Process: 616/2015-T

Date: May 2, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision (Process 616/2015-T) addresses a crucial question regarding the taxation of severance compensation under Portuguese IRS rules: how to calculate 'seniority' (antiguidade) for determining the tax exemption on termination payments. The claimant, a bank employee, challenged an additional IRS assessment of €15,480.01 for 2012 related to compensation received upon rescission of his employment contract with B... bank. The taxpayer began his banking career in 1991 at C... bank, working approximately 17 years before joining B... in April 2008. When his contract with B... was terminated in March 2012, a dispute arose over which period of service should count as 'seniority' for IRS exemption purposes under Article 2(4) of the IRS Code. The employment contract with B... contained Clause 7, which recognized the claimant's prior service at other credit institutions for pension fund purposes, but explicitly stated that time served at previous employers would not be counted 'for the calculation of the number of years of service.' The Tax Authority assessed additional IRS based on a narrower interpretation of seniority, while the claimant argued that the Collective Labor Agreement of the banking sector and his employment contract entitled him to count his full professional career. The claimant sought arbitration through CAAD (Administrative Arbitration Center), invoking Article 97(1)(a) of the Code of Procedure and Tax Process, requesting: (a) annulment of the additional assessment for violation of law and lack of reasoning, and (b) payment of compensatory interest from the date of payment in tax execution proceedings until reimbursement. This case highlights the interpretative challenges in applying IRS exemptions to severance pay when employees transfer between employers within the same sector, particularly regarding whether contractual recognition of seniority for certain purposes extends to tax exemption calculations.

Full Decision

ARBITRAL DECISION

Carla Castelo Trindade, Arbitrator designated by the Deontological Council of the Administrative Arbitration Center to form this arbitral tribunal, hereby makes the following:

ARBITRAL DECISION

I – REPORT

On 28 September 2015, A…, holder of tax identification number…, with tax domicile at Rua…, no. … Apt., …-… Braga, filed a request for arbitral decision, pursuant to the provisions of paragraph a) of section 1 of Article 97 of the Code of Procedure and Tax Process, for review of the legality of the act of additional assessment of Personal Income Tax ("IRS") for the year 2012 in the amount of € 15,480.01 which corresponds to collection notice no. 2015….

In fact, not accepting the additional tax assessment identified above, the Claimant requested the constitution of an arbitral tribunal, formulating the following claims:

a) Declaration of illegality and consequent annulment of the additional IRS assessment made, on the grounds of a defect of violation of law, by violation of the provisions of the IRS Code and, as it appears, a defect of lack of reasoning.

b) Condemnation of the Tax Administration to payment of compensatory interest, from the date of 22 September 2015 - date of payment of the debt in the tax execution process - until the date of issuance of the reimbursement, pursuant to Article 43, section 1, of the General Tax Law.

With the petition, 3 documents were attached.

As the Claimant opted for non-designation of an arbitrator, pursuant to the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of the Regime for Tax Arbitration, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrator of the singular arbitral tribunal Dr. Carla Castelo Trindade who communicated acceptance of the appointment within the applicable timeframe.

The parties were notified of this designation, and no request for recusal of the designation of Dr. Carla Castelo Trindade as arbitrator was presented.

Thus, in accordance with the provisions of paragraph c) of section 1 of Article 11 of the Regime for Tax Arbitration, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 9 December 2015.

On 27 January 2016, the Tax and Customs Authority (hereinafter "Respondent") presented a response in which it defended the total lack of merit of the request for arbitral decision.

Given that, in this case, none of the purposes that are legally entrusted to the meeting referred to in Article 18 of the Regime for Tax Arbitration were present, and taking into account the position taken by the parties, pursuant to the provisions of Article 16, paragraph c) and Article 19 of the Regime for Tax Arbitration, as well as the principles of procedural economy and prohibition of useless acts, the holding of that meeting was dispensed with.

On 3 February 2016, the parties were notified to present written arguments.

Both the Claimant and the Tax Administration presented arguments.

The Claimant concluded his arguments by stating that the seniority to be considered is that which results from the employment contract and the Collective Labor Agreement of the banking sector, as stipulated in the employment contract concluded between the Claimant and B…, and that, accordingly, the conduct of the Respondent should be considered illegal. With the arguments, he also attached two additional documents.

The Respondent counter-argued, reiterating the total lack of merit of the request for arbitral decision, due to "(…) lack of legal support".

II. PRELIMINARY EXAMINATION

The arbitral tribunal was properly constituted and is materially competent.

The process does not suffer from nullities and no issues were raised that could prevent examination of the merits of the case.

The parties have legal personality and capacity and are legitimate.

Having reviewed all of the above, it is necessary to decide.

III. FACTS

III.1. PROVEN FACTS

With regard to factual matters, it is important, first and foremost, to note that the tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish proven from unproven facts. All in accordance with Article 123, section 2, of the Code of Procedure and Tax Process and Article 607, sections 2, 3 and 4 of the Code of Civil Procedure, applicable by virtue of Article 29, section 1, paragraphs a) and e), of the Regime for Tax Arbitration. In this manner, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (see Article 596 of the Code of Civil Procedure, applicable by virtue of Article 29, section 1, paragraph e), of the Regime for Tax Arbitration).

Now, considering the positions taken by the parties, the documentary evidence and the Administrative Process, all attached to the file, the following facts with relevance to the decision are considered proven:

  1. The Claimant was a bank employee, having begun his professional career in October 1991 at Bank…, later C… (hereinafter "C…").

  2. At that entity, the Claimant worked for approximately 17 years, until April 2008.

  3. From the date he left C…, the Claimant began working at B… (hereinafter "B…"), taxpayer no….

  4. Upon conclusion of the employment contract, on 24 April 2008, between the Claimant and B…, it was established in Clause 7 that:

"1. The Bank guarantees to the Second Party the seniority resulting from service provision to other Credit Institutions, from the date contained in the Declaration of Seniority issued by the previous employer, documented, but only for the following purposes:

a) For purposes of the Pension Fund of B…, the First Party shall take into account the time of service provided to other credit institutions, with the amount of the retirement or disability benefit pension calculated in accordance with the regime provided for in the Collective Labor Agreement of the Banking Sector.

b) The portion of retirement benefit corresponding to the service provided by the Second to the First Party shall be calculated in accordance with Clause 6 of the Pension Plan of B….

c) The time of service provided to other Credit Institutions prior to the execution of this contract shall also not be taken into account for the calculation of the number of years of service.

  1. Pursuant to section 1 of Clause 137-A of the Collective Labor Agreement for the Banking Sector, workers admitted after 01.01.95 are required to contribute to the Pension Fund established by each of the Banks, with 5% (five percent) of their monthly minimum remuneration, including the Holiday Bonus and the Christmas Bonus." (see Doc. 4).

  2. On 15 March 2012, the Claimant and B… signed an Agreement for Rescission of Employment Contract in which it was established in Clause 10 that:

"1 – (…).

2 – The global monetary compensation established above as consideration for the termination of the contract is partially exempt from withholding of IRS in accordance with the provisions of Article 2, section 4 of the IRS Code, in the wording given by Law no. 100/2009, of 7 September, and excluded from Social Security contributions in accordance with the provisions of paragraph v) of Article 46 of Law no. 110/2009, of 16 September. Taking into account the terms applicable in Clause 17 of the Collective Labor Agreement with the reservations made by the first party, and the provisions of Article 2, section 4 of the IRS Code, in the wording given by Law no. 100/2009, of 7 September, given the jurisprudence on the matter supported by rulings of the Central Administrative Court South of 11 May 2004, and in particular, of 21 September 2010, both parties recognize and express their agreement in determining the seniority of the second party by counting the time of service of the latter in banking entities indicated in the referred clause of the Collective Labor Agreement exclusively for purposes of compensation for termination of the employment contract (with the exclusion of any other effects unless otherwise agreed in writing and without prejudice to the free stipulation of the value of the global compensation indicated in section 1 of clause two of this agreement), whereby the global monetary compensation established above as consideration for the termination of the contract is partially exempt from withholding of IRS, and does not constitute the basis for incidence of Social Security contributions in accordance with the provisions of Article 14 of Decree-Law no. 140-D/86 of 14 June, and section 3 of Article 46 of Law no. 110/2009, of 16 September."

  1. He was paid, for the termination of such employment contract, an indemnity of € 53,826.62.

  2. This indemnity was calculated based on the Claimant's seniority not only at B…, but also on the seniority he held at the banking institution where he had previously worked (…).

  3. B… considered, at the time of payment of the indemnity, that it was not subject to taxation insofar as it did not exceed the limit referred to in section 4 of Article 2 of the IRS Code in the wording in force on the date the income was made available.

  4. On 13 April 2015, the Claimant was notified, by official notice from the Division of Taxation and Collection of the Finance Directorate of …, to, if he so wished, comment on the draft decision in which, based on section 4 of Article 65 of the IRS Code, the modification of the income declaration for the year 2012 would proceed, since, according to the referred draft decision, for the calculation of the indemnity excluded from taxation, only the years of service at the entity that paid the indemnity were to be considered.

  5. The right to a hearing was exercised, within the established timeframe, in which it was alleged that, according to jurisprudence of the superior courts, the seniority to be considered would be seniority at both employers and not just at B….

  6. In May 2015, the Claimant was notified of the final decision in which the services maintained the projected decision.

  7. The Tax Administration considered in its decision that for the calculation of the indemnity only the time of service provided at B… was to be considered, that is….

  8. ...it was on the basis of seniority of 3.96 years (4 years) that the indemnity amount excluded from IRS taxation was determined.

  9. In 2012, Clause 2 of the Collective Labor Agreement of the Banking Sector established that:

"This Collective Labor Agreement is applicable throughout the national territory, within the banking sector, and binds the Credit Institutions and Financial Societies that subscribe to it (hereinafter generically designated as Credit Institutions or Institutions), as well as all workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands, represented by the signatory FEBASE - Federation of the Financial Sector and hereinafter designated as Trade Unions, covering 26 employers and estimating 54,300 workers covered. (...)".

  1. The Claimant was not, either at the date of execution of the employment contract – 2008 – nor at the date of payment of the indemnity, affiliated with any of the Trade Unions of Bankers of the Center, North and South and Islands.

  2. Furthermore, even though B… subscribed to the Collective Labor Agreement, it did so with the following reservation:

"In counting the time of service for any effects arising from the Collective Labor Agreement, only the time of service provided to the Institutions themselves that are signatories of this reservation shall be counted, plus possibly the time of service provided to other institutions or companies, but in this case, only provided that such results from an individual agreement between those and the worker."

III.2. UNPROVEN FACTS

As mentioned, with regard to factual matters taken as established, the tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish proven from unproven facts as provided in Article 123, section 2, of the Code of Procedure and Tax Process, applicable by virtue of Article 29, section 1, paragraphs a) and e), of the Regime for Tax Arbitration. In this manner, the facts relevant to the judgment of the case were, as mentioned above, chosen and delimited according to their legal relevance, with no other factuality alleged being relevant for the proper composition of the procedural dispute.

IV. LEGAL MATTERS

Considering the positions taken by the parties in the pleadings presented, the central issue to be resolved by this arbitral tribunal consists of reviewing the legality of the act of additional assessment of IRS.

The Claimant imputed two defects to the impugned tax act: a defect of violation of law, specifically violation of the provisions of Article 2, section 4, paragraph b) of the IRS Code, and a defect of lack of reasoning, which also corresponds to a defect of violation of law.

The merit of any one of the defects invoked by the Claimant will lead to the annulment of the tax act.

Let us begin by analyzing the defect of lack of reasoning invoked by the Claimant.

He alleges that the Tax Administration in the final decision of additional assessment made no reference to the arguments enumerated by the Claimant in the prior hearing, contrary to the provisions of section 7 of Article 60 of the General Tax Law, which determines that new elements raised in the hearing of taxpayers are mandatorily taken into account in the reasoning of the decision.

Now, first and foremost, it should be recalled that the principle of participation, which is a corollary of the right to a hearing, is enshrined within the scope of the tax procedure in Article 60 of the General Tax Law. From this derives the possibility for taxpayers and other interested parties who, during the course of the tax procedure, already have real and current rights or interests, to participate in the formation of decisions that concern them, specifically through the exercise of the right to prior hearing.

In this manner, taxpayers must be called upon to comment on decisions that may be unfavorable to them, through the exercise of the right to a hearing. In accordance with Article 60, sections 4 and 5 of the General Tax Law, the Administration shall notify them for this purpose by registered mail, indicating the timeframe for the exercise of the right to a hearing, the draft decision and its reasoning.

One of the cases in which this right to a hearing is recognized is specifically before assessment, as results from Article 60, section 1, paragraph a) of the General Tax Law.

There is no doubt that the Claimant was notified prior to the additional IRS assessment to exercise his right to prior hearing pursuant to Article 60, section 1, paragraph a) of the General Tax Law, having exercised, within the notification timeframe, the right to a hearing. Thus, the tax act does not suffer from a defect of omission of an essential legal formality provided for in Article 99, paragraph d) of the Code of Procedure and Tax Process, since there was no failure to notify the interested parties to exercise their right to prior hearing.

However, it should be noted that by virtue of section 7 of Article 60 of the General Tax Law, the reasoning of the final decision of the tax procedure must take into account the factual and legal arguments raised by the interested party in the prior hearing, requiring that these be mentioned and appreciated by the deciding authority. This must explicitly state the reasons for acceptance or rejection of those arguments.

Jurisprudence has understood that this is intended to avoid surprise decisions, as RUI DUARTE MORAIS refers to in his "Manual de Procedimento e Processo Tributário" p.143.

Thus, two different forms of violation of the taxpayer's right to participation are highlighted: either the Administration did not notify the taxpayer to comment on the draft decision – which, as we have seen, did not occur – or, on the other hand, it did not pay attention to the arguments this party may have presented in the prior hearing - that is, by not explicitly explaining the reasons for acceptance or rejection thereof.

While the failure to notify interested parties to exercise their right to prior hearing constitutes a defect of omission of an essential legal formality provided for in paragraph d) of Article 99 of the Code of Procedure and Tax Process, the failure to comply with the duty to comment on new elements - factual or legal - brought by those parties to the procedure constitutes a defect of lack of reasoning provided for in Article 99, paragraph c) of the Code of Procedure and Tax Process, resulting from these defects in the annullability of the final act in which the procedure culminates.

It is the verification of this defect of lack of reasoning that the Claimant invokes and that this tribunal must review.

Through analysis of the content of the final decision of additional assessment by the Tax Administration, one cannot agree with the position of the Claimant, taking into account that it expressly includes in this decision the appreciation of the arguments invoked by the Claimant in the prior hearing. For this, see Page 32 of the Administrative Process attached to the file. This, even though the Administration also refers in its reasoning to the content of the Binding Information of 10/10/2010, Process no. …/10.

In this manner, there is no defect of lack of legally required reasoning that could impair the legality of the tax act.

It now falls to this tribunal to review the defect of violation of law, specifically the defect of violation of the provisions of Article 2, section 4 of the IRS Code.

The Tax Authority based the act of additional assessment by applying Article 2, section 4 of the IRS Code insofar as it considered that the relevant seniority of the Claimant was that of B… - 3.96 years (4 years) - and not that of B… and C… - 21 years.

The issue that must be reviewed is, thus, the determination of the concept of "seniority" for purposes of the provisions of Article 2, section 4 of the IRS Code. Put differently, the issue that must be reviewed is the determination of the concept of "seniority" for purposes of the negative delimitation of IRS incidence on the indemnity for termination of the employment contract.

This norm establishes that only amounts received, under any title, are subject to taxation when the contracts underlying the situations referred to in paragraphs a), b) and c) of section 1 of Article 2 (individual employment contract or other legally equivalent contract, contract for acquisition of services or other of identical nature, or exercise of function, service or public office) cease, in the portion that exceeds the value corresponding to the average value of regular remuneration with the character of income subject to tax, received in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions at the debtor entity, except when in the following 24 months a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts will be taxed in their entirety.

Thus, there is from the outset a first issue that must be resolved and which concerns the interpretation of tax law, specifically the concept of "seniority" used in Article 2, section 4 of the IRS Code, for purposes of IRS incidence, in the case of indemnity for termination of the employment contract.

The interpretation of tax law is regulated in Article 11 of the General Tax Law in the following terms:

1 — In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2 — Whenever, in tax norms, terms specific to other branches of law are used, they should be interpreted in the same sense as they have there, unless otherwise directly results from law.

3 — If doubt persists about the meaning of the incidence norms to apply, attention shall be paid to the economic substance of the tax facts.

4 — Gaps resulting from tax norms covered by the reservation of law of the Assembly of the Republic are not subject to analogic integration.

Much has been discussed regarding the interpretation of tax laws, with this topic taking on special relevance in the 1920s and 1930s of the last century when Tax Law was still attempting to establish itself as an autonomous branch of law. Thus, with the purpose of demonstrating the autonomy of Tax Law in relation to other branches of law, in need of its own rules of hermeneutics, various interpretive theories emerged, among which we must highlight the theory of economic interpretation and the theory of functional interpretation.

However, over time, and as the emancipation of Tax Law from Private Law and Public Finance was affirmed, these theses lost interest, with the dominant modern jurisprudential opinion being that the interpretation of tax law does not have any specificity, and the traditional criteria of hermeneutics, provided for in Article 9 of the Civil Code, are to be applied.

As results from the Supreme Administrative Court Ruling of 23-01-2013, handed down in process no. 0968/12, "also in tax law, the fundamental principle of legal hermeneutics is rooted in Article 9 of the Civil Code". Thus, in Tax Law as well, the other interpretive techniques or canons long used in civil law can be used. In this sense, see J.L.SALDANHA SANCHES, in "Manual de Direito Fiscal" [Manual of Tax Law], 3rd ed., Coimbra Editora, Coimbra, p. 147, who regarding the interpretation of law writes:

"1. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was drafted, and the specific conditions of the time in which it is applied.

  1. However, the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

  2. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express his thought in adequate terms"."

Pursuant to Article 9 of the Civil Code, the interpreter should not limit himself to the letter of the tax law, but should reconstruct the legislative thought from the texts, taking into account the unity of the legal system, the circumstances in which the law was drafted, and the specific conditions of the time in which it is applied. As results from the Supreme Administrative Court Ruling of 5-09-2012, handed down in process no. 314/12, "To interpret in matters of laws means not only to discover the meaning that lies behind the expression, but also, among the various meanings that are covered by the expression, to select the true and decisive one (In this sense, see PIRES DE LIMA and ANTUNES VARELA, "Noções Fundamentais de Direito Civil" [Fundamental Notions of Civil Law], 6th ed., Coimbra Editora, Coimbra, 1965, Vol. I., p. 145.)".

Jurisprudence, specifically SÉRGIO VASQUES in his "Manual de Direito Fiscal" [Manual of Tax Law], p. 360 argues that the legislator, in referring directly to the interpretation criteria enshrined in the Civil Code, seems to refuse "any particularism in the interpretation of tax law".

In the case at hand, however, only section 2 of Article 11 of the General Tax Law is relevant, which determines the method of interpretation of concepts used in tax law originating in other branches of Law. In fact, it is not rare for tax norms to make use of terms and concepts specific to other branches of Law, namely Administrative Law, Labor Law or Civil Law, such as "income", "transfer" or "salary". In these cases, Article 11, section 2 of the General Tax Law determines that such concepts should be interpreted in the identical sense they have in their branches of origin, except if another meaning directly results from tax law.

We should note that these concepts often maintain their original meaning, although "there are no fewer cases in which these concepts take on another meaning when used by the tax legislator" as SÉRGIO VASQUES once again notes in "Manual de Direito Fiscal", referring specifically to the concepts of transfer of goods and provision of services in the Value Added Tax Code.

Now, there is no doubt that "seniority" constitutes a concept originating in Labor Law, and there is also no doubt that the tax legislator did not give this concept its own delimitation. Thus, this concept should be interpreted in the same sense as that which it has in labor law, insofar as the tax legislator did not define it for purposes of taxation in the context of IRS, and it does not result, it should be insisted, expressly from tax law any different meaning.

In the same sense, although with regard to the concept of capital shares, see the arbitral decision handed down in process no. 549/2015-T, within which it was stated that "the absence of a tax definition of 'capital shares' also leads the interpreter (…) to seek this definition in commercial and accounting law (…)".

Now, although it is true that we cannot extract from the Labor Code a definition of the concept of seniority, we agree with the understanding of the Central Administrative Court South Ruling of 21-09-2010, handed down in process no. 03748/10, that Article 11, section 2 of the General Tax Law "directs reference to the terms specific to other branches of law, not merely to the norms of other laws". The same ruling notes that although the current Labor Code does not regulate, of itself, the concept of worker seniority, it places, in the first place, the instruments of collective regulation as the sources of law from which, in the first instance, the norms applicable to the employment contract emerge, defining further in its Article 2 the forms that these may take (collective contracts, collective agreements and company agreements).

Thus, as well understood by the Central Administrative Court South in the ruling of 12-03-2013, handed down in process no. 591/12, it is today unanimous in labor law that there are three sources that may establish seniority: Law, Individual Employment Contract, and Instruments of Collective Labor Regulation.

Not being able to extract a concept of seniority from Law, that is, from the Labor Code, we must analyze, in the specific case, the Individual Employment Contract executed or the Collective Labor Agreement of the banking sector.

From the Collective Labor Agreement of the banking sector, there results, by force of Clause 17, that the seniority of the worker, for all purposes provided for in the Agreement, will be determined by counting all years of service provided in Portugal, in Credit Institutions with activity in Portuguese territory.

However, it should be noted that it results from Article 2 of the Collective Labor Agreement that it only binds the Credit Institutions and Financial Societies that subscribe to it and the workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands.

It thus falls to analyze the specific case.

The Tax Authority based the act of additional assessment by applying Article 2, section 4, paragraph b) of the IRS Code, considering subject to taxation the indemnity for termination of the employment contract, in the portion that exceeded the value corresponding to the average value of regular remuneration with the character of income subject to tax, received in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions at the debtor entity, corresponding to 3.96 years (4 years). It thus considered that the relevant seniority of the Claimant to be taken into account was 4 years, corresponding to the time of service at Bank B…, and it did well, in the view of this Tribunal, insofar as, in the specific case, there is no other seniority to consider.

See why.

As mentioned, the Claimant's seniority may result from Law, Individual Employment Contract, or the Collective Labor Agreement. Not being able to extract from Law any concept of seniority, it falls in the first place to analyze the Individual Employment Contract executed between the Claimant and B….

In Clause 7 of this Contract, B… guaranteed to the Claimant the seniority resulting from service provision to other credit institutions, from the date contained in the Declaration of Seniority issued by the previous employer, but only for certain purposes. To wit:

"1. The Bank guarantees to the Second Party the seniority resulting from service provision to other Credit Institutions, from the date contained in the Declaration of Seniority issued by the previous employer, documented, but only for the following purposes:

a) For purposes of the Pension Fund of B…, the First Party shall take into account the time of service provided to other credit institutions, with the amount of the retirement or disability benefit pension calculated in accordance with the regime provided for in the Collective Labor Agreement of the Banking Sector.

b) The portion of retirement benefit corresponding to the service provided by the Second to the First Party shall be calculated in accordance with Clause 6 of the Pension Plan of B….

c) The time of service provided to other Credit Institutions prior to the execution of this contract shall also not be taken into account for the calculation of the number of years of service.

  1. Pursuant to section 1 of Clause 137-A of the Collective Labor Agreement for the Banking Sector, workers admitted after 01.01.95 are required to contribute to the Pension Fund established by each of the Banks, with 5% (five percent) of their monthly minimum remuneration, including the Holiday Bonus and the Christmas Bonus." Our emphasis (see Doc. 4 of the request for constitution of the arbitral tribunal).

There is thus not recognized in this clause, nor in any other clause of the employment contract, the seniority of the worker for purposes of calculation of indemnity for cessation of the employment contract.

Thus, seniority resulting from service provision to other employing entities, in particular C…, was not recognized in the Claimant's Individual Employment Contract.

Not resulting the concept of seniority from the Individual Employment Contract, it falls to analyze the Instruments of Collective Labor Regulation, in this case, the Collective Labor Agreement of the banking sector, as has been defended by jurisprudence (rulings of the Central Administrative Court South of 11-5-2004, handed down in process no. 6002/01, and of 21/9/2010, handed down in process no. 3748/10).

As results from Clause 17 of the Collective Labor Agreement, the seniority of the worker for all purposes provided for in this Agreement will be determined by counting all years of service provided in Portugal, in Credit Institutions with activity in Portuguese territory.

However, within the scope of application of the Collective Labor Agreement, defined in its Article 2, it is established that this Agreement only binds the Credit Institutions and Financial Societies that subscribe to it and the workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands.

In fact, in 2012, Clause 2 of the Collective Labor Agreement of the Banking Sector established that:

"This Collective Labor Agreement is applicable throughout the national territory, within the banking sector, and binds the Credit Institutions and Financial Societies that subscribe to it (hereinafter generically designated as Credit Institutions or Institutions), as well as all workers in their service affiliated with the Trade Unions of Bankers of the Center, North and South and Islands, represented by the signatory FEBASE - Federation of the Financial Sector and hereinafter designated as Trade Unions, covering 26 employers and estimating 54,300 workers covered. (...)".

On the other hand, with respect to the application of collective conventions, the basic delimiting rule consists in the so-called "principle of dual affiliation" (see Article 496 of the Labor Code), which establishes, in essence, that instruments of collective labor regulation apply only to workers affiliated with a trade union association that, directly or indirectly, were parties to the collective bargaining and who provide labor to an employing entity that also was party to the same collective bargaining. Thus, it is necessary, on the one hand, that the employer be a member of the signatory employers' association or have been a party itself, and on the other, that the worker be affiliated with a signatory trade union. For this reason, in the case at hand, the Collective Labor Agreement is applicable only to workers who are affiliated with the signatory trade unions thereof, with the remaining workers not being covered by its scope of application.

This will be different, naturally, only if the scope of the collective convention was extended, following its entry into force, by an extension order, to all workers.

Extension orders, regulated in Article 514 of the Labor Code, are issued by the Ministry of Labor and establish that, regardless of the fulfillment of the criterion of dual affiliation of workers, the collective convention in force may be applied, in whole or in part, to employers and to workers integrated within the scope of the sector of activity and profession defined in that instrument. Extension orders, by virtue of the provisions of Article 516, section 2 of the Labor Code, must be published in the Labor and Employment Bulletin.

Now, as proven above, the Claimant was not, either at the date of execution of the employment contract – 2008 – nor at the date of payment of the indemnity – 2012 – affiliated with the Trade Unions of Bankers of the Center, North and South and Islands.

On the other hand, the Collective Labor Agreement was not subject to any extension order that would make possible its application to workers not affiliated with the signatory trade unions. Reason for which the norms contained in the Collective Labor Agreement are not, in the specific case, a source of law that may be used for purposes of determination of the concept of seniority in question.

Even if this were not the case, one would still conclude in the same sense as stated above – that is, in the impossibility of application of the Collective Labor Agreement – insofar as, even though B… subscribed to the Collective Labor Agreement, it did so with the following reservation:

"In counting the time of service for any effects arising from the Collective Labor Agreement, only the time of service provided to the Institutions themselves that are signatories of this reservation shall be counted, plus possibly the time of service provided to other institutions or companies, but in this case, only provided that such results from an individual agreement between those and the worker."

Now, this reservation requires, in addition to affiliation for purposes of subjective application of the agreement, also that the recognition of seniority at previous employers come to be expressly accepted in the contracts that would come to be executed with each worker.

This means that B… requires that it be specifically provided in the Individual Employment Contract executed with its workers that the recognition of the time of service provided to other institutions or companies for purposes of counting seniority. And, as established, such did not occur in the case at hand insofar as such was not expressly provided in the Individual Employment Contract executed between B… and the Claimant.

Thus, the concept of seniority that includes all years of service provided in Portugal, in Credit Institutions with activity in Portuguese territory, was not binding on either B… or the Claimant.

Nor should it be said that the concept of seniority that includes service provision to other employing entities results from Clause 10 of the Agreement for Rescission, since this cannot be considered as an addendum to the Individual Employment Contract in which, as seen, seniority is not even recognized for purposes of calculation of indemnity for termination of the employment contract.

All the more so because the agreement for rescission of the employment contract is precisely the contract extinguishing the labor relationship, which does not aim to establish conditions respecting the execution of the labor relationship but rather its cessation.

Thus, not resulting from either the Individual Employment Contract executed between the Claimant and Bank B…, nor from the Collective Labor Agreement, the Claimant's seniority at previous employing entities, the only seniority to be considered in the calculation of indemnity for cessation of the employment contract will be the Claimant's seniority at B…. This is the only seniority to which the debtor entity was obligated to pay pursuant to the rules of labor law.

If seniority of the Claimant resulting from service provision to other employing entities were recognized in the Individual Employment Contract, one could discuss whether in paragraph b) of section 4 of Article 2 of the IRS Code what is at issue is only seniority at the entity debtor of the indemnity for cessation of the employment contract, that is, in this case B…, or the seniority recognized at other employing entities. In this case, one could question whether the seniority relevant for purposes of taxation in the context of IRS of the indemnity for termination of the employment contract would be 3.96 years at B… or 21 years that would include the 17 years of seniority at previous employing entities.

However, in this case, seniority at other employing entities was not recognized to the Claimant in the Individual Employment Contract, nor does such recognition of seniority result from the Collective Labor Agreement of the banking sector, which, in any event, should be deemed inapplicable to the labor relationship in question due to non-fulfillment of the principle of dual affiliation. Thus, this proceeding is not about determining which seniority should be considered in the context of application of Article 2, section 4, paragraph b) of the IRS Code, whether only seniority at the entity debtor of the indemnity for cessation of the employment contract or also seniority at other employing entities, since the Claimant was only recognized as having seniority at the entity debtor of the indemnity for termination of the employment contract, that is, at B….

In this manner, the tax act of additional assessment does not suffer from a defect of violation of law, with the Tax Administration having proceeded with the correct application of Article 2, section 4, paragraph b) of the IRS Code.

In this sense, the tax act of additional assessment is confirmed, with the Claimant's request for annulment of the act in question not being meritorious, and, as will be seen, the payment of compensatory interest.

V. COMPENSATORY INTEREST

Finally, it remains to review the request for condemnation of the Respondent to payment of compensatory interest pursuant to Article 43, section 1, of the General Tax Law.

Now, given that, pursuant to what was set out above, the tax act of additional assessment of IRS does not suffer from the defects of violation of law that are imputed to it in the request for arbitral decision, with the request for declaration of its legality thus lacking merit, necessarily the request for compensatory interest, which is raised as a consequence of the invoked illegalities, also lacks merit.

VI. DECISION

For these reasons, it is decided:

a) To judge the request for arbitral decision to be without merit, and consequently maintain the tax act of additional assessment of IRS for the year 2012 in the amount of € 15,480.01 which corresponds to collection notice no. 2015…, impugned in this proceeding, absolving the Tax and Customs Authority from the request;

b) To judge the request for compensatory interest to be without merit, absolving the Tax and Customs Authority from the request;

c) To condemn the Claimant to pay the procedural costs.

VII. VALUE OF THE PROCEEDING

In accordance with the provisions of Article 306, sections 1 and 2 of the Code of Civil Procedure, Article 97-A, section 1, paragraph a), and section 3 of the Code of Procedure and Tax Process, applicable by virtue of paragraphs a), c) and e) of section 1 of Article 29 of the Regime for Tax Arbitration and section 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is assigned a value of € 15,480.01.

VIII. COSTS

In accordance with the provisions of Articles 12, section 2, and 22, section 4, both of the Regime for Tax Arbitration, and Article 4, section 4 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the arbitration fee is fixed at € 918, in accordance with Table I of the referred Regulation, to be borne by the Claimant, given the lack of merit of the request for annulment of the tax acts subject to this proceeding.

Let notification be made.

Lisbon

2 May 2016

The Arbitrator

(Carla Castelo Trindade)

Document prepared by computer, in accordance with Article 138, section 5 of the Code of Civil Procedure, applicable by referral of Article 29, section 1, paragraph e) of the Regime for Tax Arbitration.

The drafting of this decision is governed by traditional spelling.

Frequently Asked Questions

Automatically Created

How is severance pay for contract termination taxed under Portuguese IRS rules?
Severance compensation for contract termination is subject to partial IRS exemption under Article 2(4) of the IRS Code, as amended by Law 100/2009 of 7 September. The exempt portion is calculated based on the employee's seniority and specific multipliers established in law. The amount exceeding the exempt threshold is subject to normal IRS withholding and taxation as employment income. The compensation is also excluded from Social Security contributions under Article 46(v) of Law 110/2009. The correct calculation of the exemption depends critically on determining the relevant period of 'seniority' to apply.
What is the legal concept of seniority (antiguidade) for IRS severance pay exemption purposes?
The legal concept of seniority (antiguidade) for IRS severance pay exemption purposes is the central issue in this case. The question is whether seniority encompasses only the time served with the terminating employer or includes service with previous employers in the same sector when contractually recognized. In this case, the employment contract with B... bank acknowledged prior service at C... bank for pension fund purposes under the Collective Labor Agreement of the banking sector, but Clause 7.1.c stated that prior service time would not count 'for the calculation of the number of years of service.' The claimant argued that for IRS exemption purposes, the full professional career (approximately 21 years from 1991-2012) should be considered, consistent with the banking sector's labor agreement. The Tax Authority apparently interpreted seniority more restrictively, considering only the four years served at B... (2008-2012). Jurisprudence from the Central Administrative Court South, including rulings from 11 May 2004 and 21 September 2010, appears relevant to resolving this interpretative question.
Can a taxpayer challenge an additional IRS tax assessment through CAAD arbitration?
Yes, taxpayers can challenge additional IRS tax assessments through CAAD (Centro de Arbitragem Administrativa - Administrative Arbitration Center) arbitration. As demonstrated in this case, the claimant filed a request for arbitral decision under Article 97(1)(a) of the Code of Procedure and Tax Process (CPPT) to review the legality of an additional IRS assessment. The arbitration follows the Regime for Tax Arbitration (RJAT), introduced by Law 66-B/2012 of 31 December. The claimant can choose to designate an arbitrator or allow the Deontological Council to make the appointment. In this case, the claimant opted for non-designation, and Dr. Carla Castelo Trindade was appointed as sole arbitrator. The arbitral tribunal has jurisdiction to review the legality of tax acts and can annul unlawful assessments.
What are the grounds for annulment of an additional IRS liquidation on severance compensation?
The grounds for annulment of an additional IRS liquidation on severance compensation include: (1) Violation of law (vício de violação de lei) - where the Tax Authority misapplies provisions of the IRS Code, such as incorrectly calculating the exempt portion of severance pay under Article 2(4) by using an improper definition of seniority; and (2) Lack of reasoning (vício de falta de fundamentação) - where the tax assessment lacks adequate legal justification for the position adopted. In this case, the claimant alleged both defects, arguing that the Tax Authority violated IRS Code provisions by failing to recognize seniority from previous employment in the banking sector as contemplated in the employment contract and Collective Labor Agreement. The defect must be substantiated by demonstrating how the Tax Authority's interpretation contradicts applicable tax law, contractual terms, or established jurisprudence.
Is the Tax Authority required to pay compensatory interest after an unlawful IRS assessment is annulled?
Yes, under Article 43(1) of the General Tax Law (Lei Geral Tributária), the Tax Authority is required to pay compensatory interest when an unlawful tax assessment is annulled and amounts must be reimbursed to the taxpayer. The interest runs from the date of payment by the taxpayer until the date the reimbursement is actually issued. In this case, the claimant specifically requested compensatory interest from 22 September 2015 (the date when the debt was paid in tax execution proceedings) until the reimbursement date. This mechanism compensates taxpayers for the financial cost of having funds unlawfully withheld by the Tax Authority. The interest is calculated according to the legal interest rate applicable to tax matters and is mandatory, not discretionary, when the conditions are met.