Process: 594/2015-T

Date: June 1, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision addresses a dispute between a food distribution company and the Portuguese Tax Authority (AT) regarding IRC tax benefits for net job creation in fiscal year 2005. The petitioner initially deducted €3,372,176.33 as a job creation benefit on their Modelo 22 IRC return but later filed an administrative complaint seeking to increase this deduction to €7,744,080.54. The dispute centers on three key issues: (1) the proper treatment of part-time employment contracts when calculating the benefit, (2) whether conversions from fixed-term to permanent contracts qualify for the benefit, and (3) how worker replacements should be considered. The Tax Authority partially denied the administrative complaint, making adjustments pursuant to article 19 of the Statute of Tax Benefits (EBF). The AT recalculated the benefit, distinguishing between job creation occurring before and after amendments to article 17 (now article 19) of the EBF through Law 32-B/2002. The petitioner challenged this partial denial through the Administrative Arbitration Center (CAAD), requesting annulment of the hierarchical appeal decision, full recognition of the €2,260,515.23 job creation benefit, reimbursement of €1,188,283.56 in improperly paid tax, and payment of compensatory interest under article 43 of the General Tax Law (LGT). This case illustrates the complexities of claiming employment-related IRC benefits, the importance of proper documentation and calculation methodology, the requirement for adequate reasoning in tax authority decisions, and the taxpayer's right to seek compensatory interest when tax has been overpaid due to administrative errors or delays. The arbitral proceedings followed RJAT procedures, with both parties waiving witness testimony and oral arguments.

Full Decision

Arbitral Decision

The arbitrators Counselor José Baeta de Queiroz (arbitrator-president), Dr. José Nunes Barata and Dr. João Pedro Dâmaso (arbitrators-members), appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Court, constituted on 1 December 2015, hereby agree as follows:

I. REPORT:

A… legal entity number…, with registered office at Rua…, no.…, …-…, Sintra (hereinafter referred to as the Petitioner), filed a request for arbitral decision, pursuant to article 10 of Decree-Law number 10/2011, of 20 January (hereinafter referred to as RJAT).

The Petitioner presented the following requests:

a) The annulment of the decisions issued on 11 July 2015, in the context of hierarchical appeal filed against the partial allowance of the administrative complaint number…/08 (presented against the IRC assessment number 2006…, of 31 July 2006, concerning the taxation period 2005), in the part that partially rejects the petitioned amount;

b) Consideration and deduction in box 07 of the IRC model 22 declaration, of the amount of €2,260,515.23 relating to the tax benefit for net job creation;

c) Reimbursement to the Appellant of the amount of tax improperly paid and delivered to the State's coffers, in the amount of €1,188,283.56; and

d) Payment of indemnitory interest, pursuant to article 43 of the LGT, on the amount of tax from which the petitioner was deprived.

The petitioner did not proceed to appoint an arbitrator, and therefore, in accordance with article 6, number 2, paragraph a) of the RJAT, the signatories were appointed by the President of the Deontological Council of the CAAD, to integrate this collective Arbitral Court, having accepted under the legally established conditions.

The Tax and Customs Authority (hereinafter, AT) filed a response, arguing that the request for arbitral decision should be ruled wholly without merit.

On 1 March 2016, the meeting provided for in article 18 of the RJAT took place, whereby it was agreed that witness testimony was not necessary and the Parties waived oral arguments.

The arbitral court was regularly constituted and is materially competent, in light of the provisions of articles 2, number 1, paragraph a), and 30, number 1, of the RJAT.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, number 2, of the same statute and article 1 of Ordinance number 112-A/2011, of 22 March).

The cumulation of requests is admissible insofar as they essentially depend on the appreciation of the same factual circumstances and on the interpretation and application of the same legal principles or rules, pursuant to article 3 of the RJAT and 104 of the Code of Tax Procedure and Process (CPPT).

The proceedings do not suffer from nullities and no exceptions were raised.

Thus, there is no obstacle to the appreciation of the merits of the case.

II. FACTUAL MATTER:

II.1. Proven facts:

The following facts are considered proven:

a. The Petitioner, A…, is a company that operates in the food distribution sector (article 1 of the request for arbitral decision);

b. The Petitioner adopts a taxation period between 1 March of one year and 28 February of the following year (article 4 of the request for arbitral decision);

c. The Petitioner timely filed the income statement – IRC model 22, relating to the fiscal year 2005;

d. In determining the taxable matter for the fiscal year 2005, the Petitioner deducted, as a tax benefit relating to net job creation, the amount of €3,372,176.33 (article 7 of the request for arbitral decision);

e. The Petitioner filed an administrative complaint, which is deemed fully reproduced here, based on error in self-assessment, made in the statement referred to in the preceding paragraph (article 17 of the request for arbitral decision and administrative procedure);

f. In the administrative complaint filed, the acceptance of deduction, to the net income of the fiscal year, for the purpose of determining taxable income, of the sum of €7,744,080.54 was requested (in accordance with article 12 of the administrative complaint), in substitution of the value initially declared, of €3,372,176.33 (in accordance with article 10 of the administrative complaint and amount entered in field 234 of box 07 of the income statement model 22 for the year 2005);

g. From the administrative complaint filed, in its article 11, it reads that the amount initially deducted:

(…) only contemplates net job creation:

Occurring in fiscal years prior to 2005, considering only permanent employment contracts ab initio; and

Occurring in fiscal year 2005, considering both permanent employment contracts ab initio executed in this fiscal year, and conversions of fixed-term employment contracts into permanent contracts that had initially been concluded as fixed-term.

h. From the same administrative complaint filed, in its article 121, it reads: Taking into account the above, in particular the general interpretation of the Tax Administration regarding the treatment to be given to the conversion of fixed-term employment contracts into permanent contracts, the calculated tax benefit amounts to €7,744,080.54, (…), which should be deducted in Field 234 of Box 07 of the Income Statement Model 22 of IRC relating to fiscal year 2005.

i. The administrative complaint was partially denied by decision of 26 July 2010, issued by the Head of Division of the Large Taxpayers Unit, which is deemed reproduced here, pointing out to the AT (i) the need to make adjustments to the benefit to be enjoyed by the petitioner, pursuant to article 19 of the EBF, given the existence of part-time employment contracts underlying the benefit in question, (ii) because the conversion of fixed-term employment contracts into permanent employment contracts was not considered for purposes of this benefit, and (iii) because the replacement of workers initially considered for purposes of the benefit by others under the same conditions was not considered.

j. In the decision of partial denial of the administrative complaint, in section 3.1, among other aspects, it also reads that:

The complainant is requesting the entry of the amount of €7,744,080.54 as a tax benefit relating to net job creation for youth, in field 234 of box 07 of the IRC model 22 declaration/2005, subject to deduction from taxable profit. The complainant deducted €3,372,176.33 and requests that an additional amount of €4,371,904.21 be deducted.

k. Equally in the same decision of partial denial of the administrative complaint, in section 3.1.14, it states that:

(…) we calculated the amounts to be considered as tax benefit in the taxation period in accordance with article 19 of the EBF as drafted at the date of the facts, relating to net job creation, per worker selected by the complainant, in accordance with the tables attached to this information:

l. In Annex 1 (59 pages) we present the calculation of the tax benefit relating to net job creation that occurred before the entry into force of the amendment made to number 2 of article 17 of the Statute of Tax Benefits (E.B.F.) - current article 19, through Law no. 32-B/2002, of 30 December, for workers admitted under permanent contracts in full-time and part-time regimes and totaling €3,350,508.64.

m. In Annex 2 (8 pages) we present the calculation of the tax benefit relating to net job creation that occurred after the entry into force of the amendment made to number 2 of article 17 of the EBF – current article 19. Through Law no. 32-B/2002, of 30 December, for workers admitted under permanent contracts in full-time and part-time regimes, in the amount of €2,133,056.63.

n. In Annex 3 (11 pages) is contained the determination of "adjustment factor" to be applied to the limit of the tax benefit for workers with part-time working hours.

o. In section 3.1.38 of the same decision of partial denial of the administrative complaint filed, it also reads that:

The amount to be considered in field 234 of box 07 of the periodic income statement model 22 of IRC (deduction to be considered in determining taxable profit), relating to fiscal year 2005, relating to job creation, should be €5,483,565.27 corresponding to:

  1. €3,350,508.64 – Relating to net job creation between 01-03-2000 and 31-12-2002;

  2. €2,133,056.63 – Relating to net job creation between 01-01-2003 and 28-02-2006;

It should be noted that the amount of €3,213,650.66 has already been considered in that field of the Income Statement Model 22 as a result of the self-assessment made by the complainant in fiscal year 2005.

p. In section 3.1.38 of the decision of partial denial, in light of the administrative complaint filed, it reads that "440 employees were not accepted for the reasons indicated in section 3.1.27."

q. In section 3.1.27 of the same decision of partial denial of the administrative complaint, it reads that:

We also found that the petitioner proceeded with the alteration of workers considered for purposes of determining the tax benefit in question. When questioned on this matter, the petitioner alleged that it proceeded with the replacement of workers, that is, for purposes of calculating the tax benefit of the taxation period under analysis it replaced workers that had initially been selected for purposes of net job creation in the taxation period in which they met the conditions of eligible entries and that in the meantime in the taxation period in which they met the conditions of eligible entries but that for some reason were not initially selected.

Now, on this matter there is information that reflects the understanding of these services and that concludes the lack of legal support for the model of replacements advocated by the current complainant, having the latter been informed about these conclusions following a request for clarification for previous years.

r. In light of the partial denial that occurred, relating to the administrative complaint, the Petitioner filed a hierarchical appeal, whose terms are deemed reproduced here;

s. The grounds put forward by the Petitioner when filing the hierarchical appeal were as follows:

  1. Lack of correct and adequate substantiation for the non-acceptance of the total amount of deduction, in accordance with articles 31 to 40;

  2. For not accepting the deduction underlying the replacement of workers, in accordance with articles 41 to 140;

  3. For not fully accepting the benefit resulting from part-time employment contracts, in accordance with articles 141 to 165; and

  4. Request for indemnitory interest, pursuant to articles 166 to 173.

t. By decision of 1 June 2015, which is deemed reproduced here, issued by the Deputy General Director of Taxes, in substitution of the General Director of Taxes, the hierarchical appeal was wholly denied, maintaining the contested decision.

II.2. Unproven facts:

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

II.3. Substantiation of the factual matter:

The proven facts are based on the documents indicated and on the hierarchical appeal proceedings attached with the response, as well as on statements of the Petitioner whose correspondence to reality is not questioned.

III. LEGAL MATTER

III.1. The matter on which the Petitioner requests that the Arbitral Court pronounce itself is:

  1. Failure to exercise the right to prior hearing, resulting from the filing of a hierarchical appeal, when the decision maintaining the partial denial stated in the administrative complaint decision;

  2. Violation of the duty to substantiate on the part of the AT, in the decision issued when analyzing the administrative complaint filed, a decision maintained in the context of the hierarchical appeal review, given that the calculations underlying the matter that led to the non-acceptance of the totality of the request formulated by the Petitioner are not properly substantiated;

  3. Admission of replacement of workers, for purposes of counting the remaining period of the tax benefit, whose hiring in a given fiscal year contributed to net job creation by workers hired under the exact same conditions in that fiscal year and who equally contributed to net job creation;

  4. In cases of employment contracts in part-time regime, the limit of monthly charges to be considered as fiscal cost should be subject to proportional adjustment to the number of part-time working hours; and

  5. In cases of employment contracts that have ceased during a given fiscal year, the maximum limit of the enhancement should equally be adjusted, proportionally, to the period of validity of the employment contract.

  6. Request for indemnitory interest, pursuant to article 43 of the LGT.

III.2. We consider it necessary to begin with the appreciation of the alleged formal defect for lack of substantiation, because if it is verified, it will dictate the immediate and complete success of the petitioner's claim.

Moreover, if such a defect is found to exist, and depending on its extent, it may even happen that the Court finds itself prevented from appreciating the substantive legality of the impugned act, because it does not understand the reasons why it was executed, and therefore cannot judge its legality or illegality.

The obligation to substantiate administrative acts is a constitutional requirement, established in article 268, number 3 of the Constitution of the Portuguese Republic.

It was taken up and detailed by the ordinary legislator, namely, in articles 124 and 125 of the initial Code of Administrative Procedure, as in articles 152 and 153 of the currently applicable code.

In tax matters, it is dealt with in article 77 of the General Tax Law.

It is a matter extensively addressed by legal doctrine and jurisprudence, in terms that are well known, which dispenses us here from an extensive theoretical discourse on it.

It suffices to recall that the obligation imposed on the Administration has two basic reasons:

On one hand, to ensure that the Administration bases its decision on consideration of all relevant factual and legal elements, and is therefore properly informed and weighed.

On the other hand, to inform the administered person – in our case, the taxpayer – of the reasons why the Administration acted in one way, and not another, in such a manner that the taxpayer can make a judgment of conformity with the decision, accepting it, or a judgment of non-conformity, challenging it.

In the latter case, it is essential that the taxpayer perfectly knows the factual and legal reasons that motivated the Administration, as well as the exact extent to which their claim was accepted or rejected, so that they may contest what was decided with the rigorous measure and with the precise reasons for their disagreement.

Furthermore, the absence of substantiation, or its insufficiency or incongruence, does not allow the judicial power to assess the legality or illegality of the administrative or tax act impugned, because a reasoned judgment concerning the motivation, legal or illegal, that determined the action of the Administration remains beyond its reach.

Now, partially allowing the claim of the Appellant, the AT accepted the increase of the deduction from €3,372,176.33 to €5,483,565.27, but without it being clear what amount corresponds to each of the items questioned by the Petitioner.

And, when reviewing the hierarchical appeal, the AT not only said nothing about the alleged lack of substantiation, but again failed to distinguish between the amount of allowance relating to the enhancement of charges in cases of contracts terminated during the fiscal year and the adjustment for part-time work of contracts and departure and replacement of workers during the course of the year, calculating everything together.

In this manner, and although the AT has explained the reasons for the partial denial, by failing to quantify each of the items that the complainant/appellant had placed before it, it substantiated insufficiently the act, not revealing to the taxpayer everything that she needed to understand it completely, and to judge with full awareness whether she should conform to it or whether she should continue to litigate – and, in this latter case, in what precise terms.

Thus, having verified the formal defect of insufficient substantiation, the assessment act immediately impugned is voidable, which shall be declared hereinafter.

III.3. Right to indemnitory interest in cases of self-assessment:

The substantive regime for the right to indemnitory interest is regulated in article 43 of the General Tax Law, which establishes as follows:

Article 43

Improper payment of the tax obligation

1 – Indemnitory interest is due when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount exceeding that legally owed.

2 – Error attributable to the services is also considered to exist in cases where, despite the assessment being made based on the taxpayer's declaration, the taxpayer followed, in filling it out, generic guidelines of the tax administration, duly published.

3 – Indemnitory interest is also due in the following circumstances:

a) When the legal deadline for official restitution of taxes is not met;

b) In case of annulment of the tax act at the initiative of the tax administration, from the 30th day after the decision, without the credit note having been processed;

c) When the revision of the tax act at the initiative of the taxpayer is effected more than one year after the taxpayer's request, unless the delay is not attributable to the tax administration.

4 – The rate of indemnitory interest is equal to the rate of compensatory interest.

5 – In the period between the date of the end of the spontaneous execution deadline of a final judicial decision and the date of issuance of the credit note, concerning the tax that should have been refunded by final judicial decision, interest accrues at a rate equivalent to double the rate of late payment interest defined in general law for debts to the State and other public entities.

Of the various situations in which indemnitory interest is due indicated in article 43 of the LGT, the one relevant to us is that in which it is determined, in judicial challenge, that error attributable to the services occurs, resulting in payment of improper tax.

In our case, it is unknown whether or not there was payment of improper tax, since this does not result from what is determined in the present proceedings.

All we know is that the AT incurred a formal defect invalidating the assessment, but without it being possible to conclude that the assessed and paid tax is excessive.

This could only be affirmed if there had been an appreciation of the merits, in which a substantive defect would be determined by the AT, due to error in the appreciation of the facts or in the application of law, from which resulted the assessment and payment of improper tax.

On this subject, extensively, and with broad doctrinal and jurisprudential references, see the ruling of 30 May 2012 of the Supreme Administrative Court rendered in case no. 410/12.

Hence the lack of merit of the request for indemnitory interest.

IV. DECISION:

In accordance with the foregoing, this Arbitral Court hereby agrees to:

a) Rule that the request for arbitral decision has merit and annul the hierarchical appeal decision concerning IRC for the fiscal year 2005.

b) Rule that the request for reimbursement of the amount paid has merit and order the Tax and Customs Authority to reimburse to the Petitioner the sum of €565,128.81.

c) Rule that the request for payment of indemnitory interest lacks merit.

V. VALUE OF THE PROCEEDINGS:

In accordance with the provisions of article 315, number 2, of the CPC and 97-A, number 1, paragraph a), of the CPPT, and 3, number 2, of the Regulations of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €565,128.81.

VI. COSTS:

In accordance with article 22, number 4 of the RJAT, the amount of costs is fixed at €8,568.00, in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, and, in light of the outcome, 13.97% is charged to the Petitioner and 86.02% is charged to the Tax and Customs Authority.

Lisbon, 1 June 2016.

(José Baeta de Queiroz)

(José Nunes Barata)

(João Pedro Dâmaso)

Text prepared by computer, in accordance with number 5 of article 131 of the Code of Civil Procedure, applicable by reference of paragraph c) of number 1 of article 29 of the Regulatory Framework for Tax Arbitration.

Frequently Asked Questions

Automatically Created

What IRC tax benefits are available for net job creation under Portuguese tax law?
Under Portuguese tax law, IRC tax benefits for net job creation are governed by article 19 of the Statute of Tax Benefits (Estatuto dos Benefícios Fiscais - EBF). Companies can deduct from taxable income amounts related to the net creation of permanent employment positions. The benefit applies to workers hired under permanent contracts (contratos sem termo), and the calculation must distinguish between full-time and part-time positions, with adjustment factors applied to part-time contracts. The benefit amount varies depending on when the jobs were created, particularly before or after the 2002 amendments to the EBF through Law 32-B/2002. Companies must properly document all new hires, maintain evidence of net job creation (total positions minus departures), and exclude replacements of existing workers. The benefit is declared in field 234 of box 07 of the IRC Modelo 22 annual return and deducted from net income when determining taxable profit.
When can a taxpayer claim compensatory interest (juros indemnizatórios) on overpaid corporate tax in Portugal?
Taxpayers can claim compensatory interest (juros indemnizatórios) on overpaid corporate tax in Portugal under article 43 of the General Tax Law (Lei Geral Tributária - LGT). This right arises when the Tax Authority has retained amounts beyond what was legally due, typically resulting from: (1) administrative errors in assessment, (2) incorrect denial of legitimate tax benefits or deductions, (3) delays in processing refund requests or administrative complaints, or (4) successful appeals that result in tax reductions. The interest is calculated from the date of payment of the undue amount until the date of reimbursement, using the legally established interest rate. In job creation benefit cases, when the Tax Authority initially denies or reduces a claimed benefit and the taxpayer later succeeds in demonstrating entitlement through administrative complaint or arbitration, compensatory interest accrues on the excess tax paid during the period the taxpayer was deprived of those funds.
What constitutes insufficient reasoning (fundamentação insuficiente) in a Portuguese tax authority decision?
Insufficient reasoning (fundamentação insuficiente) in Portuguese tax authority decisions occurs when the Tax Administration fails to adequately explain the factual and legal basis for its determination. Under Portuguese administrative and tax procedure law, all tax decisions must be properly grounded, clearly stating: (1) the facts considered and the evidence supporting factual findings, (2) the legal provisions applied and their interpretation, (3) the logical connection between facts and legal conclusions, and (4) specific reasons for accepting or rejecting taxpayer arguments. In the context of job creation benefits, insufficient reasoning might include failing to explain why certain employment contracts were excluded, not detailing the calculation methodology for benefit adjustments, omitting reference to specific workers or contracts when making benefit reductions, or not addressing the taxpayer's legal arguments regarding fixed-term contract conversions. Decisions with insufficient reasoning violate fundamental principles of administrative procedure and may be annulled through hierarchical appeal or arbitration.
How can a company challenge a partial denial of a tax benefit claim through CAAD arbitration?
A company can challenge a partial denial of a tax benefit claim through CAAD (Centro de Arbitragem Administrativa) arbitration by filing a request for arbitral decision under article 10 of the Administrative Arbitration Regime (RJAT - Decree-Law 10/2011). The process involves: (1) first exhausting the administrative complaint procedure and hierarchical appeal if the initial decision is unfavorable, (2) filing the arbitration request within 90 days of notification of the final administrative decision, (3) clearly identifying the contested decision and stating the specific relief sought (such as annulment of the decision, recognition of the benefit amount, tax reimbursement, and compensatory interest), (4) presenting factual and legal grounds supporting the claim, and (5) optionally appointing an arbitrator or allowing the CAAD Deontological Council to appoint the arbitral panel. CAAD arbitration offers advantages including specialized tax law expertise, faster resolution than judicial courts, and binding decisions enforceable against the Tax Authority. The cumulation of related requests (benefit recognition, refund, interest) is permitted when they share common factual and legal issues.
How is the job creation tax benefit (benefício fiscal para criação líquida de postos de trabalho) calculated and declared on the Modelo 22 IRC return?
The job creation tax benefit (benefício fiscal para criação líquida de postos de trabalho) is calculated based on article 19 of the Statute of Tax Benefits and requires several steps: (1) identify all workers hired under permanent contracts during the fiscal year and in prior years still generating benefit rights, (2) determine net job creation by subtracting departures and excluding worker replacements, (3) calculate the benefit amount per eligible worker according to the applicable legal formula, differentiating between benefits arising before and after the 2002 EBF amendments, (4) apply adjustment factors for part-time positions proportional to their working hours compared to full-time equivalents, and (5) verify compliance with all formal requirements including documentation of employment contracts and their permanence. The total calculated benefit is declared on the IRC Modelo 22 annual return in field 234 of box 07, where it is deducted from net accounting income (box 07, field 219) when determining taxable income. Companies must maintain detailed supporting documentation including employment contracts, payroll records, and calculations demonstrating net job creation and benefit entitlement for potential Tax Authority verification.