does not dispute in this part, so that the seniority has to be effectively this reported to May 1988, which is not only by the time provided in this last employing entity, as the appealed respondent wishes, since it also is not disputed that the same has worked in the respective sector of activity, at least since May 1988, as appears in the proven matter in paragraph A) of the matter fixed in the evidentiary part of the judgment appealed, by reference to doc. contained in pages 30 to 32 of the record, which the former tax authority, in its position, contained in page 79 of the record, did not contest, since it also proves nothing that was not this the concept of seniority for this effect, which the legislator of the IRS Code intended to cast in the provision of the cited art. 2, subsection 4.

This same understanding is embodied in case 5971/12 of 12 March 2013 of the Higher Administrative Court of the Southern Region, as to the interpretation of tax laws: "(…) there being a need to determine its true meaning in accordance with the techniques and interpretative elements generally accepted by doctrine (see art. 9 of the Civil Code; art. 11 of the General Tax Law; José de Oliveira Ascensão, The Law, Introduction and General Theory, Editorial Verbo, 4th edition, 1987, page 335 et seq.; J. Baptista Machado, Introduction to Law and the Legitimizing Discourse, Almedina, 1989, page 181 et seq.; Nuno Sá Gomes, Manual of Tax Law, II, Notebooks of C.T. Tax, no. 174, 1996, page 363 et seq.)".

Returning to the case at hand, we are deciding an issue that has underlying an employment contract concluded between the now Claimant and banking institutions, with binding to the ACT for the Banking Sector, published in the Official Journal 1st series, no. 42 of 15.11.1994, a contract which terminated by revocation.

Having regard to the contract in question, it is important to ascertain the issue of the Seniority of the worker, now Claimant, since it will be this that will determine the amount of tax income and consequent assessment.

Now, from tax legislation, we hold as certain that the concept of worker seniority is not defined, however, and because applicable to the present case subsection 4 of article 2 of the CIRS which employs terms proper to other branches of law, it becomes determining by way of article 11, subsection 2 of the General Tax Law, to resort to the branch of law that regulates the contractual relationships established between the parties.

Indeed, subsection 2 of article 11 of the General Tax Law tells us that "whenever in tax rules terms proper to other branches of law are employed, the same shall be interpreted in the same sense which they have therein, unless otherwise directly derives from the law."

Thus, it will be in the regime of the branch of labor law that we will seek the concept of Worker Seniority.

Having regard to the date of commencement of the employment contract on 04/02/1991, the date from which its seniority and consequent compensation were counted, the legal regime applicable at that time nor the current Labor Code approved by law 7/2009 of 12 February, define what should be understood as worker seniority. However, both one regime and the other define the sources and application of labor law.

And in accordance with article 1 and 2 of the Labor Code, the Collective Agreement constitutes a specific source of labor law, whose legal relevance is found established in articles 405 et seq. of the Labor Code.

That way, it will be in the instruments of collective regulation applicable to the banking sector to which the Claimant and the banking institution were bound that we will seek the concept of worker seniority.

Thus, in accordance with article 17, subsection 1, paragraph a) of the Collective Labor Agreement of the Banking Sector, the following definition of Worker Seniority results: "1. For all purposes provided for in this Agreement, the worker's seniority shall be determined by counting the length of service provided as follows: a) All years of service, provided in Portugal, in credit institutions with activity in Portuguese territory."

As results from the said provision article 17, subsection 1, paragraph a) of the ACT, and from the stipulated in clause 7 of the employment contract, the seniority to be considered, in the specific case, is that which corresponds to the totality of the length of service provided by the Claimant A… in credit institutions in Portugal, that is, from 04/02/1991.

Let us resort to the broad case law of the Higher Administrative Court of the Southern Region to the CAAD, as regards for the purposes of the said IRS exemption, the length of service provided by the worker to entities of the same sector, whenever the following requirements are met, namely:

  • The new employing entity has subscribed to the ACT of the respective sector;

  • There exists an individual agreement between the worker and the new employing entity (as a rule, the employment contract) to the effect that the length of service provided to entities of the same sector is relevant; and,

  • The worker is affiliated to the respective union.

It follows from the established factual matter that the three requirements are satisfied, so much so that:

As regards the first requirement, by virtue of the employment contract of the Claimant with C…, SA and with B… both were bound by the ACT of the Banking Sector published in the Official Journal 1st series, no. 42 of 15.11.1994;

As regards the second requirement, there existed by virtue of clause 7 of the employment contract between the worker and the new employing entity contractual provision regarding the seniority of the length of service provided to entities of the same sector;

As regards the third requirement, this too is satisfied by virtue of the existence of affiliation of the Claimant between February 1991 and November 2001 with the Union of Bankers of the North (SNB), a union that is a signatory to that ACT of the Banking Sector, and from November 2001 to May 2013 with the National Union of Banking Executives and Technicians, equally a signatory to that ACT of the Banking Sector.

In addition to these requirements, some understand there to be another which pertains to the existence of payment of compensation for the length of seniority in a previous banking institution. As regards this issue, it must be said that neither the AT nor the Claimant invoked that the Claimant had received compensation for the length of seniority in a previous banking institution. However, it should still be noted that it would have been incumbent on the AT to ascertain in the context of the proceedings instruction in accordance with subsection 2 of article 65 of the IRS Code, and to avail itself of the records of IRS declarations concerning previous years and other declarative obligations of the paying entities, also through the principle of inquiry and the principle of cooperation. This factual matter, if it existed, should have been ascertained by the AT in the context of the instruction of the proceedings referred to above, preventing the application of the law in the comprehensive reading that we are here highlighting (if there is improper use of this tax regime) through the application of the general anti-abuse clause in subsection 2 of article 38 of the General Tax Law. Given that the question of payment of compensation for the length of seniority in a previous banking institution has not been brought to the record, this tribunal is led to believe that there has not been payment of prior compensation, and thus this requirement is also understood to be satisfied.

From the foregoing, it is concluded that the seniority to be considered, in the specific case, is that which corresponds to the totality of the length of service provided by the Claimant in credit institutions from 04/02/1991, by virtue of the application of the ACT of the Banking Sector, the provisions of the individual employment contracts and the text of the agreement reached for termination by revocation, which always considered it expressly, cf. docs. 6, 7, 8, 9, 10.

For all the reasons set out above, this Tribunal decides in favor of the declaration of illegality of the assessment sub judice, for suffering from a defect for violation of article 2, subsection 4 of the CIRS, due to error as to the assumptions of law, which justifies the declaration of its illegality and annulment.

In accordance with articles 608, subsection 2, 663, subsection 2 and 679 of the Code of Civil Procedure, by application of article 29 of the Legal Regime for Arbitration in Tax Matters, this Arbitral Tribunal is not obliged to assess all arguments alleged in the initial petition by the Claimant nor in the reply made by the Respondent, when the decision becomes prejudiced by the solution already given, which in the present case translates into the decision rendered on the illegality of the assessment, thus making it unnecessary to consider the remaining issues brought to the record.

H - COMPENSATORY INTEREST

The Claimant further petitions for the payment of compensatory interest.

Given the foregoing, the IRS assessment, in the part covered by the annulment, results from error of fact and law attributable exclusively to the tax administration, insofar as the Claimant fulfilled its obligation to file a declaration.

In truth, it was shown that the Claimant paid the tax challenged in an amount higher than that which is due. In this manner and by virtue of the provisions of articles 61 of the Tax Procedure Code and 43 of the General Tax Law, the Claimant has the right to compensatory interest owed, such interest being to be calculated from the date of payment of the undue tax (annulled) until the date of issuance of the respective tax credit note, the time limit for payment of which is calculated from the date when the time limit for voluntary compliance with this decision begins (article 61, subsections 2 to 5 of the Tax Procedure Code), all at the rate ascertained in accordance with the provision in subsection 4 of article 43 of the General Tax Law.

Given all of the foregoing and the invoked legal rules, it is decided in favor of granting the Claimant's request.

I - DECISION

Therefore, having regard to all of the foregoing, this Arbitral Tribunal decides:

  • To judge the request for declaration of illegality of the tax assessment act in respect of Income Tax on Natural Persons (IRS) no. 2016…, relating to the year 2013, in the total amount of 41,065.69€ (forty-one thousand, sixty-five euros and sixty-nine cents) as well-founded.

  • To condemn the Respondent to return to the Claimant that amount improperly assessed and paid, plus the payment of compensatory interest already accrued relating to the period between the date of payment of the tax and its return, as well as the payment of future compensatory interest from the date of notification of this decision until effective and complete payment, all in accordance with subsections 2 to 5 of article 61 of the Tax Procedure Code, at the legal rate ascertained in accordance with the provision in subsection 4 of article 43 of the General Tax Law until complete reimbursement.

The value of the case is fixed at 41,065.69€, which is equivalent to the amount of the assessment, taking into account the economic value of the case, as measured by the value of the tax assessments challenged, and in accordance therewith, the costs are fixed in the respective amount of 2,142.00€ (two thousand, one hundred and forty-two euros), to be borne by the Respondent in accordance with article 12, subsection 2 of the Legal Regime for Arbitration in Tax Matters, article 4 of the Regulations for Procedures of CAAD, and Table I annexed to the latter, subsection 10 of article 35, and subsections 1, 4 and 5 of article 43 of the General Tax Law, articles 5, subsection 1, paragraph a) of the Tax Procedure Regulations, 97-A, subsection 1, paragraph a) of the Tax Procedure Code and 559 of the Civil Procedure Code.

Notify.

Lisbon, 28 February 2018

The Arbitrator

Rita Guerra Alves

Frequently Asked Questions

Automatically Created

How is employment termination compensation taxed under Portuguese IRS rules?
Employment termination compensation in Portugal is partially exempt from IRS taxation under Article 2(4) of the CIRS. The exemption amount is calculated based on the worker's years of seniority and legal compensation formulas. Only the portion exceeding the exempt amount is subject to IRS as Category A income. The Tax Authority determines what qualifies as exempt compensation, with disputes often centering on how 'seniority' is defined for tax purposes.
What role do seniority years play in calculating the IRS exemption for severance payments under Article 2(4) of the CIRS?
Seniority years are fundamental to calculating the IRS exemption for severance payments under Article 2(4) of the CIRS. The exempt amount increases with more years of service. The key dispute in Process 512/2017-T was whether seniority includes only years with the final employer (AT's position: 3.86 years) or all years in the banking sector across multiple employers (taxpayer's claim: 22.3 years), as defined by the Banking Sector Collective Labor Agreement. This difference dramatically affects the exempt amount.
Can a taxpayer challenge an IRS tax assessment on termination compensation through CAAD arbitration?
Yes, taxpayers can challenge IRS assessments on termination compensation through CAAD (Centro de Arbitragem Administrativa) arbitration under Decree-Law 10/2011. The process involves filing a request for arbitral tribunal constitution after exhausting administrative remedies (gracious and hierarchical appeals). In Process 512/2017-T, the taxpayer challenged an additional IRS assessment of €41,065.69 related to 2013 severance compensation, following dismissal of both gracious and hierarchical appeals.
What was the outcome of CAAD arbitral decision 512/2017-T regarding the taxation of severance pay?
The complete outcome of CAAD decision 512/2017-T is not included in the provided excerpt, which contains only the Report section (parties' positions and arguments) but not the tribunal's reasoning or final ruling. The excerpt shows the legal dispute but cuts off before presenting whether the tribunal sided with the taxpayer's interpretation (counting all banking sector years) or the AT's position (counting only final employer years).
How does the Portuguese Tax Authority (AT) inspect and correct IRS assessments related to employment contract terminations?
The Portuguese Tax Authority inspects IRS assessments related to employment terminations through targeted inspection actions, often triggered by employer audits. In Process 512/2017-T, the inspection originated from an audit of the employer 'B...'. The AT reviews compensation payments, determines exempt amounts based on their interpretation of seniority under CIRS Article 2(4), and issues corrective assessments when they identify underpayment. Taxpayers receive formal assessment notifications and can contest through gracious appeals, hierarchical appeals, and ultimately CAAD arbitration.