Process: 516/2017-T

Date: April 16, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Case 516/2017-T examined three IRC tax benefits claimed by A… S.A. for fiscal year 2012: (1) net job creation tax benefits totaling €296,568.87 under Article 19 of the Estatuto dos Benefícios Fiscais (EBF); (2) RFAI (Tax Regime for Investment Support) deductions of €266,370.75; and (3) autonomous taxation exemptions on executive bonuses of €15,733.50. The taxpayer submitted a substitutive Model 22 IRC declaration and later filed an amicable reclamation (reclamação graciosa) when benefits were not recognized. The Tax Authority conducted an inspection and partially granted the job creation benefit (€132,023.77) but denied RFAI deductions entirely and rejected the autonomous taxation exemption alternative. The decision hinged on whether the company demonstrated net job creation in reference years 2007-2008, with the Tax Authority finding employee exits exceeded entries in those periods, thus disqualifying subsequent year benefits. The hierarchical appeal was denied by the Deputy Director-General, prompting arbitration at CAAD. This case illustrates critical evidentiary requirements for IRC tax benefits, particularly the need to prove continuous net employment growth across multiple fiscal years. The Tax Authority argued the taxpayer should bear costs for failing to provide detailed proof during the administrative phase, highlighting the importance of comprehensive documentation in gracious procedures before escalating to arbitration. The tribunal's analysis would determine whether self-assessment corrections through amicable reclamation and subsequent appeals were properly evaluated under Portuguese tax law governing employment-based incentives and investment support regimes.

Full Decision

ARBITRAL DECISION

The arbitrators Councillor Jorge Lopes de Sousa (arbitrator-president), Dr. Maria Cristina Aragão Seia and Dr. A. Sérgio de Matos (arbitrators-members), designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 06-12-2017, hereby agree as follows:

1. Report

A…, S.A., legal entity no.…, with registered office at …, no.…, …-… …, municipality of …, district of Braga, came, pursuant to the provisions of articles 2.º, no. 1, paragraph a), 10.º, no. 1, paragraph a), and no. 2, of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "LRAT"), to submit a request for arbitral pronouncement seeking the declaration of illegality of the decision denying the hierarchical appeal no. …2015…, and likewise, of the self-assessed corporate income tax (IRC) acts relating to the fiscal year 2012, and embodied in the model-22 IRC declarations submitted on 18 May 2013 and 12 November 2013, to which were respectively assigned the nos. … and …, with the remaining legal consequences, namely, the reimbursement to the Applicant of the amount unduly paid as IRC and autonomous taxation for the fiscal year 2012, in the total amount of € 336,883.54 (€ 54,779.29 relating to the tax benefit for job creation; € 266,370.75 from the RFAI; and € 15,733.50 in autonomous taxation).

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 22-09-2017.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of the LRAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated acceptance of the charge within the applicable period.

On 15-11-2017 the parties were duly notified of this designation, and did not manifest any intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11.º no. 1 paragraphs a) and b) of the LRAT and articles 6.º and 7.º of the Ethics Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11.º of the LRAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-12-2017.

On 22-01-2018, the Tax Authority and Customs Authority presented a reply in which it argued that there is an error regarding the case value (as only the recognition of the CLE benefit was denied, in the amount of € 150,817.89), that the request should be judged unfounded and that, in any event, the Applicant should be held responsible for costs, because "it had the opportunity to provide detailed clarifications and to prove the allegations, which it did not do in the amicable procedure, where the evidence is clearly insufficient."

As not all documents cited in the request for arbitral pronouncement were attached to the case, notification of the Tax Authority and Customs Authority to reply was repeated, but no new reply was presented.

By order of 28-02-2018, a hearing was dispensed with and it was decided that proceedings continue with written pleadings.

The parties submitted pleadings.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2.º, no. 1, paragraph a), and 10.º, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented, possess legal personality and capacity and have standing (articles 4.º and 10.º, no. 2, of the same statute and article 1.º of Regulation no. 112-A/2011, of 22 March).

The case does not suffer from any nullities.

2. Factual Matter

2.1. Proven Facts

Based on the elements in the case file and in the administrative proceedings attached to the record, the following facts are considered proven:

  • The Applicant submitted, on 18-05-2013, its model-22 IRC declaration for the tax period 2012 (to which no. … was assigned), which was subsequently replaced on 12-11-2013, with modification only of the value entered in field 355 of Table 10 of the aforesaid declaration (to which no. … was assigned) (document no. 2 attached with the request for arbitral pronouncement, the content of which is reproduced herein);

  • On 18-05-2015, the Applicant filed an amicable reclamation against the aforesaid self-assessment, which appears in document no. 3 attached with the request for arbitral pronouncement, the content of which is reproduced herein, requesting:

    • the recognition of tax benefits for net job creation, in the total amount of € 296,568.87;

    • the option to consider as fiscally non-deductible the expenses incurred with bonuses paid to managers, administrators and directors, not subjecting them to autonomous taxation;

    • the possibility of benefiting, with respect to investments made during fiscal year 2012, from tax incentives - in the form of IRC collection deduction - provided for in the Tax Regime for Investment Support (RFAI), in the total amount of € 266,370.75;

  • Following the submission of the aforesaid amicable reclamation, the Tax and Customs Authority conducted an inspection of the Applicant, relating to fiscal year 2012, in which clarifications were requested from the Applicant (document no. 4 attached with the request for arbitral pronouncement, the content of which is reproduced herein);

  • In that amicable reclamation, the Tax and Customs Authority decided:

    a) To partially grant the request relating to the tax benefit associated with net job creation, accepting an increase in costs incurred by the Applicant in the amount of € 132,023.77;

    b) To deny recognition of the option to consider expenses with bonuses to administrators as fiscally non-deductible, as an alternative to their subjection to autonomous taxation;

    c) To deny in full the request relating to the recognition of IRC collection deductions for fiscal year 2012, pursuant to the provisions of the RFAI, in the total amount of € 266,370.75.

  • The Applicant filed a hierarchical appeal of the decision on the amicable reclamation, in the part in which it denied its claims (document no. 7 attached with the request for arbitral pronouncement, the content of which is reproduced herein);

  • On 23-06-2017, the Applicant was notified of the decision denying the hierarchical appeal, delivered by the Deputy Director-General of the Tax Authority and Customs Authority (document no. 1 attached with the request for arbitral pronouncement, the content of which is reproduced herein);

  • In the decision denying the hierarchical appeal reference is made, among other things, to the following:

    « (...)

    Regarding CLE - Official Revision no. …2016…- article 19º EBF - Period 2011

    Nevertheless, the tax benefit requested by the appellant cannot be granted since in the periods of 2007 and 2008, no CLE occurred as better explained below.

    The appellant, with reference to the tax period of 2011, submitted a request for official revision (OR) of the IRC self-assessment tax act to which was assigned the SICAT number …2016… .

    At issue in the aforesaid OR was the request for deduction from taxable profit of the "job creation" tax benefit that the appellant believed it was entitled to, under the argument that in the tax periods of 2007 and 2008 it had recorded CLE respectively, in the number of 23 and 35 employees.

    The request was analyzed by this Service Department and, contrary to what the current appellant claimed, in the periods of 2007 and 2008 there were exits of employees in numbers higher than entries having regard to the conditions required in article 19.º of the EBF, there being therefore no record of CLE in the periods in question

    The OR request was denied, by order of 22 December 2016, by the IRC Service Director, delivered by subdelegation of powers, and the current appellant was notified of that decision.

    Since there is no record of CLE in the periods of 2007 and 2008, the appellant's claim does not merit acceptance.

    (...)

    Regarding expenses relating to bonuses/premiums allocated to administrators

    (...)

    iv) If it were the legislature's intention that the autonomous taxation provided for in no. 13 applied only to deductible expenses, it would have manifested this in the wording of the rule, which, declaredly, did not occur.

    v) Unlike representation expenses and travel allowances, for example, whose autonomous taxation is dependent on their deductibility for tax purposes (see nos. 7 and 9 of article 88.º of the IRC Code).

    vi) Therefore, if the appellant had added to table 07 the expenses incurred in variable remuneration that meet the conditions outlined in no. 13 of article 88.º of the IRC Code, they would not be excluded from the application of autonomous taxation.

    vii) That is, with the conditions for subjection provided for in the rule being met, relating to the nature and amount of the expenses themselves and their relative weight in the calculation of annual remuneration paid, the expenses incurred constitute triggering facts for the autonomous taxation provided for in that provision.

    viii) We also oppose the invocation of a reason to refrain from ruling within the scope of the amicable reclamation, since the reading of the information that gave rise to the decision now contested clearly refers to the fact that the legislature's intention regarding the autonomous taxation in question (35% on bonuses/premiums paid to administrators) is to eliminate abusive situations by taxpayers.

    ix) And that penalty would not be achieved if the autonomous taxation depended on the deductibility of the expenses incurred.

    (...)

    On the RFAI

    (...)

    In light of the elements that form an integral part of the request, we conclude that there is no verification of a net increase in the number of employees with indefinite terms relative to the average of the 12 preceding months, taking into account that:

    i) Of the total of 75 employees listed by the appellant allegedly corresponding to job creation resulting from the relevant investment made in the tax period 2012, only three employment contracts without term were entered into.

    ii) The appellant with reference to the job creation tax benefit indicated for the tax period 2012, 8 eligible entries and 19 eligible exits.

    iii) The calculation of entries for indefinite term referenced by the appellant (11=3+6) proves to be less than the number of exits (19), leading to a decrease and not a creation of jobs

    iv) It should be noted that the argument used by the appellant that such jobs are maintained to date cannot be accepted, since in the period of 2012 they did not have a permanent character, they only assumed that nature in subsequent periods.

    v) Note that the assessment of compliance with the requirement "job creation" is mandatorily carried out in all tax periods in which relevant investments are made for purposes of enjoying the RFAI tax benefit and the appellant also indicated this benefit in periodic declarations for the periods of 2013 and thereafter.»

  • In an official revision procedure of the IRC self-assessment act for 2011, the draft decision was prepared which appears in document no. 11 attached with the request for arbitral pronouncement, the content of which is reproduced herein, in which reference is made, among other things, to the following:

    « (...)

    2.1. CLE 2007

    (...)

    Quantification of Exits

    vii) The list of 29 employees that the applicant identified as eligible exits in the period of 2007 is set out in the table indicated below.

    (...)

    viii) However, it is found that in the period of 2007, in addition to the 29 aforementioned employees, 26 more employees left who had been hired by the applicant between 2003 and 2006 and who at the date of hiring met the requirements to be considered eligible entries for purposes of article 17.º (current article 19.º) of the EBF.

    It is therefore understood that the eligible exits in the period of 2007 amount to 55 (29 + 26) employees and not the 29 employees identified by the applicant.

    Assessment of CLE 2007

    It is concluded that, in the period of 2007, no CLE was recorded insofar as there was no positive difference between the number of eligible hires (46), pursuant to no. 1 of article 19.º of the EBF and the number of employee exits who, at the date of their hiring, were in the same conditions (55), as determined by paragraph d) of no. 2 of the aforementioned legal provision.

    (...)

    CLE 2008

    (...)

    Quantification of Exits

    In the following table the 27 employees that the applicant identified as eligible exits in the period of 2008 are set out.

    (...)

    On the other hand, it is noted that in addition to the exits indicated by the applicant, 29 more employees left who had been hired, between 1999 and 2006, meeting the same, at the date of their hiring, the requirements to be considered eligible entries for purposes of article 17.º (current article 19.º) of the EBF.

    xvi) It follows that the eligible exits in the period of 2008 amount to 56 (27 + 29) employees and not the 27 employees identified by the applicant.

    Assessment of CLE 2008

    xvii) It is concluded that, in the period of 2008, no CLE was recorded insofar as there was no positive difference between the number of eligible hires (49), pursuant to no. 1 of article 19.º of the EBF and the number of employee exits who, at the date of their hiring, were in the same conditions (56), as determined by paragraph d) of no. 2 of the aforementioned legal provision.»

  • Of the employees identified in the tables prepared by the Tax Authority, in the scope of the aforementioned official revision procedure, relating to eligible exits for purposes of assessing net job creation in the years 2007 and 2008, five [in 2007, D…, K… and U…; and in 2008, II… and LL…] had, at the date of their respective hiring, age greater than 30 years and less than 31 years (document no. 8 attached with the request for arbitral pronouncement);

  • In the case of the remaining employees identified therein, all had age less than 23 years at the date of their respective hiring, and none of them had completed secondary education nor were attending any education or training offer that would allow them to achieve a higher level of education or professional qualification to ensure completion of that level of education (documents nos. 8 and 12 attached with the request for arbitral pronouncement and, likewise, documents nos. 1 to 50 attached with the Applicant's pleadings);

  • In fiscal year 2012, the Applicant made investments in the total amount of € 3,257,666.88, of which relevant investments were made for purposes of the RFAI in the total amount of € 1,618,211.25 (documents nos. 14 and 15 attached with the request for arbitral pronouncement);

  • In 2012, there were 212 new hires, of which 4 were formalized through indefinite-term contracts and 208 through fixed-term contracts (document no. 17 attached with the request for arbitral pronouncement);

  • In the same time period, there were 60 departures, of which 30 correspond to the termination of indefinite-term contracts and 30 to the termination of fixed-term contracts (document no. 17 attached with the request for arbitral pronouncement);

  • The overall balance of job creation in fiscal year 2012 thus computes to a positive result of 152 new jobs created (document no. 17 attached with the request for arbitral pronouncement);

  • Of the said 152 new jobs created in 2012, 74 correspond to jobs directly related to the relevant investment made in 2012 (document no. 17 attached with the request for arbitral pronouncement);

  • Of the 74 jobs directly related to the relevant investment made in 2012, 3 were initially formalized through indefinite-term contracts and the remaining 71 were formalized through fixed-term contracts (document no. 17 attached with the request for arbitral pronouncement);

  • All of the said fixed-term contracts (71) were converted to indefinite-term contracts within the 3-year period following the investment (document no. 17 attached with the request for arbitral pronouncement);

  • Of the said 74 employees hired in 2012 directly related to the relevant investment made in that fiscal year, 64 remained in the employ of the Applicant until 31 December 2016, with the remaining 10 employees having terminated their employment and been replaced by new employees for the same positions (documents nos. 18, 19 and 20 attached with the request for arbitral pronouncement);

  • In fiscal year 2012, the Applicant made available to the members of its respective governing bodies, as a bonus/premium, the total amount of € 255,000.00 (document no. 2 attached with the request for arbitral pronouncement);

  • On the said amount of € 255,000.00, distributed to the members of the Applicant's governing bodies, there was autonomous taxation, pursuant to article 88.º, no. 13, of the IRC Code, at the rate of 35% (document no. 2 attached with the request for arbitral pronouncement);

  • On 21-09-2017, the Applicant submitted the request for arbitral pronouncement that gave rise to the present case.

2.2. Unproven Facts and Reasoning for the Determination of Factual Matter

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents attached by the Applicant with the request for arbitral pronouncement and on the administrative proceedings.

With respect to document no. 8 attached with the request for arbitral pronouncement, whose probative value the Tax Authority and Customs Authority contests in article 25.º of the Reply, the facts stated are corroborated by the documents attached to the pleadings and the Tax Authority and Customs Authority does not indicate which facts it understands not to correspond to reality or reasons to doubt what appears in that document.

Moreover, the said document constitutes Annex 3 attached with the amicable reclamation procedure, so the Tax Authority and Customs Authority had the opportunity to verify its correspondence or not to reality, within the framework of the duties of "discovery of material truth" imposed upon it by article 58.º of the General Tax Law.

As for documents 11 to 20 attached with the request for arbitral pronouncement, the Tax Authority and Customs Authority expressly raised in its Reply the question of their lack of notification and, with notification repeated to contest with notification of those documents, it said nothing, so their correspondence to reality is not disputed.

3. Legal Matter

3.1. Question of Net Job Creation

The Applicant in its pleadings states that it will have misinterpreted the decision of the hierarchical appeal, in summary, by having understood that the partial grant of the amicable reclamation had been changed and, noting that the Tax Authority and Customs Authority states in the present arbitral proceeding that the decision of the hierarchical appeal confirmed the decision of the amicable reclamation, it comes to frame the question raised on net job creation "to the question of whether the expenses incurred in 2012 with the employees identified in the tables attached by the APPLICANT to the present case under documents nos. 12 and 13, and which were not considered for purposes of the increase recognized in the amicable reclamation decision, should be increased in accordance with article 19.º of the EBF".

The Applicant argues, in summary, the following:

– "in the assessment of eligible exits of employees of the APPLICANT in the years 2007 and 2008, only employees whose employment relationship terminated in those years and who, at the date of execution of their respective employment contract, met the legal requirements in force at the date of the termination (2007 and 2008), that is, who were of "age greater than 16 years and less than 30 years (...), with the exception of young people under 23 years of age who have not completed secondary education and who are not attending any education or training offer that would allow them to achieve a higher level of education or professional qualification to ensure completion of that level of education" (see article 17.º no. 2, paragraph a), of the EBF, in the wording in force in 2007 and 2008) should be considered.

– "as follows from the established factual matter, of the employees added by the Tax Authority, five had, at the date of their respective hiring, age greater than 30 years, more specifically: i) in 2007, D… (30.23 years), K… (30.63 years) and U… (30.19 years); and ii) in 2008, II… (30.59 years) and LL… (30.78 years)".

– "all the remaining employees added by the Tax Authority had age less than 23 years at the date of their respective hiring and none of them had completed secondary education or were attending any education or training offer that would allow them to achieve a higher level of education or professional qualification to ensure completion of that level of education (on this point it should be noted that this circumstance would always have imposed, even accepting the position defended in the reply presented in the scope of the present arbitral proceeding, the disregard of such exits".

In 2007 and 2008, the tax benefit relating to job creation was provided for in article 17.º of the EBF, in the wording given to it by Law no. 53-A/2006, of 29 December, which was as follows:

Article 17.º

Job Creation

1 - For the determination of taxable profit of IRC taxpayers and of IRS taxpayers with organized accounting, the expenses corresponding to the net creation of jobs for young people and for the long-term unemployed, hired by indefinite-term employment contracts, are considered at 150% of their respective amount accounted as an exercise cost.

2 - For purposes of the foregoing, the following shall be considered:

a) Young people are workers aged over 16 years and under 30 years, assessed at the date of execution of the employment contract, with the exception of young people under 23 years of age who have not completed secondary education and who are not attending any education or training offer that would allow them to achieve a higher level of education or professional qualification to ensure completion of that level of education;

b) Long-term unemployed are workers available for work, pursuant to Decree-Law no. 220/2006, of 3 November, who are unemployed and registered in employment centers for more than 12 months, without prejudice to having entered into, during that period, fixed-term contracts for a period of less than 6 months, whose combined duration does not exceed 12 months;

c) Expenses are the amounts incurred by the employer on the worker, as remuneration and social security contributions payable by the same employer;

d) Net creation of jobs is the positive difference, in a given economic year, between the number of eligible hires under no. 1 and the number of departures of workers who, at the date of their respective hiring, were in the same conditions.

3 - The maximum amount of the annual increase, per job, is the corresponding amount to 14 times the guaranteed minimum monthly remuneration.

4 - For purposes of determining net job creation, employees who are part of the family unit of the respective employer are not considered.

5 - The increase referred to in no. 1 applies for a period of five years from the beginning of the validity of the employment contract, and is not cumulative, either with other tax benefits of the same nature, or with other employment support incentives provided for in other statutes, when applicable to the same employee or job.

6 - The scheme provided for in no. 1 can only be granted once in relation to the same employee, regardless of the employer entity.

In light of this article, net job creation allowed the benefit of a cost increase allowance for five years.

Pursuant to paragraph d) of no. 2 of this article, "net creation of jobs" constitutes "the positive difference, in a given economic year, between the number of eligible hires under no. 1 and the number of departures of workers who, at the date of their respective hiring, were in the same conditions".

The Tax Authority and Customs Authority understood that, in the years 2007 and 2008, no net job creation occurred, since the number of workers departing was greater than the number of workers hired, considering workers with the relevant requirements for allocation of the tax benefit.

The divergence between the Applicant and the Tax Authority and Customs Authority concerns the number of employee departures, with the Applicant arguing that only relevant exits based on the requirements of the law in force at the date of termination of employment relationships should be considered.

The Tax Authority and Customs Authority argues, in this arbitral proceeding, that "contrary to what is intended by the A., the relevant age for eligibility is between 16 and 35 years, and not between 16 and 30".

However, not only was this thesis not adopted, at least explicitly, in the decision of the hierarchical appeal, but the change in the relevant age only occurred in 2009, through the wording given by Law no. 10/2009, of 10 March, to no. 2 of article 19.º of the EBF (which corresponds to article 17.º, following the renumbering carried out by Decree-Law no. 108/2008, of 26 June).

Since this is a temporary tax benefit, the rules that alter it "are not applicable to taxpayers who already enjoy the right to the respective tax benefit, in everything that prejudices them, unless the law provides otherwise" (article 11.º, no. 1, of the EBF).

Therefore, since the Applicant had the right to the tax benefit, for five years, in light of the requirements in force in 2007 and 2008, its exclusion that could result from the increase in the maximum age provided for in Law no. 10/2009 is not relevant.

Pursuant to paragraph a) of no. 2 of the said article 17.º of the EBF, the age of workers is "assessed at the date of execution of the employment contract", so, since it follows from the established factual matter that five employees considered by the Tax Authority and Customs Authority as relevant for the calculation of departures were already over 30 years of age on the dates they were hired, they are not considered for that purpose.

The same applies to the remaining employees under 23 years of age on the dates of hiring, as, as follows from the factual matter fixed, the Applicant proved that none of them had completed secondary education or were attending any education or training offer that would allow them to achieve a higher level of education or professional qualification to ensure completion of that level of education.

In these terms, it is concluded that the decision of the hierarchical appeal suffers from a defect of error as to the factual presuppositions, which justifies, in the respective part, its annulment, as well as of the self-assessment relating to fiscal year 2012.

3.2. Question of Non-Recognition of Tax Benefits Associated with the Realization of Investments in Fiscal Year 2012 (RFAI)

The Tax Regime for Investment Support carried out in 2009 (RFAI 2009) was approved by Law no. 10/2009, of 10 March, and remained in force in 2012, by virtue of article 162.º of Law no. 64-B/2011, of 30 December (State Budget Law for 2012).

The RFAI embodies "a specific system of tax incentives for investment made in 2009 in certain sectors of activity", "respecting Regulation (EC) no. 800/2008, of the Commission, of 6 August, which declares certain categories of aid compatible with the common market, in application of articles 87.º and 88.º of the Treaty ('General Block Exemption Regulation')" (article 1.º of Law no. 10/2009).

The Tax Authority and Customs Authority understood that the Applicant cannot benefit from this scheme because, in summary:

– by virtue of paragraph b) of no. 3 of article 12.º of that Regulation no. 800/2008, "the relevant investment project must lead to a net increase in the number of employees of the company concerned relative to the average of the 12 preceding months";

– in line with Binding Information no. 1212:

  1. Only the hiring of employees through the execution of indefinite-term (or permanent) employment contracts can be included in the concept of "job creation", covering the hiring of new employees and of employees already in the company but under a fixed-term contract.

  2. This condition is considered to be met when, as of 31 December 2009 (considering that the taxpayer's tax period coincides with the calendar year), there is a net increase in the number of employees relative to the average of the 12 preceding months.

  3. This net increase can occur with the hiring of a single employee.

– "there was no net increase in the number of employees with indefinite terms relative to the average of the 12 preceding months, taking into account that:

i) Of the total of 75 employees listed by the appellant allegedly corresponding to job creation resulting from the relevant investment made in the tax period 2012, only three indefinite-term employment contracts were entered into.

ii) The appellant with reference to the job creation tax benefit indicated for the tax period 2012, 8 eligible entries and 19 eligible exits;

iii) The calculation of entries for indefinite term referenced by the appellant (11=3+8) proves to be less than the number of exits (19), leading to a decrease and not a creation of jobs;

iv) "the argument used by the appellant that such jobs are maintained to date cannot be accepted, since in the period of 2012 they did not have a permanent character, they only assumed that nature in subsequent periods".

v) "the assessment of compliance with the requirement 'job creation' is mandatorily carried out in all tax periods in which relevant investments are made for purposes of enjoying the RFAI tax benefit and the appellant also indicated this benefit in periodic declarations for the periods of 2013 and thereafter".

The Applicant argues, citing the arbitral award of 24-02-2014, delivered in case no. 212/2013-T, that "there is no basis in this RFAI 2009 scheme to conclude that only the creation of lasting employment was intended, as no requirement is formulated for the allocation of the benefit that the jobs created must be occupied by employees hired on fixed-term contracts".

The position adopted in the said arbitral award appears to be correct, which is reaffirmed here:

"(...) Law no. 10/2009 does not include any rule similar to that of no. [5] of article 17.º of the EBF, in the wording in force in 2001, which would allow one to infer a link between the tax benefit and certain employment contracts.

In fact, on the contrary, it is found in paragraph f) of no. 3 of article 2.º of the RFAI 2009, which establishes, as one of the conditions for allocation of the tax benefit, the "relevant investment that provides for the creation of jobs and their maintenance until the end of the deduction period set out in nos. 2 and 3 of article 3.º", clear textual support for the understanding that, for allocation of the tax benefits provided therein, in the part in which it is based on investment from which jobs are created, it is sufficient to maintain them to ensure the maintenance of the benefit".

Moreover, there is no basis in this RFAI 2009 scheme to conclude that only the creation of lasting employment was intended, as no requirement is formulated for the allocation of the benefit that the jobs created be occupied by employees hired for indefinite terms, the same applying to paragraph b) of no. 3 of article 12.º of that Regulation no. 800/2008.

Thus, the decision of the hierarchical appeal suffers from an error as to the legal presuppositions that justifies its annulment, as well as of the self-assessment relating to fiscal year 2012, in the respective part, in which it did not recognize the Applicant's right to an IRC collection deduction as a result of the application of the RFAI, in the amount of € 266,370.75.

3.3. Question of Illegality Relating to the Assessment of Autonomous Taxation Levied on Bonuses Paid to Administrators

In fiscal year 2012, the Applicant made available to the members of its respective governing bodies, as a bonus/premium, the total amount of € 255,000.00, on which there was autonomous taxation, pursuant to article 88.º, no. 13, of the IRC Code, at the rate of 35%.

The Applicant, invoking arbitral jurisprudence, formulated a request in amicable reclamation that the said amount be "disregarded as an expense for purposes of determining its taxable profit, by reference to the tax period 2012, being, therefore, added to table 07 of the income declaration (Model 22) of the IRC" and, concurrently, "not be subject to autonomous taxation".

In the decision of the hierarchical appeal, the Tax Authority and Customs Authority understood, in summary, that:

– "if it were the legislature's intention that the autonomous taxation provided for in no. 13 [of article 88.º of the IRC Code] applied only to deductible expenses, it would have manifested this in the wording of the rule, which, declaredly, did not occur";

– "unlike representation expenses and travel allowances, for example, whose autonomous taxation is dependent on their deductibility for tax purposes (see nos. 7 and 9 of article 88.º of the IRC Code)";

– "the inclusion of expenses relating to indemnities, bonuses and other remuneration paid to managers, administrators or directors within the scope of autonomous taxation under the conditions provided for in the rule, is explained by the legislative intention of reducing expenses involving situations of lesser tax transparency alongside the objective of inducing companies to minimize as much as possible such expenses that negatively affect tax revenue".

Article 88.º, no. 13, paragraph b) of the IRC Code establishes that "the following are taxed autonomously, at the rate of 35%:" "expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these represent a portion greater than 25% of annual remuneration and have a value greater than (euro) 27,500, unless their payment is subordinated to the deferral of a portion of not less than 50% for a minimum period of three years and conditioned on positive performance of the company over that period".

It does not follow from this rule or from any other the possibility of an option for non-deduction of the expenses or charges referred to as an alternative to the deduction as autonomous taxation that the Applicant defends.

Moreover, in this specific case of autonomous taxation there is no reference to "deductible expenses", so there is not even textual support for making autonomous taxation dependent on the deductibility or otherwise of the expenses in question.

In any case, the possibility of an option, regarding the deduction of expenses, is reduced to the possibility of deducting them or not, for purposes of article 23.º of the IRC Code, as it is the responsibility of the taxpayer, in the first instance, to formulate and apply judgment regarding their indispensability for the realization of income subject to tax or for the maintenance of the income-producing source.

But such judgment is subject to the control of the Tax Authority and Customs Authority, which may and must carry out appropriate corrections, whether favorable or unfavorable to the taxpayer, in the exercise of its functions in pursuit of the public interest, in accordance with the principle of legality (article 55.º of the General Tax Law).

Thus, even if the taxpayer chooses not to deduct certain expenses, by deciding not to formulate judgment in the direction of such indispensability, those accounted expenses do not cease to have been incurred and are not disqualified from being deductible, if that is the qualification that should be given to them in light of article 23.º of the IRC Code.

And, therefore, even in cases where article 88.º of the IRC Code, in the wordings prior to Law no. 42/2016, of 28 December, makes reference to "deductible expenses" as a condition for the application of autonomous taxation, if the expenses are to be classified as deductible and meet the presuppositions of the application of autonomous taxation applicable to deductible expenses, they will be subject to them.

It is not recognized, therefore, to the taxpayer a right to consider non-deductible expenses that are deductible in order to avoid the application of autonomous taxation.

In fact, it is essentially this that is expressly clarified in footnote no. 6 of the arbitral award of 02-02-2015, delivered in case no. 628/2014-T, in which, after referring to the fact that the taxpayer may choose to "not deduct the expense", it is clarified:

"We are not here claiming, of course, that autonomous taxation is optional. Rather, what will be optional (in a certain sense, at least) is the classification or otherwise of a certain expense as deductible, insofar as it presupposes its necessity for the maintenance of the income-producing source, and such judgment is the responsibility of the taxpayer (in this sense, see, for example, the STA Award of 30-11-2011, delivered in case 0107/11, available at www.dgsi.pt).

Nor is it a matter of suggesting that expenses can be "omitted". In fact, the accounting of a certain expense as non-deductible entails, precisely, its relevance in accounting, which is, precisely, the opposite of its omission. ( [1] )"

By this footnote, which specifically aims to clarify the scope of the statement regarding the option to "not deduct the expense", it is seen that the arbitral jurisprudence that the Applicant cites is not unanimous and even in that award it is considered that, "of course", autonomous taxation is not optional.

Moreover, the references made in article 88.º of the IRC Code to "deductible expenses" and not to "deducted expenses" point to the fact that what is relevant for purposes of autonomous taxation in which such expression is used is the nature of the expenses and not the taxpayer's option to deduct them or not.

Therefore, being entitled to presume that the legislature knew how to express its intention in adequate terms (article 9.º, no. 3, of the Civil Code), this interpretation that flows linearly from the literal tenor could only be departed from if the existence of other legally admissible interpretative elements were found. But this is not the case, as, on the contrary, the primary reason for autonomous taxation relating to fringe benefits is to encourage taxpayers to refrain from incurring such expenses, "whether for reasons of transparency in the remuneration practices of companies, or for reasons of tax evasion" ( [2] ), reasons that do not cease to be valid in cases where the taxpayer chooses not to deduct the expenses.

Thus, in the case at hand, not questioning the classification of the expenses in question as "deductible expenses", in light of the criteria of article 23.º of the IRC Code, one cannot but conclude that the autonomous taxation provided for in article 88.º of the IRC Code is applicable.

In any case, in the specific case of the autonomous taxation provided for in article 88.º, no. 13, paragraph b), of the IRC Code, there is not even allusion to the deductible nature of the expenses as a condition for the application of autonomous taxation.

Thus, if the taxpayer incurs in the expenses provided for in article 88.º of the IRC Code, there is autonomous taxation applicable, regardless of the tax relevance of the expenses as costs for purposes of determining taxable profit, as follows from the autonomous nature of such taxation. As stated in the cited award delivered in case no. 148/2016-T, "Each act of expense incurred by taxpayers that is subject to autonomous taxation forms an autonomous tax fact, to which the taxpayer is subject, regardless of whether or not there is taxable matter in the IRC sphere at the end of the respective tax period".

Based on the foregoing, the decisions of the amicable reclamation and the hierarchical appeal, as well as the self-assessment relating to fiscal year 2012, do not suffer from any illegality in the part relating to this autonomous taxation.

Thus, the request for arbitral pronouncement is unfounded as to this question.

4. Decision

On these grounds, the members of this Arbitral Tribunal agree:

  • To judge the request for arbitral pronouncement as founded as to the questions of the job creation tax benefit and the application of the RFAI, and to annul the decision of the hierarchical appeal and the self-assessment of IRC relating to fiscal year 2012 in their respective parts;

  • To judge the request for arbitral pronouncement as unfounded as to the question of autonomous taxation and to absolve the Tax Authority and Customs Authority from the respective claim.

5. Case Value

In accordance with the provisions of article 306.º, no. 2, of the Code of Civil Procedure and 97.º-A, no. 1, paragraph a), of the Code of Tax Procedure and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case value is set at € 336,883.54.

The reduction of the claim that results from the Applicant's pleadings (by acknowledging that the Tax Authority and Customs Authority partially granted its claim in the amicable reclamation and maintained it in the hierarchical appeal decision) is not relevant for purposes of determining the case value, as follows from no. 1 of article 299.º of the Code of Civil Procedure, subsidiarily applicable by virtue of the provisions of article 29.º, no. 1, paragraph e), of the LRAT.

6. Costs

Pursuant to article 22.º, no. 4, of the LRAT, the amount of costs is set at € 5,814.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings.

The Applicant is responsible for costs resulting from defeat on the question of autonomous taxation (in the amount of € 15,733.50) and the Tax Authority and Customs Authority as to the question of the RFAI (in the amount of € 266,370.75).

As regards the job creation tax benefit, the Applicant requested in the amicable reclamation the recognition of the amount of € 296,568.86, with an increase of € 164,545.09 and grant of € 132,023.77. This grant amount was maintained in the hierarchical appeal decision.

The Applicant, however, interpreted the hierarchical appeal decision as entirely denying this claim relating to job creation (€ 296,568.86) and challenged it only as to the amount of € 190,007.94 (article 25.º of the request for arbitral pronouncement), to which corresponded the IRC value of € 54,779.29.

But the Tax Authority and Customs Authority in the amicable reclamation decision accepted the Applicant's claim as to the amount of € 132,023.77, which it maintained in the hierarchical appeal decision, so the Applicant unnecessarily formulated a claim as to this amount, which constitutes a percentage of 69.48% of the claimed correction.

Thus, as to the claim relating to the amount of € 54,779.29, the Applicant is responsible for costs in the proportion of 69.48%, which is equivalent to defeat in the amount of € 38,060.65.

Based on the foregoing, the Applicant is responsible as to the total amount of € 53,794.15 (€ 15,733.50 + 38,060.65) and the Tax Authority and Customs Authority as to the remaining part which is € 283,089.39 (€ 336,883.54 - € 53,794.15).

Thus, the cost responsibilities of the Applicant and the Tax Authority and Customs Authority are set at 19% and 81%, respectively.

Lisbon, 16-04-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Maria Cristina Aragão Seia)

(A. Sérgio de Matos)

[1] This jurisprudence is followed in the award of 03-10-2016 delivered in case no. 148/2016-T.

[2] Report on the State Budget for 2011.

Frequently Asked Questions

Automatically Created

What IRC tax benefits were claimed in CAAD case 516/2017-T, including job creation and RFAI?
In CAAD case 516/2017-T, three IRC tax benefits were claimed: (1) tax benefits for net job creation (criação líquida de postos de trabalho) totaling €296,568.87 under Article 19 of the EBF, where the taxpayer sought deduction from taxable profit based on employment increases; (2) RFAI (Regime Fiscal de Apoio ao Investimento) deductions of €266,370.75, representing IRC collection credits for investments made during fiscal year 2012; and (3) exemption from autonomous taxation on executive bonuses of €15,733.50 by treating these expenses as fiscally non-deductible. The Tax Authority partially accepted the job creation benefit (€132,023.77) but completely denied the RFAI deductions and autonomous taxation alternative, leading to arbitration proceedings seeking reimbursement of €336,883.54 in total.
How does the net job creation tax benefit (criação líquida de postos de trabalho) apply under Portuguese IRC rules?
The net job creation tax benefit (criação líquida de postos de trabalho) under Article 19 of Portugal's Estatuto dos Benefícios Fiscais allows companies to deduct from taxable IRC profit a percentage of employment costs for net new permanent jobs created. To qualify, the taxpayer must demonstrate that employee entries exceed exits in the relevant fiscal year, creating genuine employment growth. The benefit calculation considers salary costs for newly created positions. Critically, as shown in case 516/2017-T, the Tax Authority examines reference periods (here 2007-2008) to verify consistent net job creation patterns. If in baseline years exits exceeded entries, subsequent claims may be denied. The benefit aims to incentivize employment but requires rigorous documentation proving: permanent employment contracts, actual net increase in headcount, and sustained employment maintenance. Companies must substantiate claims with detailed employee records, social security documentation, and payroll evidence during administrative procedures.
What is the RFAI (Regime Fiscal de Apoio ao Investimento) and how does it reduce IRC liability?
The RFAI (Regime Fiscal de Apoio ao Investimento) is Portugal's Tax Regime for Investment Support, providing IRC credits to encourage productive investment. Under RFAI, companies can deduct from IRC liability (not from taxable profit) a percentage of eligible investment expenditures in qualifying assets like machinery, equipment, and technology. In case 516/2017-T, the taxpayer claimed €266,370.75 in RFAI deductions for fiscal year 2012 investments. The regime operates as a tax credit against IRC collection, reducing final tax payable rather than adjusting taxable income. To benefit, investments must meet specific criteria: productive nature, new assets, and compliance with State aid rules. The Tax Authority completely denied this claim, suggesting insufficient evidence or non-compliance with RFAI requirements. Companies must submit detailed investment documentation, including invoices, asset registrations, and demonstration that investments serve productive business activities, during the declaration submission and any subsequent gracious procedures.
Are autonomous taxation (tributações autónomas) amounts eligible for challenge through tax arbitration at CAAD?
Yes, autonomous taxation (tributações autónomas) amounts are eligible for challenge through CAAD tax arbitration. In case 516/2017-T, the taxpayer contested €15,733.50 in autonomous taxation on executive bonuses, seeking recognition of an option to treat these expenses as fiscally non-deductible instead of subjecting them to autonomous rates. Portuguese IRC law imposes autonomous taxation on certain expense categories (vehicle costs, entertainment, bonuses to directors) at fixed rates regardless of profit. Article 88 of the IRC Code allows companies to opt-out by treating such expenses as non-deductible, avoiding autonomous taxation. The Tax Authority denied this option in the amicable reclamation. CAAD arbitration jurisdiction under Decree-Law 10/2011 covers challenges to self-assessment acts and administrative decisions regarding IRC, including autonomous taxation determinations. Taxpayers may contest both the application of autonomous rates and the denial of opt-out alternatives, making this a recognized subject matter for arbitral review within CAAD's tax dispute resolution framework.
What happens when a taxpayer fails to provide sufficient evidence in the administrative (gracious) phase before filing for arbitration?
When taxpayers fail to provide sufficient evidence during the administrative (gracious) phase before arbitration, they face significant procedural and cost consequences. In case 516/2017-T, the Tax Authority explicitly argued the applicant should bear arbitration costs because 'it had the opportunity to provide detailed clarifications and to prove the allegations, which it did not do in the amicable procedure, where the evidence is clearly insufficient.' Portuguese tax procedure emphasizes the gracious phase (reclamação graciosa and recurso hierárquico) as the primary venue for presenting evidence and detailed justifications. The Tax Authority conducts inspections and requests clarifications during this phase. Failure to provide comprehensive documentation—employee records for job creation benefits, investment invoices for RFAI, contractual evidence for autonomous taxation options—weakens claims and may result in partial or complete denial. Subsequently filing for CAAD arbitration without having substantiated claims administratively can lead to: adverse cost allocation, evidentiary limitations (new evidence restrictions), and unfavorable tribunal assessment of claim credibility. Best practice requires exhaustive documentation submission during gracious procedures to maximize success in potential arbitration.