IRS Severance Pay Exemption: Seniority & Banking Sector Employment Termination (CAAD 55/2018-T)

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator chair), Dr. Ricardo Rodrigues Pereira and Prof. Dr. Manuel Pires (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. On 13 February 2018, A..., NIF ... (hereinafter, separately the Applicant), and B..., NIF ... (hereinafter, separately the Applicant), domiciled at Rua ..., ..., Lisbon (hereinafter, jointly the Applicants), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (hereinafter, briefly designated RJAT), with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, with a view to obtaining a ruling from this tribunal regarding:

• Declaration of illegality and annulment of the act of dismissal of the hierarchical appeal filed under no. ...2016..., of the Personal Income Tax Service, which concerned the Personal Income Tax (IRS) assessment no. 2015..., for the year 2014;

• Declaration of illegality and partial annulment of the Personal Income Tax assessment no. 2015..., for the year 2014, in the amount payable of €32,196.76;

• Restitution of Personal Income Tax overpaid, together with compensatory interest at the legal rate, from the date of payment of the tax until the date of its full reimbursement.

The Applicants attached 16 (sixteen) documents and did not request the production of additional evidence.

The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1. In essence and in brief summary, the Applicants allege a breach of law by erroneous qualification and quantification of taxable income, and the consequent voidability, both of the decision dismissing the hierarchical appeal and of the Personal Income Tax assessment, insofar as applicable.

They consider that the assessment made by AT is unlawful by violation of the provisions of the negative delimitation of taxable base provided in article 2, no. 4, paragraph b) of the Personal Income Tax Code, by considering subject to this tax the compensation, in the amount of €169,410.00, received for the termination, by agreement, of the employment contract between the Applicant and the employer entity C..., S.A., subsequently denominated D..., S.A. and E..., S.A. (hereinafter, C...). This understanding derives, in their view, from an incorrect interpretation and application of the concept of seniority and, for purposes of calculating the non-taxable compensation, wrongly disregards the remuneration earned in the 12 months preceding the termination of the employment contract.

They add that the Applicant meets all the conditions that Personal Income Tax payers must meet in order to benefit from the non-taxation regime contained in the aforementioned paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, namely: that the cessation of functions justifying payment of the indemnity does not concern functions of administrator or manager of the legal entity paying the compensation; that no new professional or business link is created in the following 24 months with the same entity or with related entities; and that the beneficiary has not, in the previous 5 years, benefited from the aforementioned exclusion from taxation.

According to the Applicants, AT made an error of law in applying the calculation criteria for the limit of exclusion from Personal Income Tax incidence which, in accordance with the cited provision, is based on the average value of remuneration earned in the 12 months preceding termination, multiplied by the number of years or fraction of seniority or exercise of functions in the debtor entity.

In their perspective, on one hand AT disregarded, for purposes of seniority, the period in which this contract was suspended, by "transfer" for the performance of administration functions in another company of Group F..., from November 2001 until the termination of the employment contract, with effect from 1 September 2014, reducing, without legal basis, the multiplier of the 22 years of the employment contract (from March 1993 to August 2014).

Furthermore in this regard, they claim that seniority is a concept of labour law aimed at guaranteeing the legal position of the worker, and all the time the employment contract binding the employer entity was in force must be taken into account, counting the period of suspension by express provision of labour legislation (articles 294 and 295 of the 2009 Labour Code, articles 330 and 331 of the 2003 Labour Code and article 2, no. 2 of Decree-Law no. 398/83, of 2 November).

They consider untenable the argument of AT that this was an illicit "de facto transfer" and that, therefore, the employment relationship would have been terminated in January 2002. In fact, even if illicit recourse to occasional worker transfer or some irregularity in the transfer agreement had occurred, the legal discipline does not determine the invalidity or termination of the employment relationship, but instead grants the transferred worker the right to choose to remain in the service of the transferee, a faculty which, if not exercised, has no effect on the calculation of the worker's seniority. They add that, furthermore, we are not dealing with the figure of occasional worker transfer, which presupposes the provision of work in another company, since the Applicant began to exercise functions as administrator of another entity.

Thus, what occurred was a suspension of the employment contract for the period in which the Applicant exercised functions as administrator in another entity, while maintaining the link with the employer entity as explicitly acknowledged in a document issued by the latter at the time of suspension, in which it stated that the benefits enjoyed by the Applicant were not affected, namely "counting of seniority".

Equally, the Collective Labour Agreement (ACT) celebrated by Group F..., published on 29 March 2014, provides, for purposes of counting seniority, in its article 31, that service time provided outside the signatory institutions is recognised, on a reciprocal basis, applying to workers represented by the National Union of Banking Executives and Technicians (SNQTB), to which the Applicant has been affiliated since 1 July 2010.

Thus, from this instrument of collective regulation, a source of labour law, it can be seen that the counting of the Applicant's seniority in the employer entity includes the period of permanence in the transferred entity, as administrator.

On the other hand, regarding the remuneration of the last 12 months, the Applicants conclude that necessarily the amount of €115,000.00 received in the last year before termination of the employment contract must be taken into account for calculating the amount not subject to Personal Income Tax, regardless of this amount not having been paid by the employer entity (debtor), but by the entity to which he had been transferred, and in any case, AT did not even consider the value of the 12 last remunerations earned before the suspension of the employment contract that occurred in December 2001.

1. The request for constitution of an arbitral tribunal was accepted by the President of CAAD and followed its normal procedure with notification to AT on 19 February 2018.

2. The Applicants did not appoint an arbitrator, so, pursuant to the provisions of article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective Arbitral Tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

4.1. On 4 April 2018, the Parties were notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Deontological Code.

4.2. Thus, in accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 24 April 2018.

1. On 29 May 2018, the Respondent, duly notified for this purpose, submitted its Response in which it raised the incident concerning verification of the value of the claim and specifically contested the arguments raised by the Applicants, concluding that the present action should be dismissed and requesting its absolution from the claim. It did not request production of evidence and subsequently attached the administrative file on 3 September 2018.

In essence and also briefly, it is important to highlight the most relevant arguments on which the Respondent based its Response.

Regarding the value of the claim indicated by the Applicants of €85,462.84, the Respondent contends that it should be corrected to correspond to the amount whose annulment is sought, €32,196.76, pursuant to article 97-A of the Tax Code of Administrative and Tax Procedure (CPPT), by referral of article 29, no. 1, paragraph a) of the RJAT.

On the merits, and regarding the determination of the average value of regular remuneration with the character of taxable compensation earned in the last 12 months, the Respondent submits that the last 12 months of effective remuneration from the employer entity should be considered, i.e., before the suspension of the employment contract that occurred on 1 December 2001. It argues that the "current" remuneration should not be considered, as it relates to the exercise of functions of a different nature by the Applicant in another entity, specifically, functions as member of the Board of Administration, outside the scope of an employment relationship.

Article 2, no. 4, paragraph b) of the Personal Income Tax Code requires that the concept of seniority to be considered be in the exercise of functions in the entity debtor of the compensation for termination of the employment contract, not including service time provided in another entity. This regime is based on a clear anti-abuse purpose, so agreements that established labour seniority, imposing artificial seniorities and their recognition for purposes of negative delimitation of the tax base, would not be acceptable.

Even if it were necessary to resort to labour law for completion of the concept of seniority in the fiscal sense, in accordance with the provisions of article 11, no. 2 of the General Tax Law (LGT), which the Respondent understands not to be necessary in that the tax legislator was clear, the Labour Code does not define, nor present a univocal qualification of that concept. However, even in labour law, the clear prevalence of the notion of "seniority in the company" can be found, including in matters of termination of the employment contract.

Article 2, no. 4, paragraph b) of the Personal Income Tax Code has its own sense of the concept of "seniority in the company" which cannot be permeable to other qualifications of seniority agreed in legal instruments of a negotiating nature, bilateral or collective, that impose on the entity debtor of the monetary payment referred to in the provision a seniority greater than that of the contractual relationship granted by such entity, determining the breadth of the taxation itself. This would be opposed by the principle of legality and also the principle of equality, with constitutional grounding.

The ACTs of the banking sector do not regulate the matter concerning compensations/indemnities paid to workers for termination of the employment contract and, in any case, their provisions would not be enforceable against AT. It adds that the qualification of the legal transaction made by the parties does not bind AT (article 36, no. 4 of the LGT).

The Respondent concludes that the seniority provided in paragraph b) of no. 4 of article 2 of the Personal Income Tax Code is the seniority in the "debtor entity", corresponding to "seniority in the company", with the breadth resulting from no. 10 of the same article and from situations of succession, namely by effect of the equivalence of article 285 of the Labour Code.

It advocates that the "debtor entity" referred to in no. 4 of article 2 of the Personal Income Tax Code must be the "employer entity" mentioned in no. 10 of the same legal provision, which becomes explicit when no. 4 conditions the exclusion from taxation on the non-creation of a new professional or business link within the 24-month period with the same "entity".

In this way, the amount of indemnity excluded from Personal Income Tax taxation should be determined based on the seniority the Applicant has in C... – from March 1993 to November 2001 – since this is the service time provided to the employer entity on which falls the duty to pay the compensation and not the period in which the contract was suspended, because during that time there was no exercise of functions in this entity.

Finally, it considers that in the specific case no error attributable to the services has been verified and that, therefore, the prerequisites for the right to compensatory interest, in accordance with the provisions of article 43, no. 1 of the LGT, are not met.

1. By order of 3 July 2018, the Applicants were notified to comment on the value of the claim and the holding of the meeting referred to in article 18 of the RJAT was waived, given the absence of evidence production proceedings and matters of defense by exception. A period was granted for submission of written submissions, setting 23 October 2018 as the deadline for delivery of the arbitral award.

2. The Applicants, in exercising the right of reply, submitted the understanding that the value of the claim they indicated is correct, as it corresponds to the Personal Income Tax assessed (levied) on the compensation received and not the amount payable as a result of the contested assessment, which took into account other income, deductions from the tax and withholdings at source.

3. Both Parties submitted written submissions, in which they reiterated the positions previously taken in their respective pleadings.

II. PRELIMINARY EXAMINATION

The Tribunal was regularly constituted and is competent ratione materiae, given the configuration of the subject matter of the proceedings (cf. articles 2, no. 1, paragraph a) and 5 of the RJAT).

The request for arbitral ruling is timely, as it was presented within the period provided for in article 10, no. 1, paragraph a) of the RJAT.

The parties have legal personality and capacity, have standing and are duly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings are free from nullities and no preliminary questions were raised, other than the incident concerning verification of the value of the claim, raised by the Respondent, which will be assessed and decided immediately after the establishment of the facts.

III. REASONING

III.1. ON THE FACTS

§1. Proven Facts

The following facts are considered proven:

a) The Applicant began functions in Group F..., specifically in the company C..., S.A., subsequently denominated D..., S.A. and E..., S.A. (hereinafter C...), on 29 March 1993, through an Employment Contract which, at that date, the parties did not reduce to writing. [cf. document no. 3 attached to the Request for Arbitration and administrative file (PA)]

b) On 29 September 1993, the employment relationship between the Applicant and C... was formalised through the execution, in writing, of an Employment Contract which stipulated, in its clause 7, that "The seniority and service time of the second party [the Applicant] are counted without any interruption and for all purposes, namely Social Security purposes, from 29 March 1993, the date on which he began his career in the banking sector." [cf. document no. 4 attached to the Request for Arbitration and PA]

c) This Employment Contract further established, in its clause 10, that "This contract is subject, for all matters not provided for, to the provisions of the Vertical Collective Labour Agreement of the Banking Sector in force on this date, as well as to collective labour regulation instruments that revise or replace it, precisely insofar as C..., S.A. adheres to them." [cf. document no. 4 attached to the Request for Arbitration and PA]

d) Between Group F..., the National Union of Banking Executives and Technicians and the Independent Banking Union, the Collective Labour Agreement "ACT" was celebrated, published in the Labour and Employment Bulletin, 1st Series, no. 1 of 8 January 1998, subject to subsequent amendments. [cf. documents nos. 13 and 15 attached to the Request for Arbitration]

e) According to Clause 1 of this ACT, under the heading "Personal and professional scope" the agreement binds the institutions and unions that sign it and applies to individual employment relationships existing between those institutions and workers in their service represented by the National Union of Banking Executives and Technicians and the Independent Banking Union, whether established before or after the entry into force of the same agreement. [cf. documents nos. 13 and 15 attached to the Request for Arbitration]

f) Regarding seniority, the ACT provides, in Clause 31, that, for all purposes provided for in the agreement, service time provided outside the signatory institutions is recognised whenever the respective entities also recognise service time provided in those institutions, on a reciprocal basis. [cf. documents nos. 13 and 15 attached to the Request for Arbitration]

g) On 1 December 2001, the Applicant began to exercise functions as member of the Board of Administration in another company, G..., S.A., later denominated H..., S.A. (hereinafter G...), an entity then integrated in Group F... . [cf. document no. 5 attached to the Request for Arbitration and written clarifications provided by G... to AT contained in the PA]

h) The assumption of functions in G... by the Applicant was effected in accordance with the objectives of Group F..., maintaining his status as employee of Group F..., under the terms of the declaration dated 9 January 2002, which was addressed to him, with the following content:

"We thank you for your consent to exercise functions at G... .

Thus, despite the de facto suspension of functions verified, the benefits you enjoy are not affected: counting of seniority, access to credit facilities, attribution of shares reserved to employees in capital increases, participation in consolidated results, including through the exercise of options on Bank Shares or others that are or may be applied to employees of the same professional category.

Reintegration into the Group F... workforce upon cessation of functions at the aforementioned company [G..., S.A.], as well as progression in the professional career relating to the time that has elapsed will take into account, on one hand, the evaluation of your performance and experience acquired, and on the other hand, the professional development of all employees who, at the date of suspension, performed functions of equivalent category." [cf. document no. 5 attached to the Request for Arbitration and contained in the PA]

i) Between December 2000 and November 2001 – corresponding to the 12 months preceding the suspension of functions of the Applicant at C... resulting from the beginning of the exercise of the position of member of the Board of Administration of G...– the Applicant earned the following remuneration from C... (gross amounts, before deductions for Social Security, Pension Fund, SAMS, and Personal Income Tax withholdings when applicable):

[Detailed remuneration tables for each month from December 2000 to November 2001 follow]

[cf. document no. 12 attached to the Request for Arbitration and PA including written confirmation from C...]

j) The Applicant became affiliated to the National Union of Banking Executives and Technicians on 1 July 2010. [cf. document no. 14 attached to the Request for Arbitration]

k) The regular remuneration earned by the Applicant, in his capacity as member of the Board of Administration of G..., in the 12 months preceding the termination of the employment contract with C..., i.e., from September 2013 to August 2014, amounted to €115,500.00 (one hundred and fifteen thousand five hundred euros). [cf. document no. 9 attached to the Request for Arbitration and Remuneration Descriptions (DMRs) contained in the PA]

l) From 2010 onwards, G... ceased to be part of Group F..., with no relationship of domination or group, nor direct or indirect shareholder relationship, simple participation or any qualified participation, existing between that company and Group F... from that date. Since May 2014, G... belongs to group I... (indirectly), with its capital held 100% by J... . [cf. documents nos. 10 and 11 attached to the Request for Arbitration and PA]

m) The processing of G... payroll continued to be carried out by K..., ACE in the regime of service provision/outsourcing, based on the same model of remuneration slip, called "remuneration description", used for other entities, including those within Group F... . This model has the mention "Group F..." affixed to its upper right corner. [cf. document no. 11 attached to the Request for Arbitration and PA]

n) On 29 March 2014, amendments to the ACT identified above were published in the Labour and Employment Bulletin no. 12, of 29 March 2014, celebrated between Group F... and the National Union of Banking Executives and Technicians and the Independent Banking Union, adopted by 9 employer entities, which include C... and G... [cf. document no. 13 attached to the Request for Arbitration]

o) On 8 September 2014, between C... and the Applicant an Agreement for Revocation of the Employment Contract was executed, with effect from 31 August 2014, with a gross compensation agreed and paid to the Applicant for termination of the employment contract of €169,410.00 (one hundred and sixty-nine thousand four hundred and ten euros). According to clause six of this Agreement, liabilities relating to retirement benefits are fully funded by G... in the Pension Fund of Group F..., with G... also responsible for assuming total seniority in the banking sector and future responsibility for payment of benefits arising from the current clause 122 of the ACT, headed "Subsidy and Pension for Survivors in case of Death in the Banking Sector." [cf. document no. 6 attached to the Request for Arbitration and PA]

p) C... classified the said compensation as income from dependent work of the Applicant, subjecting it to source withholding, having accordingly declared in the "Model 10 – Income and Withholdings", €75,387.00 (seventy-five thousand three hundred and eighty-seven euros), of tax [Personal Income Tax], as source withholding, and €3,273.00 (three thousand two hundred and seventy-three euros), as Personal Income Tax surcharge. [cf. document no. 7 attached to the Request for Arbitration and PA]

q) The Applicants made the amount of said compensation received by the Applicant appear in their Personal Income Tax statement "Model 3" for the year 2014. [cf. document no. 8 attached to the Request for Arbitration and PA]

r) On 27 June 2015, Personal Income Tax assessment no. 2015..., for the year 2014, was issued, with the amount payable of €32,196.76 (thirty-two thousand one hundred and ninety-six euros and seventy-six cents). [cf. document no. 1 attached to the Request for Arbitration and PA]

s) On 27 August 2015, the Applicants made timely payment of the said amount of €32,196.76 (thirty-two thousand one hundred and ninety-six euros and seventy-six cents). [cf. document no. 16 attached to the Request for Arbitration]

t) On 12 November 2015, not agreeing with the Personal Income Tax treatment of the said compensation received from C..., the Applicants filed a gracious appeal against the Personal Income Tax assessment act identified in paragraph r) above, with grounds identical to those contained in the request for arbitral ruling. [cf. gracious appeal procedure contained in the PA]

u) The gracious appeal was filed under no. ...2015... and, within its scope, AT requested clarifications from the former Applicant's employer, C..., which confirmed the following points:

(i) payment to the Applicant of the compensation of €169,410.00 for rescission of the employment contract by mutual agreement;

(ii) commencement of the employment relationship with the Applicant on 20 March 1993, suspension on 1 December 2001 and termination on 1 September 2014;

(iii) regular and effective remuneration paid to the Applicant in the 12 months preceding suspension of the employment contract (between December 2000 and November 2001), corresponding to the amounts indicated in paragraph i) above, it not having been possible by seniority to obtain the respective remuneration slips; and,

(iv) the non-existence of any shareholder relationship with G... [cf. gracious appeal procedure contained in the PA]

v) The Applicants were notified of the draft decision to dismiss the gracious appeal, for purposes of exercising the right to be heard. As grounds for dismissal, AT invokes that:

• the Applicant continues to be a member of G...'s Board and the remuneration descriptions issued, whether by this entity or by C..., contain the mention "Group F...", so the exclusion from taxation provided for in article 2, no. 4, paragraph b) of the Personal Income Tax Code is not applicable, since the necessary negative condition relating to the creation within the following 24 months of a professional or business link, regardless of its nature, with the same entity or with another in a relationship of domination or group (article 2, nos. 5 and 10 of the said legal compendium) is not met;

• The response to clarifications requested from the former employer was "evasive and ambiguous" informing only that there is no shareholder relationship between the entities referred to, so the Applicant has not met the burden of proof of the absence of relationship of the entities in question, pursuant to article 74, no. 1 of the LGT;

• The limit of exclusion from taxation established in article 2, no. 4, paragraph b) of the Personal Income Tax Code should be calculated based on the value of average effective remuneration for the last 12 months before suspension of the employment contract, namely, on 1 December 2001. Because the employer entity, given the seniority, did not obtain the remuneration descriptions, the values confirmed by the employer entity to AT as having been paid to the Applicant lack documentary support, proof not having been made in accordance with the cited article of the LGT;

• The interpretation of the Applicants that the remuneration of the 12 months preceding the signature of the agreement revoking the employment contract should be taken into account is not to be admitted, either because the employment contract was suspended, those remunerations relating to the exercise of functions in a different entity from the employer entity, not being owed (or having been paid) by the latter; or by the different nature of the functions assumed, as such remunerations are owed for the functions of member of the Board of Administration of another entity and not in the capacity of a worker;

• Seniority to be considered is that in the exercise of functions in the debtor/paying entity (article 2, no. 4, paragraph b) of the Personal Income Tax Code) and not seniority agreed for purposes of labour law;

• There being no tax shortfall, the right to compensatory interest is prejudiced. [cf. gracious appeal procedure contained in the PA]

x) The Applicants exercised the right to be heard, in which they opposed their arguments, having attached remuneration descriptions for the period from December 2000 to November 2001, called "Remuneration Description" and, equally, the Financial Statements of G... for 2014 and 2015, with express mention of the subcontracting of payroll processing to the Group F... ACE and evidencing the absence of a relationship of domination or group between that entity and Group F... . [cf. gracious appeal procedure contained in the PA]

z) The Applicants were notified on 31 August 2016 of the final decision to dismiss the Gracious Appeal based on the grounds of the draft decision, AT considering that the documents attached in the right to be heard do not prove that it is only a matter of subcontracted services [payroll processing] or that there is no relationship of domination or group. [cf. gracious appeal procedure contained in the PA]

aa) The Applicants filed a Hierarchical Appeal of this decision to dismiss, which was filed under no. ...2016... and also dismissed by order of 23 November 2017, pursuant to official letter no. ..., dated 28 November 2017, from the Personal Income Tax Service, sent by registered letter with confirmation of receipt, based on grounds which are summarised as follows:

• it follows from the literal interpretation of the legal formula for negative delimitation of the tax base provided for in article 2, no. 4, paragraph b) in conjunction with no. 10 of the same article that the relevant criterion to be considered is the number of years or fraction of seniority or exercise of functions in the debtor entity, which is the one obliged to pay the amounts due for termination of the employment contract, with the exception of seniority verified in other entities in a relationship of domination or group, by force of the subjective extension operated by article 2, no. 10 of the Personal Income Tax Code. This is the interpretation that also results from the historical-systematic and teleological elements in the application of articles 11, no. 1 of the LGT and 9 of the Civil Code;

• The same solution results from labour law, if recourse thereto should be necessary subsidiary, since the Labour Code does not contain a definition of seniority and, if any were to be drawn from it, it would be that of seniority in the company and not that resulting from a clause of any collective labour agreement or agreement established between the parties;

• The increase in seniority resulting from negotiating legal instruments that may voluntarily delimit the breadth of exclusion from the tax base is not admissible and, being liable to manipulation by the parties, to raise the limit of exclusion from Personal Income Tax taxation of amounts received by the worker, as recognised by doctrine and the opinion of the Tax Studies Centre issued in 2016, opposed to the jurisprudence of the Central Administrative Court South (TCA South) to the contrary;

• The transfer of the Applicant, as a worker of Group F..., for the exercise of functions in G..., on 1 December 2001, does not meet the requirements of occasional worker transfer and is unlawful, in accordance with Decree-Law no. 358/89, of 17 October, with the subsequent amendments introduced by Law no. 39/96, of 31 August, and Law no. 146/99, of 1 September;

• Occasional worker transfer is, as a rule, prohibited, given the anomalous character of the dissociation between ownership and use in the employment relationship, pursuant to articles 26 to 30 of Decree-Law no. 358/89, and articles 322 et seq. of the 2003 Labour Code, although admitted within the framework of collaboration between companies that are juridically and financially associated or economically interdependent. As from 2010 there is no relationship of domination or group between the entities [cedent and cessionee], they are not affiliated companies, in a relationship of reciprocal participations, domination or group and the contrary is also not demonstrated;

• the appeal should be dismissed, because the concept of seniority relevant is that which corresponds to seniority in the company debtor entity and due to lack of proof (non-existence of documentary support) of the values of the last 12 months of effective remuneration in the cedent entity. [cf. document no. 2 attached to the Request for Arbitration and PA]

bb) On 13 February 2018, the request for constitution of an arbitral tribunal was filed, which gave rise to the present proceedings. [cf. CAAD procedural management information system]

§2. Unproven Facts

With relevance to the assessment and decision of the case, there are no facts that have not been proven.

§3. Justification of Factual Matters

The facts pertinent to the judgment of the case were chosen and delimited according to their legal relevance, in light of the plausible solutions of the legal questions, in accordance with the combined application of articles 123, no. 2, of the Tax Code of Administrative and Tax Procedure, 596, no. 1 and 607, no. 3 of the Civil Procedure Code ("CPC"), applicable pursuant to article 29, no. 1, paragraphs a) and e) of the RJAT.

Regarding the proven factual matters, the Tribunal's conviction was based on critical analysis of the documentary evidence on file, including the administrative file, highlighting the clear demonstration of the remuneration earned by the Applicant from C... between December 2000 and November 2001, the period corresponding to the 12 months preceding the suspension of his functions as a worker of Group F..., whether by formal statement from the employer entity (written and signed by the company's secretary), or by the attachment, by the Applicant, of the actual remuneration descriptions.

It was equally established in the proceedings that, from 2010 onwards, G... on one hand, and C... on the other, are not affiliated companies. In particular with regard to the year in which the compensation was paid (2014) and following, this conclusion is clear from the analysis of the Financial Statements of G... for 2014 and 2015, whose Board of Administration confirms (in those reports of the two years referred to) that the company is held (indirectly) 100% by I..., through J..., which holds (directly) 100% of the capital and voting rights of G..., information provided pursuant to article 448, no. 4 of the Commercial Companies Code, with the company's accounts subject to certification by a Statutory Auditor. In fact, the relationships of qualified participation between the entities referred to [C... and G...], if they existed, would have to be evidenced in those Financial Statements.

III.2. ON THE LAW

§1. Delimitation of the Subject Matter

The merit question submitted to the assessment of this tribunal concerns the incidence of Personal Income Tax on the compensation received by the Applicant in 2014, for termination of the employment contract by mutual agreement, in light of the provisions of the negative delimitation provision contained in article 2, no. 4, paragraph b) and no. 10 of the Personal Income Tax Code.

The Applicants raise, in this context, an error of law on two points.

The first relates to the interpretation of the concept of relevant seniority, for purposes of application of the legal formula for calculating the "indemnity" not subject to tax.

The second concerns the exclusion from this calculation of remuneration paid in the last 12 months by an entity other than the employer entity, where the Applicant exercised functions as member of the Board of Administration, from 1 December 2001.

In the hypothesis that the understanding of AT prevails that the remuneration of the last 12 months to be considered in said formula is only that paid by the employer entity (in the case at hand, that which preceded the suspension of the employment contract in 2001), it is also of interest to assess the validity of the disregard, by AT, of such remuneration, based on alleged lack of proof due to non-existence of documentary support, as stated in the grounds of the decision dismissing the Hierarchical Appeal, taking into account the proof made by the Applicant in the administrative proceedings and also in the present arbitral process and the correct application of the relevant provision, article 2, no. 4, paragraph b) of the Personal Income Tax Code.

Finally, the Tribunal must rule on the dependent claim for restitution of tax together with compensatory interest.

§2. Verification of the Value of the Claim

Because in tax proceedings regulated by the CPPT and RJAT there is no phase of preliminary examination, the judge must fix the value of the claim in the decision that terminates the proceedings, in accordance with the provisions of article 306, nos. 1 and 2 of the Civil Procedure Code, of subsidiary application to tax and tax arbitration proceedings.

Thus, and as a preliminary matter, it is important to assess and decide the incident raised by AT, which contests the value of the claim indicated by the Applicants of €85,462.84. To do so, it argues that the Personal Income Tax assessment in dispute was issued in the amount of €32,196.76 [amount payable] and that, in accordance with article 97-A of the CPPT, applicable by referral of article 29, no. 1, paragraph a) of the RJAT, the value of the proceedings is the amount whose annulment is sought, and the value of the claim should accordingly be corrected to €32,196.76.

In arbitral jurisdiction, the criterion for fixing value is derived from the Costs Regulation in Tax Arbitration Proceedings which provides, in its article 3, no. 2 that "[t]he value of the claim is determined pursuant to article 97-A of the Tax Code of Administrative and Tax Procedure". For its part, no. 1, paragraph a) of this latter provision provides that, in the specific case of challenging an assessment, and it is important not to forget that the tax arbitration process is a challenge proceeding, the value to be considered, for purposes of costs or others provided for in law, is "the amount whose annulment is sought".

As Jorge Lopes de Sousa refers in relation to this provision, "[all] situations fall within it in which an "assessment is challenged", including not only direct challenges of assessment acts through the judicial challenge process, but also challenges of acts dismissing gracious appeals or hierarchical appeals in which the legality of assessment acts is appreciated, challenges of self-assessment acts, source withholding and payments on account, because in all cases an act determining a tax amount is challenged", concluding that the value of the proceedings "will be that of the assessment itself, if total annulment is sought, or the value of the part challenged, if only partial annulment is sought." - cf. Annotated and Commented Tax Code of Administrative and Tax Procedure, Volume II, 6th edition, Áreas Editora, p. 72.

However, the situation in question does not present the invoked and straightforward correspondence between the value of the assessment, in the sense of the value of tax (Personal Income Tax) payable, and the "amount whose annulment is sought". In fact, the value of the Personal Income Tax assessment, in the hypothetical situation of full success of the Applicants' claim, would result, according to their calculations, in a value of Personal Income Tax overpaid to be refunded by AT of approximately €53,266.08.

Thus, the favourable outcome of the action results in the annulment of an assessment with a positive amount payable of €32,196.76, but which, if the alleged defects were purged, should instead result in a credit (to be received) of €53,266.08. From this it follows that this hypothetically invalid assessment, under this presumption, arithmetically contains a value of Personal Income Tax assessed in excess of €85,462.84, resulting from the sum of those two items.

The assessment act did not result in tax payable in the amount of €85,462.84 solely because throughout 2014 Personal Income Tax withholdings were made by the entities paying the income, which were imputed (deducted) from the final tax due. In this way, the amount that the Applicants seek to have annulled is, in truth, €85,462.84 and not only the "payable" value mentioned in the assessment, €32,196.76, which ignores the additional Personal Income Tax refund of €53,266.08 to which they believe they are entitled, already paid via the tax substitution mechanism (withholdings at source) provided for in article 20 of the LGT.

This understanding emanates from and is a corollary of the general principle that the value of a claim represents the immediate economic benefit of the claim, a principle expressed in various procedural codes, beginning with the Code of Procedure in Administrative Courts (CPTA) – article 31, no. 1 – and in the Civil Procedure Code – article 296, no. 1, applicable subsidiarily to tax proceedings which, on this matter, is limited to a single provision relating to specific criteria, the aforementioned article 97-A.

In the same interpretative line, the TCA South ruling of 13 March 2014 in case no. 7125/13 pronounces:

"Pursuant to article 296/1, of the CPC, "[e]very case must be assigned a certain value, expressed in legal currency, which represents the immediate economic benefit of the claim". Article 297/1, of the CPC, provides that "[i]f the action seeks to obtain a certain sum of money, that is the value of the case, with no objection or agreement to the contrary being admissible; if the action seeks to obtain a benefit other than that, the value of the case is the sum of money equivalent to that benefit".

For its part, article 32, no. 1, of the CPTA determines "[w]hen by the action it is sought to obtain payment of a certain sum, that is the value of the case"; pursuant to no. 2 of the provision "[w]hen by the action it is sought to obtain a benefit other than payment of a sum, the value of the case is the sum equivalent to that benefit".

[…]

As regards the determination of the economic benefit of the claim, "[a]ccount must be taken of [the fact] that this is always grounded in the cause of action that explains and delimits it. From it the criterion of immediate economic benefit of the claim does not abstract, so this is not considered abstractly, but rather in confrontation with the cause of action, for determination of the value of the case". The cause of action consists of the fact constitutive of the legal situation which the plaintiff wishes to uphold or deny, falling to it the function of individualisation and delimitation of the claim. […]"

Thus, as stated in this ruling, the criterion set out in article 97-A, no. 1, paragraph a), of the CPPT is not detached from the amount corresponding to the economic benefit to be obtained with success of the action, being, moreover, evidenced by the very wording of the provision in question, when it refers to the "amount whose annulment is sought".

In the concrete situation, satisfaction of the Applicants' claim translates in their legal and patrimonial sphere an inflow of €85,462.84, a value of Personal Income Tax of which they will be refunded in case of an annulling (partial) constitutive ruling on the Personal Income Tax assessment act in dispute, whose repristinatite effect ex tunc implies the restoration of the hypothetical current situation that would be verified if that part of the act [of assessment] had never existed, in accordance with the provisions of paragraph b) of no. 1 of article 24 of the RJAT, which imposes on AT the duty to "[r]estore the situation that would exist if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for that purpose".

In light of the foregoing and based on the legal criteria enunciated, the value of the action is set at €85,462.84 (eighty-five thousand four hundred and sixty-two euros and eighty-four cents), coinciding with the pecuniary benefit of the sought (partial) annulment of the Personal Income Tax assessment at issue in the proceedings, for 2014.

§3. On the Merits

A. Introduction

It constitutes the subject matter of the present proceedings to determine the terms in which the non-taxation provision provided for in article 2, no. 4, paragraph b) of the Personal Income Tax Code applies to the compensation paid by the employer to the Applicant, on account of the extinction of the employment contract by agreement. The points of disagreement in the positions in confrontation are, essentially, the following:

• Whether or not the entire period in which the Applicant was a member of the Board of Administration of another entity, within the same sector of activity (financial), should be taken into account as a "multiplier" in the legal formula for calculating the compensation paid by the employer that is not taxed in Personal Income Tax;

• The possibility of considering the remuneration earned as a member of the Board of Administration of another entity different from the employer entity, in the last 12 months preceding the termination of the employment relationship, as the basis for reference or "multiplicand" in the legal formula for calculating which determines the labour compensation, for termination of the employment contract, that is not subject to Personal Income Tax;

• If the concept of seniority to be considered is that advocated by AT (effective service time provided to the employer entity), the alleged lack of proof of the remuneration earned by the Applicant in the last 12 months of work provision (from December 2000 to November 2001), which grounds the dismissal of the Hierarchical Appeal challenged here and the consequent Personal Income Tax assessment on the total value of the compensation received.

Beyond the difficulties inherent in the interpretation of the concept of seniority, on which the following section focuses, the concrete situation raises new questions in jurisprudence, as the matter does not concern succession of work provision in different entities within the same sector, but an employment relationship with the employer entity, followed by service provision as a member of a Board of Administration in another entity which, at the time of appointment to the position (2001), was part of the financial group in which the employer entity was integrated, but subsequently ceased to be so (2010), with the termination of the employment contract occurring after, in 2014.

B. The Concept of Seniority Adopted by the Normative Hypothesis of Article 2, No. 4, Paragraph b) of the Personal Income Tax Code

It is important, in this regard, to examine the Personal Income Tax incidence provision with relevance to its respective framework, in the wording in force on the date of the taxable event, i.e., relating to the moment in which the agreed compensation was paid or placed at the disposal, in the case at hand in 2014 (in this sense, see, among others, the Rulings of the STA, cases no. 32/10, of 27 June 2012, and no. 827/06, of 29 November 2006).

Article 2 of the Personal Income Tax Code provided, at that date:

"Income from Category A

1 - Income from dependent work includes all remuneration paid or placed at the disposal of its holder, coming from:

a) Work on behalf of another provided under an individual employment contract or another one legally equivalent to it;

b) Work provided under a contract for acquisition of services or another of identical nature, under the authority and direction of the person or entity that occupies the position of active subject in the legal relationship resulting from it;

c) Exercise of public function, service or office;

[…]

3 - The following are also considered income from dependent work:

a) Remuneration of members of statutory bodies of legal persons and equivalent entities, with the exception of those who participate in them as statutory auditors;

[…]

4 - When, in any form, the contracts underlying the situations referred to in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provisions in paragraph d) of the same number, regarding payments that continue to be due even if the employment contract does not continue, or the cessation of public manager functions, administrator or manager of a legal person, as well as representative of a permanent establishment of a non-resident entity, the amounts earned, for whatever reason, remain always subject to taxation:

a) In full, in the case of a public manager, administrator or manager of a legal person, as well as representative of a permanent establishment of a non-resident entity;

b) In the part exceeding the value corresponding to the average value of regular remuneration with the character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions in the debtor entity, in other cases, except when within the following 24 months a new professional or business link is created, regardless of its nature, with the same entity, in which case the amounts shall be taxed in full.

5 - For purposes of the foregoing number, a new business link is also considered created when relationships are established with the entity with which labour, commercial or service provision relationships ceased, by a company or other entity in which at least 50% of its capital is held, individually or together with some elements of the respective family unit, by the beneficiary or by a plurality of beneficiaries of the amounts received, except if the said labour, commercial or service provision relationships represent less than 50% of the sales or service provisions effected in the period.

[…]

10 - For purposes of this tax, all entities that pay or place at the disposal remuneration constituting income from dependent work pursuant to this article are considered employer entities, and any other entity that with them is in a relationship of domination or group, regardless of its geographic location, is equated to them."

The first question that arises concerns the fixing of the concept of seniority for tax purposes (Personal Income Tax), on which the jurisprudence of the TCA South and arbitral tribunals has pronounced, as well as doctrine, without agreement of points of view.

The position adopted by the TCA South is to the effect that it does not result from the tax incidence provision provided for in article 2, no. 4, paragraph b) of the Personal Income Tax Code that the concept of seniority refers restrictively to service time in the entity debtor of compensation for termination of the employment contract, nor is a restrictive interpretation of the same justified. A broad concept of seniority is adopted, which allows consideration of service time and category already achieved in other employer entities, grounded in the argument that, seniority being a labour law concept, it is in this that its clarification should be sought, in harmony with the interpretative canon enshrined in article 11, no. 2 of the LGT.

In accordance with this jurisprudence, the Personal Income Tax negative delimitation provision of incidence must consider the increased seniority that results from service time in other entities of the same sector, when this is provided for by labour legislation [Labour Code], or by sources of labour law recognised by it in its articles 1 to 3: negotiating collective regulation instruments and the individual employment contract.

In this way, the broader notion and consequent increase in seniority arising from labour legislation, from negotiating collective regulation instruments or from individual employment contract stipulation, a practice which is not prohibited by law and is frequently observed in collective regulation instruments and in the practices of the profession of work and of companies, must be accepted for calculation of the value not subject to Personal Income Tax – cf. Rulings of the TCA South nos. 5971/12, of 12 March 2013; 3748/10, of 21 September 2010; and 6002/01, of 11 May 2004.

This approach was followed in several arbitral decisions that invoke, for purposes of Personal Income Tax incidence, a broad concept of seniority drawn from labour law, thus encompassing the 3 aforementioned sources of labour rights and obligations – cf. arbitral decisions nos. 230/2016-T, of 14 November 2016; 158/2017-T, of 17 November 2017; 277/2017-T, of 29 November 2017; 321/2017-T, of 7 December 2017; 353/2017-T, of 10 December 2017; 349/2017-T, of 14 December 2017; and 512/2017-T, of 28 February 2018.

However, even accepting the broad conception of seniority, there are multiple arbitral decisions of dismissal, due to lack of demonstration or even non-existence of the prerequisites on which the seniority invoked under labour law is grounded, in particular because the worker was not affiliated to a union, and consequently was not subjectively covered by the (more favourable) ACT regime, in accordance with the principle of dual affiliation of article 496 of the Labour Code (arbitral decision no. 616/2015-T, of 2 May 2016); or because the ACT or the adhering employer entity (by reservation) conditions the "extension" of seniority (considering service time provided to other employers) to its provision in the individual employment contract, without such having been verified in the concrete cases (arbitral decision no. 126/2017-T, of 19 October 2017, and arbitral decisions nos. 308/2017-T, of 20 November 2017, and 227/2017-T, of 5 January 2018).

It is further worth noting that in the dissenting opinion relating to ruling no. 505/2017, an intermediate thesis is expressed, according to which the tax provision would be compatible with the application of a concept of seniority delimited by a collective labour regulation instrument, whose scope and binding force derive from law itself, but not with a concept delimited by mere agreement between the parties (i.e., by individual employment contract or by agreement for revocation of the employment contract). It states there that "a concept of seniority based solely on an individual agreement between employer and worker goes beyond the ratio of the provision in question because the legislator cannot have designed a provision whose concrete application could ground unjustified benefits for workers, by force of [of] conventional amendments (namely singular) to the concept of seniority, accepting a concept that easily would result in situations of violation of the principle of equality and non-discrimination. In this case we would clearly be in a zone of unconstitutionality with the implications described in the Ruling of this arbitral tribunal, so the Applicant's claim cannot succeed."

Finally, advocating a conception opposed to that of the TCA South and arbitral jurisprudence just described, arbitral decisions nos. 357/2017-T, of 18 December 2017; 505/2017-T, of 16 March 2018; and 599/2017-T, of 30 April 2018, argue that the tax law contains its own concept of seniority, which refers strictly to service time in the entity debtor of compensation for termination of the employment contract, so there is no place for densification of the concept by appeal to other branches of law (in the case labour law), nor, consequently, for the increase in seniority by service time provided in other entities.

In harmony with this jurisprudence it is also inadmissible the consideration of non-legislative sources, as it concerns a matter of tax incidence and violates the principle of legality, to which is added the fact that the principle of dual affiliation discriminates unionised workers against non-unionised ones, colliding with the principle of equality.

It is illustrative, on this point, the reasoning of arbitral ruling no. 505/2017 which is set out below:

"The expression 'number of years or fraction of seniority or exercise of functions in the debtor entity', used in paragraph b) of no. 4 of article 2 of the CIRC, clearly shows that as for the 'number of years or fraction of... exercise of functions', only what is reported to exercise 'in the debtor entity' is relevant.

As for 'seniority' there is no such clarity, as the final reference to the 'debtor entity' can refer, grammatically, only to 'exercise of functions'.

However, grammatically, the final reference to the 'debtor entity' can also, without appreciable effort, refer to 'seniority' ('seniority ... in the debtor entity'), being this a form textually adequate to express a legislative intent to the effect that the relevant seniority is also, as happens as to 'exercise of functions', that referring to the debtor entity.

This latter reading appears to be the most consistent, as the alternative referred to therein, between 'seniority' and 'exercise of functions', is justified by the concept of seniority being adequate to reference service time provided within an employment contract, but not to service provided within other functions to which this regime applies, referred to in the body of said no. 4, as is clearly the case of exercise of public manager functions (as flows from the respective Statute, approved by Decree-Law no. 71/2007, of 27 March), but also functions of administration in legal persons. This is also confirmed by paragraph a) of the same no. 4 of article 2 in which 'exercise of functions of public manager, administrator or manager of a legal person, as well as representative of a permanent establishment of a non-resident entity' is expressly mentioned.

There being no negative delimitation of incidence as to the part of the indemnity corresponding to this exercise of management and representation functions [as was later made explicit by the wording given to that paragraph a) by Law no. 82-E/2014, of 31 December, to which its article 14 attributed interpretative nature], the reference in paragraph b) to existence of negative delimitation in cases of 'exercise of functions in the debtor entity' will target cases in which workers did not exercise only those functions in the debtor entity, cumulating them with work to which the concept of seniority applies.

[…]

Thus, in the context in which the said expression is used, it appears adequate to interpret this provision as alluding to 'seniority ... in the debtor entity' and 'exercise of functions in the debtor entity'.

Moreover, for purposes of indemnity for termination of an employment contract, the normal scope of the expression 'seniority', tout court, is that of 'seniority in the company', the duration of the employment contract, as has long been understood.

However, even with this reading, the scope of the expression is not completely clarified, as, literally, seniority of the worker in the debtor entity can be understood as that legally recognised to the worker, including that referring to work in other entities, but recognised in him relating to the company by force of collective labour agreement, or extension order, or individual employment contract.

However, as AT says in the Tax Inspection Report, such an interpretation would imply the unconstitutionality of that paragraph b) of no. 4 of article 2 of the CIRC, as it would come down to acknowledging the relevance of acts of non-legislative nature for integrating a concept which, by force of the CRP, is subordinated to the reservation of formal law.

In truth, that paragraph b) of no. 4 of article 2 of the CIRS constitutes a negative delimitation of Personal Income Tax incidence and the provisions that define the incidence of taxes are constitutionally valid only if they are inserted in formal law or decree-law issued under a legislative authorisation of the Assembly of the Republic, as results from the provisions of articles 103, no. 2, and 165, no. 1, paragraph i), and 198, no. 1 paragraph b), of the CRP.

And, by force of the provisions of article 112, no. 5, of the CRP, 'no law may create other categories of legislative acts or confer on acts of another nature the power to, with external efficacy, interpret, integrate, modify, suspend or revoke any of its provisions'.

For this reason, paragraph b) of no. 4 of article 2 of the CIRC would be unconstitutional if interpreted as attributing to individual contracts or to normative acts of non-legislative nature (as are collective labour agreements and extension orders) the power to define the breadth of the delimitation of Personal Income Tax incidence.

If it is understood that article 11, no. 2, of the LGT assures the possibility of making appeal to non-legislative norms to define the scope of Personal Income Tax incidence, in that interpretation, it will be materially unconstitutional, as it is incompatible with article 112, no. 5 of the CRP. The reference to 'no law' contained in this constitutional provision encompasses the LGT.

Consequently, the constitutionally admissible interpretation of this provision is that which attributes to it a precise scope, not modifiable by normative acts or individual agreements, which is that it refers to seniority in the 'debtor entity', similar to what happens with 'exercise of functions'.

Moreover, it is also this interpretation that is most congruent and that ensures the constitutionally principle of equality (article 13 of the CRP), as at this level of taxation in Personal Income Tax of indemnities due for cessation of activity in a company, no reasons are seen that would justify different regimes being applied depending on the nature of the service provided.

In fact, in any case the reasons hold that can justify this negative delimitation of incidence which are 'to take into account the fact that the indemnity amount will be necessary for the worker to ensure his subsistence during the period of unemployment that, in most cases, will follow' and 'to take into account that receipt of such a sum, generally relatively substantial, will have a triggering effect on the tax rate: the income obtained in that year will be exceptionally high, so it will be taxed at high rates given the progressivity of the tax'.

On the other hand, still from the perspective of the principle of equality, no reason is seen that would justify distinguishing, for purposes of Personal Income Tax taxation of workers receiving indemnities for termination of employment contracts, between those who are unionised in unions that celebrated collective labour agreements and those who are not unionised or who are unionised in unions that have not celebrated such agreements.

[…]

For this reason, that paragraph b) of no. 4 of article 2 of the CIRS would be materially unconstitutional, by violation of article 13 of the CRP, if interpreted as making the negative delimitation of Personal Income Tax incidence provided therein depend on the applicability to the worker of rules provided for in collective labour agreements or in individual contracts.

By the foregoing, it is concluded that the interpretation of this provision of the CIRS compatible with the Constitution is that made by AT and underlying the contested assessment, of which, for all workers, the seniority to be considered is the seniority in the entity debtor of the indemnity, similarly to what happens with managers."

In the same sense the main doctrine pronounces itself.

Beginning with Manuel Faustino, "[i]t is not enforceable against the Tax Administration the clause of the ACTV banking sector which imposes, in the transfer of a worker between credit institutions, the counting of seniority time verified in the prior or prior credit institutions of which he had been a worker. As, a fortiori, neither are any agreements that, relating to the guarantee of benefits inherent to seniority, have been celebrated between the worker and the employer entity. Without considerations which today could be provided by the subjective extension of the concept of employer entity operated by no. 10 of article 2, since that rests on relationships of domination or group between companies, regardless of their geographic location, we reaffirm here the known orientation of the Tax Administration according to which the time of seniority relevant is, only, the time of seniority 'acquired' in the entity with which the individual employment contract ceases, as literally follows from the law, there appearing to be no margin for any other type of interpretation." - cf. Manuel Faustino, On the sense and scope of the new wording of article 2 no. 4 of the Personal Income Tax Code – the taxation of amounts received for termination of the contractual link with the employer entity, Tax Revista de Direito e Gestão Fiscal nos. 13/14, January/April 2003, ISG edition, pp. 5-25 (citation of note 12, pp. 10-11).

Equally, Filipe Fraústo da Silva and Cláudia Reis Duarte disagree with the jurisprudential understanding according to which article 2, no. 4 of the Personal Income Tax Code adopts the notion of seniority in its full labour law amplitude which addresses the number of years of seniority of the worker resulting from law, collective labour agreement or the employment contract itself.

These authors extract from the written letter of the Personal Income Tax Code that "the number of years or fraction to be considered as multiplying criterion in the application of the formula to arrive at the delimitation of the value negatively delimited (and excluded from Personal Income Tax taxation), whether in situations of termination of contracts, or in cessation of exercise of functions, is the number of years or fraction verified '…in the debtor entity…'."

They further consider that labour law does not explicitly define any concept of seniority, but if to it resort should be made for delimitation of this concept, in its more current expression, it would correspond "to the measure of the duration of the labour situation that, paradigmatically, involves a worker and an employer commonly called seniority in the company".

On the other hand, revocation is one of the modalities of termination of the employment contract admitted and regulated in the Labour Code (article 340), with the parties usually establishing a global monetary compensation for the worker (article 349, nos. 4 and 5 of the same Code) which, being a "counterpart negotiated for termination of the employment contract by agreement, besides being accidental, does not follow any legal criterion in its fixing, being in the total availability of the parties", the respective amount not being "a matter limited by any mandatory legal provision".

They conclude that the "solution most consonant with the express letter of the law, as well as the most correct interpretation even if not already drawn from the written letter and it would be necessary to resort to labour law, is that which considers, as multiplying factor for purposes of determining the negative delimitation of incidence, seniority in the company or in the debtor entity". If taken "as reference for completion of the tax provision the concept of seniority adopted for labour purposes at the time of termination of the contract and for purposes of calculating the compensation to be attributed to the worker, would be found the way for the limit of exclusion from taxation to be freely manipulable by the parties, which, let us agree, was certainly not — cannot have been — the intention of the tax legislator."

Rui Morais also appears to share this position in stating that "[t]he limit of non-taxation is the average value of regular remuneration with character of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions in the debtor entity (no. 4, al.b), of art.º 2). The excess shall be taxed according to the general rules." - cf. the author, On Personal Income Tax, 3rd edition, Almedina, 2016, pp. 54-55.

We concur with this thesis which, in the matter in hand, coincides with that of the Respondent. However, in the situation under scrutiny, there exists an additional factor which militates in favour of not being able to be considered the period of exercise of functions of the Applicant as a member of the Board of Administration of another entity (and also the respective remuneration in that capacity, as analysed below).

C. In Case of Exercise of Functions as Administrator of a Legal Person

In the first place, it is important to note the fact that the exercise of statutory positions of administration of companies does not fall within labour law, being the relationship established between the holder of the administrative body and the company it represents governed by commercial law, more specifically by commercial law.

Traditional doctrine grounds this relationship in the mandate contract which is one of the modalities of the service provision contract (article 1155 of the Civil Code), through which one of the parties undertakes to "carry out one or more legal acts on account of the other" (article 1157 of the Civil Code). Nevertheless, because the content of the function involves more than the performance of legal acts and the administrator enjoys autonomy in the exercise of his functions, this understanding has suffered criticism giving preference to the more comprehensive qualification of the service provision contract – which may involve the performance of material acts (article 1154 of the Civil Code). For some authors, non-shareholder administrators are linked to the company through a relationship of labour nature, a construction that is not to be followed, as it devalues the central dimension of legal subordination inherent in the employment contract, which does not