CAAD 639/2018-T: IRC Job Creation Tax Benefits for Part-Time Workers Under Article 19 EBF

ARBITRAL DECISION

I. REPORT

1. On 16 December 2018, A..., Tax Identification Number..., with registered office at Rua..., ...–..., ... (hereinafter, the Claimant), filed an application for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2, No. 1, subparagraph a), and 10, Nos. 1, subparagraph a), and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), with a view to this tribunal's determination regarding:

• Declaration of illegality and annulment of the act of rejection (partial) of the gracious complaint No. ...2018...;

• Declaration of illegality and partial annulment of the additional corporation income tax (IRC) assessment No. 2017... which includes the assessment of default interest No. 2017..., relating to the year 2015;

• Reimbursement of the amounts of tax and default interest improperly paid, increased by indemnity interest, from the date of payment until the date of its full reimbursement.

The Claimant attached 3 (three) documents and did not request the production of any other evidence.

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

1. In essence, the Claimant alleges a defect of violation of law, through erroneous interpretation and application of the norm contained in Article 19 of the Tax Benefits Statute and the consequent voidability, both of the rejection (partial) of the aforementioned gracious complaint and, to the extent applicable, of the aforementioned additional IRC assessment and default interest.

2.1. As results from the application for arbitral determination (hereinafter, PPA), the Claimant bases the challenge of the disputed acts essentially on the following arguments:

The Claimant was subject to a tax inspection procedure which resulted in arithmetic corrections to the IRC taxable matter for the year 2015. Such corrections concern, among other things, the allegedly improper deduction as a tax benefit resulting from the net creation of jobs, by violation of what is established in Article 19 of the Tax Benefits Statute and, more specifically and among others, the unfavorable adjustment concerning workers hired in part-time work arrangements.

The Claimant filed a gracious complaint aimed at the partial annulment of the aforementioned corrections to the 2015 taxable matter and the additional IRC assessment reflecting them. In the decision on that gracious complaint, the AT maintained only the correction related to the adjustment of the tax benefit regarding workers hired in part-time work arrangements, arguing that the maximum amount of the annual increase of the aforementioned benefit should be limited proportionally to the number of part-time hours of work, since the very definition of tax benefit has underlying it principles and criteria of proportionality and coherence.

The Claimant understands that this interpretation of Article 19 of the Tax Benefits Statute not only lacks minimum support in the letter and spirit of the law, but has already been rejected by the courts. Since the legislator makes no reference, direct or indirect, to the necessity of the job being created on a full-time basis, and the ratio of this tax benefit is to encourage the creation of jobs for indeterminate periods, whether full-time or part-time. Moreover, the exceptionality recognized by law to norms creating tax benefits implies that they must be interpreted in their precise terms, without restrictions or analogies; now, the interpretation adopted by the AT is restrictive and, therefore, prohibited.

The Claimant further argues that the success of the PPA should not only determine the reimbursement of improperly paid tax, but also the payment of indemnity interest, since the respective legal requirements are satisfied.

Finally, the Claimant petitions the following:

"a) The annulment of the decision of rejection (partial) of Gracious Complaint No. ...2018...;

b) The annulment of the corrections to the taxable matter for the taxation period of 2015 in the amount of € 99,968.49;

c) The partial annulment of the act of additional IRC assessment and default interest No. 2017..., relating to 2015;

d) The reimbursement to the Claimant of the amount of € 29,341.62 relating to 2015 IRC and default interest improperly borne; and, also,

e) The payment to the Claimant of indemnity interest in accordance with Articles 43 and 100 of the General Tax Law and Article 61 of the Tax Procedure and Process Code."

1. The application for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 21 December 2018.

2. The Claimant did not proceed to appoint an arbitrator, so, pursuant to Article 6, No. 1, and Article 11, No. 1, subparagraph a), of the RJAT, the President of the Deontological Council of CAAD designated the signatory as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period.

4.1. On 6 February 2019, the parties were duly notified of this designation and did not manifest intent to refuse the arbitrator's designation, in accordance with combined provisions of Article 11, No. 1, subparagraphs b) and c), of the RJAT and Articles 6 and 7 of the CAAD Deontological Code.

4.2. Thus, in accordance with the provision of Article 11, No. 1, subparagraph c), of the RJAT, the singular Arbitral Tribunal was constituted on 26 February 2019.

1. On 28 March 2019, the Respondent, duly notified for this purpose, filed its Response in which it contested both the value of the dispute indicated in the PPA and, specifically, the arguments adduced by the Claimant, concluding for the lack of merit of the present action, with its consequent dismissal of the claim.

5.1. In essence and also briefly, it is important to extract the most relevant segments of the argument adduced by the Respondent:

The AT begins by stating that it results from the legislative intent the possibility of consideration, for purposes of the tax benefit in question, of workers hired in part-time work arrangements, provided that the other legal requirements are met.

The framing of this tax benefit in the broader context of public policy for incentivizing stable and lasting employment, directed to a specific segment of the Portuguese population that faces serious employability problems, implies that a relationship of proportionality should be maintained with the social advantage associated with the part-time job created (measured in number of hours individually contracted/performed), also limiting proportionally to the number of part-time work hours, the maximum amount of annual increase per job contained in No. 3 of Article 19 of the Tax Benefits Statute; and this under penalty of, when confronted with full-time employment contracts in similar situation, being considered a tax benefit far superior to what is contained in the law.

Accordingly, the AT proposes that the rules defining the tax incentive should be interpreted taking into account the existing norms that regulate, in particular, the financial incentives granted by Social Security, with identical purposes and similar requirements (Ordinance No. 125/2010) and which in this respect adopt the rule of proportionality enshrined in the Labor Code (Article 150).

The Respondent further argues that No. 3 of Article 19 of the Tax Benefits Statute measures the right to the increase based, among others, and for purposes of calculating charges, on the minimum wage indicator and minimum monthly remuneration guaranteed; now, the minimum monthly remuneration guaranteed/minimum wage, determined by law, has as a prerequisite full-time work. Thus, says the AT, the increase in question aims at the occupation of a full-time job. Therefore, with regard to determining the tax benefit, an adjustment must be made, creating proportionality between the total benefit/full-time employment contract and that of "partial" benefit/part-time employment contract.

The Respondent understands that failure to adjust the amount of minimum monthly remuneration guaranteed for purposes of No. 3 of Article 19 of the Tax Benefits Statute would result in a bias of the amount of the benefit in favor of hiring part-time workers, to the detriment of hiring full-time workers; an effect that contradicts the objectives pursued with the application of this measure, and the application of the norm in the terms advocated by the Claimant would always result in unequal treatment and a violation of the principle of equality, set out in Article 13 of the Constitution.

5.2. The Respondent did not request the production of evidence and proceeded to attach the administrative record (hereinafter, PA) to the case file.

1. On 9 April 2019, the Claimant, notified for this purpose, made pronouncements on the question of the value of the dispute, in the terms given here as fully reproduced and to which we will allude below.

2. On 10 April 2019, an order was issued in which, among other things, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with, a deadline was set for the presentation of optional and successive written submissions, and 23 August 2019 was determined as the final date for the issuance of the arbitral decision.

3. The parties did not present submissions.

II. CASE MANAGEMENT

1. The Arbitral Tribunal was regularly constituted and is competent in terms of subject matter, given the configuration of the object of the proceedings (cf. Articles 2, No. 1, subparagraph a) and 5 of the RJAT).

The application for arbitral determination is timely, as filed within the period provided for in Article 10, No. 1, subparagraph 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 Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities.

No exceptions or preliminary issues that prevent consideration of the merits and that should be addressed have been raised.

As stated, the AT contested the value of the dispute indicated in the PPA; for the appreciation and decision of this issue, it appears necessary to first establish the factual matters.

III. REASONING

III.1. ON THE FACTS

§1. PROVEN FACTS

1. The following facts are considered proven:

a) The Claimant is a commercial company engaged primarily in the trade of food and consumption products, including the sale of medical products and devices and educational and training materials and books, restaurants and beverages, in stores "B..." located in national territory.

b) The Claimant was subject to a tax inspection procedure conducted by the Division of Inspection of Non-Financial Companies I of the Large Taxpayers Unit, under Service Order No. OI2017..., concerning the verification and confirmation of its true tax situation regarding IRC for the taxation period of 2015. [cf. document No. 1 attached to the PPA and PA]

c) As a result of that inspection action, various arithmetic corrections were made to the Claimant's IRC taxable matter relating to the year 2015, one of which concerned the tax benefit relating to job creation, because it was understood that the Claimant "improperly deducted in Field 774 of table 07 of the income statement Model 22 (DRM22), the amount of € 213,303.49, as a title of increase in charges relating to job creation, due to failure to comply with the requirements inherent in Article 19 of the Tax Benefits Statute (Tax Benefits Statute)", among other things, because "[f]rom the analysis performed on the map documenting the increase in charges corresponding to the net creation of jobs for young people and for long-term unemployed made available by the taxpayer during the inspection procedure, we detected that some workers, considered eligible for purposes of the tax benefit, had a work schedule of less than 40 hours per week, as they were in a part-time work arrangement"; since it was understood that "the limit of the increase referred to in No. 1 of Article 17 of the Tax Benefits Statute (now Article 19) should be adjusted proportionally to the number of weekly normal working hours of each of the workers considered for the calculation of the tax benefit", the calculation of the tax benefit was considered incorrect by € 99,968.49, regarding the "proportionality between the deductible tax benefit and normal working time". [cf. Tax Inspection Report contained in PA]

d) Following the aforementioned corrections to the Claimant's IRC taxable matter for the year 2015, an additional IRC assessment No. 2017..., dated 27.11.2017, was issued, which includes the assessment of default interest No. 2017..., which determined the total amount to be paid of € 69,063.72, with the payment deadline of 10.01.2018. [cf. document No. 2 attached to the PPA]

e) On 10.01.2018, the Claimant made timely and complete payment of the amount resulting from the aforementioned additional IRC assessment (€ 69,063.72). [cf. PA]

f) On 03.04.2018, the Claimant filed a gracious complaint against the disputed additional IRC assessment, in the terms and with the grounds contained in the respective initial petition which is here given as fully reproduced, arguing the illegality of part of the aforementioned corrections related to the tax benefit relating to job creation. [cf. PA]

g) The aforementioned gracious complaint was filed under No. ...2018..., and an order was issued on 17.09.2018 by the Head of the Tax Justice Division of the Large Taxpayers Unit, determining the partial approval of its request – in the terms and with the grounds contained in Information No. …-AIR1/2018, dated 14.09.2018, on which it was based and which is here given as fully reproduced – with the correction relating to the adjustment of the tax benefit relating to job creation regarding workers hired in part-time work arrangements being maintained, with the following reasoning [cf. document No. 1 attached to the PPA and PA]:

"V.I.II. Of the Correction Concerning Net Job Creation – Adjustments Associated with the Period of 2015 – Improper Proportionality between Deductible Tax Benefit and Normal Working Time

(…)

§ V.I.II.III. Of the Assessment

1. The Tax Administration considers there are corrections to be made with respect to NJCC [net job creation] relating to the taxation period of 2015, in the amount of € 99,968.49, with respect to the proportionality between the deductible tax benefit and normal working time (…).

2. In clear contrast, the Complainant argues that from the analysis of the norm in question in which such correction is based (Article 19 of the Tax Benefits Statute), it results only that the maximum amount of the annual increase, per job, is 14 times the highest national minimum wage.

3. Therefore, the annulment of the correction to the taxable matter made by the AT should be determined, insofar as it suffers from a defect of violation of law.

4. It further states that the understanding on which the Administration bases itself (opinion of the Tax Studies Center, information No. 76/2010), lacks any legal force attributed by the Constitution, under penalty of blatant violation of the principle of tax legality, inherent in Articles 103, No. 2 and 266, No. 2, of the Constitution.

5. On the question at hand, it results from the letter of the law of the tax benefit in question (Article 19 – Job Creation) the possibility of including in the calculation thereof collaborators in part-time work arrangements provided that the other legal requirements that govern it are met.

6. As is well known, such employment contracts are characterized by providing for a weekly work period less than that practiced in a comparable situation, such that the worker hired under the same (part-time worker), at the level of remuneration, is entitled to remuneration that will correspond, at minimum, to that earned by full-time workers in a comparable situation in proportion to their respective normal weekly work period.

7. Therefore, having regard to the principles and criteria of proportionality and coherence justified by the very definition of "tax benefit" that Article 2 of the Tax Benefits Statute considers to be "exceptional measures instituted for the protection of public and extra-fiscal interests relevant to those of taxation itself which prevent" and the framing of the aforementioned norm of the Tax Benefits Statute in the broader context of public policy for incentivizing stable and lasting employment directed to a specific segment of the Portuguese population that faces serious employability problems aggravated by the country's economic crisis (persons under 35 years of age and long-term unemployed), we understand that a relationship of proportionality should be maintained with the "social advantage" associated with the part-time job created (measured in number of hours individually contracted/performed), also limiting proportionally to the number of part-time work hours, the maximum amount of annual increase per job contained in No. 3 of Article 19 of the Tax Benefits Statute, under penalty of, when confronted with full-time employment contracts in similar situation, being inexplicably considered a tax benefit far superior to what is contained in the Law.

8. Moreover, the aforementioned understanding, which has been applied generally in cases, has implicit the rules relating to the interpretation of the Law.

9. As results from Article 11 of the General Tax Law, in the interpretation of Tax Law the rules of legal hermeneutics present in Article 9 of the Civil Code must be followed, pursuant to which the interpretation of Law should not be limited to the letter of the Law, but reconstruct from the texts the legislative thought, taking into account the principle of unity of the legal system, the circumstances in which the Law was elaborated and the specific conditions of the time in which it is applied.

10. According to this principle, the rules defining the tax incentive should be interpreted taking into account the existing norms that regulate, in particular, the financial incentives (granted by Social Security) with identical purposes and similar requirements (Ordinance No. 125/2010) and which in this respect adopt the rule of proportionality enshrined in the Labor Code (previously Articles 180 to 187 of the Labor Code approved by Law No. 99/2003 of 27/08, now Article 150 of the Labor Code approved by Law 7/2009 of 12 February).

11. Also, with regard to the circumstances in which the Law in question was elaborated, it is never too much to emphasize that this tax benefit was introduced into our legislation by Law No. 72/98 of 3 November, and resulted from a proposal to combat youth unemployment, considered at the time as a scourge to our economy.

12. With said law it was intended to encourage the creation and stability of new jobs, as it resulted in tax benefits for the employing entity.

13. Subsequently this mechanism was extended to the long-term unemployed in view of the reality experienced.

14. It is thus verified that the interpretation by the AT, relating to the proportional limitation of the maximum amount of annual increase per job to the respective normal weekly work period, in cases of part-time work, does not constitute a violation of the principle of equality, as there are grounds for the unequal treatment advocated and Article 13 of the Constitution enshrines the observance of material equality (not merely formal) and it is required to treat "equally what is equal and unequally what is unequal".

15. Failure to adjust the amount of minimum monthly remuneration guaranteed for purposes of No. 3 of Article 19 of the Tax Benefits Statute, as seems to be defended by the now appellant, would result, in fact, in a bias of the amount of the benefit in favor of hiring part-time workers to the detriment of hiring full-time workers, an effect which certainly contradicts the objectives pursued with the application of this measure.

16. Therefore, it should be concluded for the maintenance of the fiscal correction made by the Tax Inspection Services of € 99,968.49, relating to the proportionality between the deductible tax benefit and normal working time (…) itemized by worker, in the terms and grounds set out above, under the legal requirement of No. 3 of Article 19 of the Tax Benefits Statute in cases of indeterminate-term but part-time work."

h) The Claimant was notified of the decision on that gracious complaint by letter dated 17.09.2018, sent by registered mail, having later been notified by letter dated 20.09.2018, also sent by registered mail, of the correction made to that same decision, due to the existence of various writing and calculation errors. [cf. document No. 1 attached to the PPA and PA]

i) On 16.12.2018, the Claimant filed the application for constitution of an arbitral tribunal that gave rise to the present proceedings. [cf. CAAD Process Management System]

§2. FACTS NOT PROVEN

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

§3. MOTIVATION REGARDING THE FACTUAL MATTERS

1. The facts pertinent to the judgment of the case were selected and delimited according to their legal relevance, in light of the plausible solutions to the legal issues, in accordance with combined application of Articles 123, No. 2, of the Tax Procedure and Process Code, 596, No. 1 and 607, No. 3, of the Code of Civil Procedure, applicable by virtue of Article 29, No. 1, subparagraphs a) and e), of the RJAT.

The Tribunal's conviction was based on the facts articulated by the parties, whose adherence to reality was not disputed, and on the critical analysis of the body of evidence of a (merely) documentary nature brought to the case file, including the administrative record.

III.2. ON THE LAW

§1. ON THE VALUE OF THE DISPUTE

1. The AT argues that it has no knowledge whatsoever of how the Claimant calculated the value of € 29,341.62 that it indicated as the value of the economic benefit of the claim. Furthermore, it states that the Claimant does not demonstrate that, in view of the correction to the taxable matter for the taxation period of 2015 in the amount of € 99,968.49, the tax to be paid is € 29,341.62.

Consequently, the "Respondent contests the value determined by the Claimant in the present proceedings of € 29,341.62".

1. The Claimant pronounced itself on this question by stating, essentially, that "in compliance with the Law, questioning the (Partial) Tax Assessment the Claimant merely performed the arithmetic operations for calculating the Tax to be annulled resulting from the application of the legal rates that would apply to TC/LT, applied to its concrete situation, i.e.: € 99,968.49*21%/1.5%*3%=20,993.38+1,499.52+6,848.71=29,341.62 (tax rate / 21% * Surcharge / 1.5% * State Surcharge / 3%)".

Considering and deciding (Article 306, Nos. 1 and 2, of the Code of Civil Procedure ex vi Article 29, No. 1, subparagraph e), of the RJAT).

1. As results from No. 1 of Article 296 of the Code of Civil Procedure, a certain value must be assigned to every case, expressed in legal currency, which represents the immediate economic benefit of the claim.

In the same legal compendium, it is also important to consider the norm of No. 1 of Article 299, which states that in determining the value of the dispute, account must be taken of the moment when the action is filed.

For its part, Article 10, No. 2, of the RJAT provides that the application for constitution of an arbitral tribunal is made by means of a petition which must contain, among other things, the indication of the value of the economic benefit of the claim (subparagraph e)). Regarding this norm, the following is emphasized in the arbitral judgment issued on 06.12.2017 in case No. 422/2017-T: "(…) if it is true that this subparagraph e) points in the direction that the value of the dispute of arbitral processes is the 'economic benefit of the claim', it is also true that the application of this criterion for determining the value of the dispute is only viable when it is possible to determine such economic benefit. (…) Therefore, said subparagraph e) of No. 2 of Article 10 must be interpreted restrictively, with the natural and forced limitation that the value of arbitral processes will be the economic benefit of the claim, when it is possible to determine such benefit."

On the other hand, it results from Article 3, No. 2, of the Regulations on Costs in Tax Arbitration Proceedings that the value of the dispute is determined in accordance with Article 97-A of the Tax Procedure and Process Code.

Finally, Article 97-A of the Tax Procedure and Process Code provides that the values to be considered for purposes of costs or others provided for in law, for actions conducted in tax courts are as follows: a) when an assessment is challenged, that of the amount whose annulment is sought.

Turning to the concrete case, we have that the Claimant partially challenges the disputed additional IRC assessment, having determined according to the objective criterion it explained (application of tax rates and surcharges to the value of the contested correction) the amount whose annulment it seeks and, correspondingly, the value of the economic benefit of the claim.

The AT contests that value; however, contrary to what is provided for in Article 305, No. 1, of the Code of Civil Procedure, applicable ex vi Article 29, No. 1, subparagraph e), of the RJAT, it does so without offering another value in substitution, which is a sine qua non condition for the contestation of the value of the dispute indicated in the initial petition to be made. For this reason and given the above, the contestation in question necessarily has to fail.

1. In these terms, without need for additional considerations, the value of the dispute is fixed at € 29,341.62 and, consequently, the question of the value of the dispute raised by the Respondent is devoid of merit.

§2. ON THE MERITS

§2.1. ON THE TAX BENEFIT FOR JOB CREATION

§2.1.1. THE EVOLUTION OF THE LEGAL REGIME

1. The legal norm that is at the epicenter of the disagreement between the parties is Article 19 of the Tax Benefits Statute, relating to job creation, currently repealed.

Until its repeal in 2018 by Article 4 of Law No. 43/2018 of 9 August, it was subject to various amendments and therefore it is important to recall the evolution of the respective regime and identify the one in force at the time of the occurrence of the situation in these proceedings.

This type of incentive was inserted into the Tax Benefits Statute in 1998 by Law No. 72/98 of 3 November, which added to the Tax Benefits Statute Article 48-A, with the heading Job Creation for Young People.

In its original wording, Article 48-A provided the following:

1 – For purposes of the corporation income tax (IRC), charges corresponding to the net creation of jobs for workers hired under permanent contracts with age not exceeding 30 years are treated as cost at a value corresponding to 150%.

2 – For purposes of the provision in the preceding number, the maximum amount of monthly charges, per job, is 14 times the national minimum wage. 3. The increase referred to in No. 1 shall take place for a period of five years counting from the effectiveness of the employment contract.

Following the reform introduced by Law No. 30-G/2000 of 29 December, with amendments to the Personal Income Tax and Corporation Income Tax Codes and the Tax Benefits Statute, followed by comprehensive revision and full publication of said Codes by Decree-Law No. 198/2001 of 3 July, the matter came to be contained in Article 17 of the Tax Benefits Statute, maintaining the heading Job Creation for Young People, with the following wording:

1 – For purposes of the corporation income tax (IRC), charges corresponding to the net creation of jobs for workers hired under permanent contracts with age not exceeding 30 years are treated as cost at a value corresponding to 150%.

2 – For purposes of the provision in the preceding number, the maximum amount of monthly charges, per job, is 14 times the highest national minimum wage. 3 - The increase referred to in No. 1 takes place for a period of five years counting from the beginning of the effectiveness of the employment contract.

No. 2 of said Article 17 of the Tax Benefits Statute was amended by Law No. 32-B/2002 of 30 December, coming to provide the following: For purposes of the provision in the preceding number, the maximum amount of annual increase, per job, is 14 times the highest national minimum wage.

That regime underwent substantial changes with the State Budget for 2007, approved by Law No. 53-A/2006 of 29 December, in which Article 17 came to have the heading Job Creation. The scope of application was extended to long-term unemployment, adopting, both in the case of young people and in the case of long-term unemployed, the concepts used for purposes of access to benefit in the area of social security.

Subsequently, the following amendments are also noted:

(i) Law No. 10/2009 of 10 March introduced amendments to No. 2 of Article 19, specifically in subparagraph a), increasing the upper age threshold in the definition of young unemployed and in subparagraph b), reducing the time of registration with the employment center for the definition of long-term unemployed;

(ii) Law No. 3-B/2010 of 28 April, which approved the State Budget for 2010, provided in Article 115, with the heading Strengthening of Tax Benefits for Job Creation in 2010, the following: During the year 2010, the tax benefit provided for in Article 19 of the Tax Benefits Statute, approved by Decree-Law No. 215/89 of 1 July, is cumulative with other employment support incentives provided for in other legislation, when applicable to the same worker or job;

(iii) Law No. 55-A/2010 of 31 December, which approved the State Budget for 2011, amended No. 6, coming to provide the following: The regime provided for in No. 1 may only be granted once per worker admitted to that entity or to another entity with which there are special relationships under Article 63 of the Corporation Income Tax Code;

(iv) This same law gave the following wording to Article 19 of the Tax Benefits Statute, which was in force at the time of the corrections made by the AT in these proceedings:

Article 19

Job Creation

1 - For the determination of taxable profit of corporation income tax (IRC) taxpayers and personal income tax (IRS) taxpayers with organized accounting, charges corresponding to the net creation of jobs for young people and for long-term unemployed, hired under permanent employment contracts, are considered at 150% of the respective amount, recorded as expense of the fiscal year.

2 - For purposes of the provision in the preceding number, the following are considered:

a) "Young people" workers aged over 16 and under 35 years, inclusive, determined as of the date of the employment contract execution, with the exception of young people under 23 years of age who have not completed secondary education, and who are not attending an education and training offer that allows raising the level of education or professional qualification to ensure completion of that level of education;

b) "Long-term unemployed" workers available for work, under Decree-Law No. 220/2006 of 3 November, who are unemployed and registered with employment centers for more than 9 months, without prejudice to having been entered into fixed-term contracts during that period for periods of less than 6 months, whose total duration does not exceed 12 months;

c) "Charges" amounts incurred by the employer with the worker, by way of fixed remuneration and contributions to social security charged to the same employer;

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

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

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

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

6 - The regime provided for in No. 1 may only be granted once per worker admitted to that entity or to another entity with which there are special relationships under Article 63 of the Corporation Income Tax Code.

§2.1.2. THE QUALIFICATION OF THE BENEFIT

1. In the case under examination, what is at issue is the application of a norm which aims, through the granting of a tax relief, at the creation of employment, of jobs endowed with stability.

It is, therefore, a tax relief with the characteristics of a tax benefit, that is to say, a measure of an exceptional character instituted for the protection of relevant public and extra-fiscal interests superior to those of taxation itself which prevent (cf. Article 2, No. 1, of the Tax Benefits Statute).

On the other hand, it is configured as a dynamic tax benefit, also designated tax incentive or stimulus, in which the cause of the benefit is the (future) adoption of the benefited behavior or the (future) exercise of the promoted activity; it is integrated into an extra-fiscal policy, for the pursuit of economic and social objectives through fiscal means.

It has a temporary character and is temporally conditioned, insofar as the benefit is granted for a period of five years counting from the beginning of the effectiveness of the employment contract and is granted in the form of an increase in costs deductible from the taxable matter.

Finally, according to the classification of the Tax Benefits Statute, it is an automatic benefit because, once the requirements are verified, it derives directly from the law, not depending on acts of recognition by the administration.

§2.1.3. THE RULES FOR INTERPRETING THE TAX BENEFIT FOR JOB CREATION

1. The norm under analysis, by consecrating the tax benefit relating to job creation for young people, does not contain in itself all the criteria to which the determination or assessment of the various concepts it uses (some of an economic and social matrix) must be subject and which constitute or integrate the legal situation presupposed for the acquisition of such benefit.

In the absence of definition of such concepts, we must resort to the general and specifically applicable interpretive rules in the matter of tax benefits.

Thus, No. 1 of Article 11 of the General Tax Law provides that 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. The subsequent No. 2 provides as follows: Whenever tax norms employ terms specific to other branches of law, these must be interpreted in the same sense as they have there, unless otherwise results directly from the law. In accordance with what is provided in its No. 3, if doubt persists about the meaning of the norms of incidence to apply, account must be taken of the economic substance of the tax facts.

By virtue of said No. 1 of Article 11 of the General Tax Law, we must seek the interpretive parameters contained in Article 9 of the Civil Code.

We have, therefore, that the letter of the law is a starting point in the interpretive task but is not necessarily the finishing point. If the law itself postulates that the interpreter cannot consider legislative thought that does not have in the letter of the law a minimum of verbal correspondence, however imperfectly expressed, the letter cannot be considered an absolute limit. Alongside the letter, other factors exist and should be weighed to arrive at the sense in which the law should be applied. Those other factors will be, in particular, the teleology of the norm or, in the expression of that Article 9, the legislative thought, commonly understood as tending towards overcoming the doctrinal discussion between the preponderance to be given to mens legislatoris or to mens legis, a question that today can be understood as settled in the sense that regard must be had to the will of the historical legislator cum grano salis.

On the other hand, the hypothesis of proceeding with analogical integration must be excluded, since the norm under interpretation in the case under examination enshrines a tax benefit and therefore this is prohibited by Article 10 of the Tax Benefits Statute. An extensive interpretation may, however, be carried out if it is concluded that the letter of the text falls short of the spirit of the law, the formulation being defective. In that case, the norm must be given the scope in accordance with legislative thought, thus making the letter of the law correspond to the spirit of the law.

It is therefore necessary to inquire into the teleology of the norm, with the first step being to discern the relevant public extra-fiscal interests that underlay the consecration of the benefit. It appears to be an easy task to perceive the purpose to be achieved through this norm, already with some tradition in our tax law system.

In fact, the tax benefit enshrined in Article 19 of the Tax Benefits Statute was introduced and is justified with the purpose of encouraging the increase of jobs for young people, through permanent employment contracts and the maintenance of the corresponding jobs in subsequent years, thus favoring the access of young people to the labor market under conditions of stability.

Subsequently, the purpose of reintegrating long-term unemployed was also integrated within the scope of the norm. This purpose is pursued by the granting of a tax benefit, translated into the right of the employing entity to increase the charges deductible from the taxable matter, for purposes of determining taxable profit within the scope of corporation income tax.

§2.1.4. THE CONCRETE CASE: SUBSUMPTION TO ARTICLE 19 OF THE TAX BENEFITS STATUTE

1. The contested correction made to the Claimant's taxable matter, relating to the year 2015, results from the fact that it increased charges with workers who, during the period under analysis, were working part-time, without adjusting the maximum amount of annual increase per job, provided for in No. 3 of Article 19 of the Tax Benefits Statute, in proportion to the reduction of the effective normal work period.

According to the AT, this correction is imperative for two reasons:

• firstly, in light of the principle of unity of the legal system, the rules defining the tax incentive should be interpreted taking into account the norms that regulate the financial incentives (granted by social security) with identical purposes and similar requirements (Ordinance No. 125/2010) and that in this respect have adopted the rule enshrined in the Labor Code (Article 150);

• secondly, failure to adjust the amount of minimum monthly remuneration for purposes of Article 19 of the Tax Benefits Statute would result in a bias of the amount of the benefit in favor of hiring part-time workers to the detriment of hiring full-time workers, an effect that certainly contradicts the objectives pursued with the application of this measure.

1. The interpretation of Article 19 of the Tax Benefits Statute that is advocated by the Respondent goes beyond the letter of the law and goes beyond even analogical application itself, attempting to the AT bring into the sphere of this benefit regimes of other benefits and legislation not applicable, even subsidiarily, in this regard.

2. Let us see what are the requirements for, under Article 19 of the Tax Benefits Statute, the tax benefit to be applied.

In the first place, it is necessary that there be net job creation for young people and for long-term unemployed hired under permanent employment contracts. Therefore, it is necessary, in the first place, that, in a given year, permanent employment contracts (conversion of fixed-term contracts into permanent contracts being considered as permanent hiring) be entered into with young people or with long-term unemployed, both corresponding to categories that the law defines.

In the second place, it is necessary that the number of permanent employment contracts with young people or long-term unemployed entered into during a given fiscal year exceed the number of contracts of the same type that cease to be in force during the same period. The tax benefit applies only to new contracts that exceed in number the terminated contracts.

The law is clear in establishing that the tax benefit applies to contracts: i) without term; ii) entered into with young people or long-term unemployed; iii) that exceed in number the contracts terminated in the same fiscal year.

These are the only requirements for the application of the tax benefit provided for in Article 19 of the Tax Benefits Statute.

The law makes no reference to the fact that the new contracts, without term, entered into with young people or long-term unemployed are full-time or part-time.

Now, if where the legislator does not distinguish, it is not for the interpreter to distinguish (ubi lex non distinguit, nec nos distinguere debemus), it is clear that the tax benefit cannot fail to apply to part-time contracts that meet all the requirements provided for in the law.

1. The AT does not dispute that the tax benefit applies to part-time contracts that meet the requirements established in the law; but considers that, in the case of part-time employment contracts, the benefit should be proportionally reduced.

The tax benefit, under Article 19, No. 1, of the Tax Benefits Statute, consists of the increase of the charges borne with each worker, for purposes of determining taxable profit, to 150% of the respective amount.

The AT understands that if the full-time contract is, for example, 40 hours per week, and if the part-time contract to which the increase applies is 20 hours per week, then to this part-time contract only an increase of charges to 125% of the respective amount would be applicable, which corresponds to a reduction of the increase rate to half of what is fixed in the law.

This interpretation of the law is not admissible in light of the criteria for interpreting laws enshrined in Article 9 of the Civil Code.

It is logical that an employer who enters into a part-time employment contract is entitled to a smaller tax benefit for that contract than for a full-time employment contract. However, it is the law itself that takes charge of ensuring that proportionality, by establishing the tax benefit as a percentage (in proportion, therefore) of the charges borne with the worker.

This is evidenced by the following example contained in the judgment issued on 05.01.2018 in case No. 68/2017-T:

"Suppose the Claimant hires two workers, worker A, full-time, with annual remuneration of 12,000, and worker B, part-time 50% of full-time, with annual remuneration of 6,000.

For worker A, the Respondent will have an increase in expenses of 6,000 (= 12,000 * 50%). For worker B, the Respondent will have an increase in expenses of 3,000 (= 6,000 * 50%), i.e. exactly proportional to the percentage of contracted work time.

The proportionality between the contracted work time and the tax benefit enjoyed is therefore ensured by the legislator himself."

1. Therefore, the rule that the Respondent intends to apply to part-time employment contracts does not have the effect of a proportional reduction but rather a more than proportional reduction of the tax benefit.

But even if that were not the case, it would never be incumbent upon or be permitted to the AT, substituting itself for the legislator, to create a new norm that has no correspondence in the letter of the law; that is clearly the case with which we are confronted in the situation under examination.

Article 19, No. 1, of the Tax Benefits Statute refers to permanent employment contracts. The expression literally encompasses both full-time and part-time contracts; therefore, the regime applicable to part-time contracts is found defined in the legal norm, coinciding with the regime for full-time contracts.

By creating a special regime – by reducing the increase rate – for part-time contracts, the AT is substituting itself for the legislator, establishing rules that are not legislated, thereby violating the principle of legality to which its actions are strictly subject.

Indeed, that the Tax Administration is substituting itself for the legislator is apparent from the administration's own arguments, which clearly does not rest on hermeneutic criteria, since, as has been demonstrated, a specific regime for part-time employment contracts finds no minimal correspondence in the letter of the law.

1. There is yet another order of reasons that absolutely rejects the interpretive thesis advocated by the Respondent.

The AT clarifies the reasons why it understands that the tax benefit should be reduced for part-time employment contracts, saying that the social advantage associated with the part-time job created is less than the social advantage generated by a full-time contract.

Now, the argument that the creation of jobs with permanent part-time contracts has associated with it a lesser social advantage is contradicted straightaway by recent legislation that considers the creation of part-time employment worthy of fiscal protection.

Ordinance No. 34/2017 of 18 January, which regulates the creation of the Employment-Contract measure, which consists of the granting, to the employing entity, of financial support for entering into an employment contract with an unemployed person registered with the Employment and Professional Training Institute, I.P., postulates in its Article 4:

1 – The requirements for granting financial support are as follows:

a) Advertising and registration of the employment offer on the IEFP, I.P. portal, www.netemprego.gov.pt, flagged with the intention of applying for the measure;

b) The entering into of an employment contract, full-time or part-time, with an unemployed person registered with IEFP, I.P.;

(...)

It thus results crystal clear that, in a recently approved statute, with the objective of encouraging job creation, the legislator does not exclude from the incentive regime part-time contracts, thereby making clear that it does not consider part-time work less worthy of tax incentive.

Moreover, examining the support mechanism established by this norm, it is verified that the support granted for full-time and part-time contracts is the same, with a reduction exactly proportional.

1. In the same sense of the understanding that has been set out, we find, in addition to the arbitral judgments cited by the Claimant in the PPA and others, the judgments issued in arbitral cases Nos. 68/2017-T and 249/2018-T and the very recent judgment of the Higher Administrative Court issued on 20.02.2019 in case No. 095/16.5BESNT, where the following is stated:

"With regard to the adjustment of the tax benefit for part-time workers.

The Fiscal Person argues that in cases of part-time work the increase limit should be adjusted to the number of part-time hours, under penalty of being considered a tax benefit superior to what the law sets out.

The AT understands that since the calculation of the annual increase limit is associated with the value of the guaranteed minimum wage, the 40-hour-per-week period should be considered as "normal" for purposes of Article 19 of the Tax Benefits Statute, since the minimum wage is legally determined for full-time/complete contracts, that is, employment contracts with that duration.

Now, from the norms of Article 19, Nos. 1 and 3 of the Tax Benefits Statute, it results that, to enjoy the benefit the law only requires the net creation of jobs for workers hired under permanent employment contracts, young people and long-term unemployed, being these alone the criteria (and no others) established by the legislator."

1. The Respondent further argues that "the application of the norm [Article 19 of the Tax Benefits Statute] in the terms advocated by the Claimant would result in unequal treatment and a violation of the principle of equality set out in Article 13 of the Constitution".

Having regard to all that has been set out above and which is reiterated here regarding the interpretation and application of Article 19 of the Tax Benefits Statute, specifically regarding the increase of charges relating to workers hired part-time, we fail to see any prejudice to the principle of equality in any of its dimensions.

1. In view of the foregoing, it is concluded that the interpretation and application of Article 19 of the Tax Benefits Statute made by the AT lacks any legal support and, therefore, the contested correction made to the Claimant's taxable matter, relating to the year 2015, appears to be illegal, due to an error regarding the legal requirements, a defect that invalidates both the decision of rejection (partial) of the gracious complaint No. ...2018... and partially the act of additional IRC assessment No. 2017... which includes the assessment of default interest No. 2017....

§2.2. ON REIMBURSEMENT OF IMPROPERLY PAID AMOUNTS, PLUS INDEMNITY INTEREST

1. Article 24, No. 1, subparagraph b), of the RJAT provides that the arbitral decision on the merits of the claim not subject to appeal or challenge binds the tax administration from the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for spontaneous execution of the decisions of the tax courts, restore the situation that would have existed if the tax act object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose, which is in line with what is provided for in Article 100 of the General Tax Law (applicable ex vi Article 29, No. 1, subparagraph a), of the RJAT), which establishes that the tax administration is obliged, in case of total or partial success of a gracious complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation object of the dispute, including the payment of indemnity interest, if applicable, from the end of the deadline for execution of the decision.

Although Article 2, No. 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals that function at CAAD, not making reference to condemnatory decisions, it should be understood that it encompasses the powers that in judicial challenge proceedings are attributed to tax courts, and that is the interpretation that harmonizes with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which the first guideline is proclaimed that "the tax arbitration procedure must constitute an alternative procedural means to judicial challenge proceedings and to actions for recognition of a right or legitimate interest in tax matters".

Judicial challenge proceedings, despite being essentially a procedure for annulment of tax acts, admits condemnation of the Tax Administration to the payment of indemnity interest, as can be deduced from what is provided for in Article 43, No. 1, of the General Tax Law and Article 61, No. 4, of the Tax Procedure and Process Code.

Thus, No. 5 of Article 24 of the RJAT, by saying that payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Tax Procedure and Process Code, must be understood as allowing the recognition of the right to indemnity interest in the arbitral procedure.

On the other hand, since the right to indemnity interest depends on the right to reimbursement of amounts improperly paid, which are its basis of calculation, the possibility of recognition of the right to indemnity interest is inherent in the possibility of assessment of the right to reimbursement of such amounts.

§2.2.1. ON THE RIGHT TO REIMBURSEMENT OF PAID AMOUNTS

1. Following the illegality and partial annulment of the act of additional IRC assessment No. 2017... which includes the assessment of default interest No. 2017..., relating to the year 2015, it is necessary to conclude that the Claimant bore a tax obligation superior to what is legally due, and therefore reimbursement of the amounts of tax and default interest improperly paid is warranted, by virtue of the provision of Article 24, No. 1, subparagraph b), of the RJAT and Article 100 of the General Tax Law (applicable ex vi Article 29, No. 1, subparagraph a), of the RJAT), since this appears essential to restore the situation that would have existed if that tax act had not been performed.

Thus, the claim for reimbursement of the amounts of tax and default interest improperly paid by the Claimant is well-founded and, in compliance with this decision, these amounts should be determined by the AT.

§2.2.2. ON THE PAYMENT OF INDEMNITY INTEREST

1. Article 43, No. 1, of the General Tax Law determines that indemnity interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error imputable to the services resulting in payment of the tax obligation in an amount superior to what is legally due, with No. 5 of Article 61 of the Tax Procedure and Process Code providing that interest is calculated from the date of improper payment of the tax until the date of processing of the respective credit note, in which it is included.

In the concrete case, as stated, the Claimant bore a tax obligation superior to what is legally due.

Moreover, it is verified that the illegality and consequent partial annulment of the additional IRC assessment No. 2017... which includes the assessment of default interest No. 2017..., relating to the year 2015, is imputable to the AT because in it the AT incurred in error regarding the legal requirements, consisting of the incorrect interpretation and application of Article 19 of the Tax Benefits Statute; the same applies to the illegality of the act of rejection (partial) of the aforementioned gracious complaint, which is also wholly imputable to the AT.

Thus, the Claimant is entitled to indemnity interest, in terms of what is provided for in Article 43, No. 1, of the General Tax Law and Article 61 of the Tax Procedure and Process Code, to be calculated after the determination by the AT of the amounts of tax and default interest paid in excess, in compliance with this decision.

1. To conclude, it is important to note that the relevant issues submitted for consideration of this Tribunal were addressed and considered, as were not those whose decision was prejudiced by the solution given to others.

IV. DECISION

In the terms set out above, this Arbitral Tribunal decides to render judgment favorable to the application for arbitral determination and, consequently:

a) The decision of rejection (partial) of the gracious complaint No. ...2018... is declared illegal and annulled;

b) The additional IRC assessment No. 2017... which includes the assessment of default interest No. 2017..., relating to the year 2015, is partially declared illegal and annulled, to the extent that it is based on the correction relating to the tax benefit for job creation, concerning workers hired in part-time work arrangements, in the amount of € 99,968.49;

c) The Tax and Customs Authority is condemned:

(i) to reimburse to the Claimant the amounts of tax and default interest that, in execution of this decision, are determined to have been improperly assessed and paid;

(ii) to pay indemnity interest to the Claimant, calculated on the amounts to be reimbursed, in accordance with legal terms;

(iii) to the payment of the costs of the present proceedings.

VALUE OF THE PROCEEDINGS

In accordance with what has been decided above, the proceedings are assigned a value of € 29,341.62 (twenty-nine thousand three hundred and forty-one euros and sixty-two cents).

COSTS

Pursuant to the provisions of Articles 12, No. 2, and 22, No. 4, of the RJAT and Article 4, No. 4, and Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,530.00 (one thousand five hundred and thirty euros), to be borne by the Tax and Customs Authority.

Notify.

Lisbon, 7 June 2019.

The Arbitrator,

(Ricardo Rodrigues Pereira)