Process: 642/2017-T

Date: May 11, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 642/2017-T) concerns the application of Article 19 of the Portuguese Tax Benefits Statute (EBF), which provides tax incentives for net job creation for young workers. The Claimant, A… Ltd., sought partial annulment of an IRC (Corporate Income Tax) self-assessment for fiscal year 2011, arguing entitlement to increase deductible costs by 50% of expenses related to two employees (B… and C…), up to €6,790 each. The company had originally filed its Form 22 declaration without claiming this benefit, then submitted a gracious complaint (reclamação graciosa) which was dismissed. A subsequent hierarchical appeal was also rejected on grounds that the Claimant failed to prove compliance with Article 19(6) of the EBF, which stipulates the benefit can only be granted once per worker, whether employed by the taxpayer or related entities under Article 63 of the IRC Code. The Tax Authority identified that the previous employer (D… Ltd., later E… Ltd.) had declared tax benefits in field 234 of Table 07 for fiscal years 2004-2007, raising concerns about duplicate claims. The Claimant argued it had proven these specific employees were not the subject of previous benefit claims by the former employer, submitting documentary evidence for years 2004-2009. The central legal issue concerns interpreting the 'once per worker' limitation and burden of proof requirements when employees transfer between related entities, highlighting procedural challenges in claiming employment-based tax incentives under Portuguese corporate tax law.

Full Decision

ARBITRAL DECISION

1. Report

1.1

A…, Ltd., hereinafter designated as "Claimant", taxpayer no. …, with registered office at Rua…, no. …º Esq., in Lisbon, requested the constitution of a single arbitral tribunal, under the combined provisions of Article 2, no. 1, paragraph a) and Article 10, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter designated only as "LRTM") and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, against which the Tax and Customs Authority (TCA) is the respondent.

1.2

The request for arbitral ruling, presented on 07 December 2017, has as its object the partial annulment of the dispatch issued on 07-09-2017, in the hierarchical appeal proceedings against the dismissal of the gracious complaint no. …2014…, presented with reference to the self-assessment of Corporate Income Tax (CIT) no. 2012…, relating to the year 2011.

1.3

The Claimant chose not to appoint an arbitrator.

1.4

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TCA on 07 December 2017.

1.5

The undersigned was designated by the President of the Deontological Council of CAAD as arbitrator of the single arbitral tribunal, pursuant to Article 6 of the LRTM, and acceptance of the appointment was communicated within the applicable timeframe.

1.6

On 26 January 2018, the Parties were notified of this appointment and did not oppose it, pursuant to the combined provisions of Article 11, no. 1, paragraphs a) and b) of the LRTM and Articles 6 and 7 of the CAAD Deontological Code.

1.7

Thus, in accordance with the provision of Article 11, no. 1, paragraph c) of the LRTM, the single arbitral tribunal was constituted on 15 February 2018.

1.8

The Respondent was notified, by arbitral dispatch of the same date, pursuant to Article 17, no. 1 of the LRTM, to present a response, if it so wishes, within 30 days and to request the production of additional evidence.

1.9

Moreover, it was notified to present, within the same timeframe, the administrative file (PA) referred to in Article 111 of the Code of Tax Procedure (CPPT).

1.10

On 19 March 2018, the Respondent presented its Response, defending itself by way of objection, arguing for the dismissal of the request for arbitral ruling.

1.11

On the same date it submitted the respective administrative file to the case record.

1.12

Considering that the Parties did not request the production of any evidence beyond the documentary evidence that the Claimant attached to the request for arbitral ruling, the Arbitral Tribunal, in light of the principles of autonomy in the conduct of proceedings, celerity, simplification and procedural informality, inherent in Articles 16 and 29, no. 2, of the LRTM, by dispatch of 20 March 2018, dispensed with the holding of the meeting provided for in Article 18 of the same enactment, having further decided that the proceedings would continue with optional written submissions, to be presented successively by the Respondent.

1.13

It was further decided that the final arbitral decision would be delivered within 30 days following the presentation of submissions by the Respondent or the expiration of the respective timeframe.

1.14

On 20 March 2018 the Parties were notified of this dispatch and did not present submissions.

2. Position of the Parties

2.1 Of the Claimant

It sustains its request for arbitral ruling, in summary, as follows:

On 13-05-2012 it submitted its income statement form 22, relating to the year 2011, in which it calculated a taxable profit of 21,043.78 €.

Having noticed the existence of an error in its completion, since it did not mention in field 774 (tax benefits) of table 07 (calculation of taxable profit) the increase to which it was entitled under Article 19 of the Tax Benefits Statute (TBS) relating to net creation of jobs, it presented a gracious complaint against the respective self-assessment, pursuant to no. 1 of Article 131 of the Corporate Income Tax Code (CITC), which was dismissed by dispatch of 27-10-2014.

From this dispatch it filed a hierarchical appeal, which by dispatch of 07-09-2017 upheld the challenged act with the following reasoning: "(…) although the elements provided by the Appellant are considered, it is not demonstrated that the requirement established in no. 6 of Article 19 of the TBS has been met, upon the compliance with which also depends the right to the benefit, namely that the tax benefit sought, with reference to the employees in question, has never yet been granted (regardless of who is the entity that has already enjoyed the benefit and/or the existence or otherwise of special relationships between the appellant and the same)."

"Being relevant to the matter in question, as already mentioned in the context of the Gracious Complaint, that in the fiscal years 2007, 2006, 2005 and 2004, years in which some employees in question were employees of this company, the latter recorded values in field 234 of Table 07 – Tax Benefits, of their respective income statements."

Not conforming to this decision, at least in relation to employees B… and C…, for whom it managed to prove that they had not been considered for the application of the same benefit in the entity that previously hired them, that is, the company "D…, Ltd.", NIPC …, and which currently operates under the name "E…, Ltd.", of which F…, managing partner of the Claimant, was a shareholder, it presented a request for arbitral ruling in order for the increase in costs due to net creation of jobs to be considered under the regime set forth in the said enactment.

Thus, as for the years 2008 and 2009, the Claimant had already proved that the company in question had not declared any tax benefit in the context of CIT.

Regarding the years 2007, 2006, 2005 and 2004, it was proved that the values recorded in field 234 (tax benefits) of table 07 (calculation of taxable profit) of form 22 statement do not refer to employees B… and C…, as shown by documents nos. 5 to 14 which it attaches.

Therefore, finding that all legal requirements for the application of the benefit provided for in Article 19 of the TBS have been met, the annual increase should be considered as a cost of fiscal year 2011 of 50% of the expenses with the said employees, in the maximum amount of 6,790.00 €, each.

It concludes arguing for the admissibility of the request for arbitral ruling and therefore for the partial annulment of the contested assessment, with the correction of the taxable profit to 7,463.78 € [21,043.78 € - (6,790.00 € x 2)] and of the respective CIT to 932.00 €, with the Respondent to be ordered to refund to the Claimant the amount of 2,766.45 € (3,698.45 € - 932.00 €) paid in excess.

2.2 Of the Respondent

Defending itself by way of objection, it invokes the following arguments:

That the tax benefit set forth in Article 19 of the TBS has as its purpose to encourage the increase in jobs that meet the requirements described therein, translating into a right granted to the employer entity to increase the deductible expenses to the taxable base of CIT, in return for net job creation.

Thus, what is at issue is whether the Claimant can or cannot benefit from the regime provided for in that legal provision, since pursuant to no. 6 it can only be granted once per worker admitted to that entity or another entity with which there are special relationships pursuant to Article 63 of the CITC, this being the requirement under discussion in the present proceedings, which the Claimant failed to prove, namely the fact of having recorded values in field 234 of Table 07 of form 22 statement for the fiscal years 2004 to 2007.

It concludes arguing for the total dismissal of the request for arbitral ruling and absolution of the Respondent, since the contested assessment constitutes a correct interpretation and application of the law to the facts, not suffering from the defect of violation of law.

3. Case Management

3.1

The Parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (Articles 4 and 10, no. 2, of the LRTM and Article 1 of Ordinance no. 112-A/2011, of 22 March).

3.2

The proceedings do not suffer from any nullities.

3.3

The Arbitral Tribunal is regularly constituted and is materially competent to hear and decide the request, cf. Article 2, no. 1, paragraph a) of the LRTM.

3.4

There are no other circumstances that prevent the examination of the merits of the case.

4. Substantiation

4.1 Established Facts

Facts relevant to the assessment and decision of the substantive question raised are hereby established and proved as follows:

4.1.1

The Claimant is a commercial company constituted on 07-09-2009 adopting the form of a limited liability company.

4.1.2

In the years 2009 and 2010 the Claimant entered into contracts of indefinite duration with the following employees, having borne expenses by way of fixed remuneration, cf. annexes to doc. no. 2, and which is hereby fully reproduced:

Name Date of Birth Age in 2009 Age in 2010 Date of Admission Annual Remuneration (€)
B… 13-10-1985 24 — 09-12-2009 17,111.76
C… 20-08-1974 35 — 09-12-2009 17,304.96
G… 13-05-1978 32 — 02-12-2009 24,029.48
H… 12-12-1979 30 — 02-12-2009 16,958.16
I… 08-12-1980 — 29 04-01-2010 14,591.76
J… 15-01-1982 — 28 04-01-2010 14,280.66
4.1.3

Of the admitted employees, only G… terminated the contract on 31-08-2011, the contract of the others being maintained.

4.1.4

Employee B… had an employment relationship, as an employee, with the company "D…, Ltd.", NIPC …, which currently operates under the name "E…, Ltd.", presenting remuneration from October 2007 to December 2009, cf. p. 19 of the information attached to doc. no. 4.

4.1.5

Employee C… had an employment relationship, as an employee, with the company "D…, Ltd.", NIPC…, which currently operates under the name "E…, Ltd.", presenting remuneration from May 2002 to December 2009, cf. p. 19 of the information attached to doc. no. 4.

4.1.6

The values recorded in field 234 (tax benefits) of table 07 (calculation of taxable profit) of form 22 statement of the company "D…, Ltd.", NIPC …, which currently operates under the name "E…, Ltd.", relating to the years 2004 to 2007, do not refer to employees B… and C… previously mentioned, cf. docs. nos. 5 to 14.

4.1.7

In form 22 statements for the years 2008 and 2009 of the said company, no tax benefits were declared in the context of CIT, cf. mentioned on the last page of doc. no. 3.

4.1.8

On 13-05-2012 the Claimant presented form 22 income statement, relating to CIT for the year 2011, in which, in field 774 (tax benefits) of table 07 (calculation of taxable profit), it did not mention any amount, cf. doc. no. 1.

Having further declared taxable profit of 21,043.78 € (field 778 – Taxable profit; table 07 – Calculation of taxable profit), as well as the tax (CIT) self-assessed in the amount of 3,698.45 € (field 351 – Tax liability, of table 10 – Calculation of tax).

4.2 Unproven Facts

There are no facts relevant to the decision of the case which should be considered unproven.

4.3 Motivation

Regarding the factual matter, the Tribunal does not have the obligation to rule on all the facts alleged, but rather to select those that are relevant for the decision, taking into account the cause (or causes) of action that substantiates the claim made by the claimant [(cf. Articles 596, no. 1 and 607, nos. 2 to 4 of the Civil Procedure Code, applicable by virtue of Article 29, no. 1, paragraphs a) and e) of the LRTM)] and to record whether it considers it proved or unproven (cf. Article 123, no. 2 of the CPPT).

According to the principle of free assessment of evidence, the Tribunal bases its decision, regarding the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its experience of life and knowledge of persons (cf. Article 607, no. 5 of the Civil Procedure Code). Only when the probative force of certain means is pre-established in law (e.g. full probative force of authentic documents, cf. Article 371 of the Civil Code) does the principle of free assessment of evidence not govern in the assessment of the evidence produced.

Thus, the Tribunal's conviction was based on the documentary evidence submitted to the case record as well as on the positions assumed by the parties.

4.4 Substantive Law (Reasoning)

Subject Matter of the Dispute

The question which constitutes the thema decidendum comes down to whether, in the year 2011, all the requirements provided for in Article 19 of the TBS were met, necessary for the Claimant to be able to benefit from the tax benefit for net creation of jobs for young people.

Question to be Decided:

  • Regarding the (il)legality of the contested assessment.

The tax benefit set forth in Article 19 of the TBS has as its purpose to encourage the increase in jobs that meet the requirements described therein, translating into a right granted to the employer entity to increase the deductible expenses to the taxable base of CIT, in return for net job creation.

Indeed, the following is the wording of the said provision at the time of the facts (2011):

"1 - For the determination of taxable profit of CIT taxpayers and IRS taxpayers with organized accounting, expenses corresponding to net creation of jobs for young people and for the long-term unemployed, admitted by contracts of indefinite duration, shall be considered at 150% of their respective amount, recorded as an expense for the fiscal year.

2 - For purposes of the above provision:

'Young people' are workers aged above 16 and below 35 years, inclusive, calculated on the date of conclusion of the employment contract, with the exception of young people under 23 years of age, who have not completed secondary education, and who are not attending an education-training offer that allows raising the level of education or professional qualification to ensure the completion of that level of education;

'Long-term unemployed' are workers available for work, under the terms of 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 concluded, during that period, fixed-term contracts for a period of less than 6 months, whose total duration does not exceed 12 months;

'Expenses' the amounts borne by the employer entity with the worker, by way of fixed remuneration and contributions to social security charged to the same entity;

'Net creation of jobs' the positive difference, in a given fiscal year, between the number of eligible hires pursuant to no. 1 and the number of departures of workers who, on the date of their admission, were in the same conditions.

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

4 - For purposes of determining net job creation, 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 from the start 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 enactments, when applicable to the same worker or job.

6 - The regime provided for in no. 1 can only be granted once per worker admitted to that entity or another entity with which there are special relationships pursuant to Article 63 of the Corporate Income Tax Code."

Of the various requirements provided for in the norm above transcribed, it is important to address only that which the Respondent understands as not being met, namely that provided for in no. 6, cf. Articles 15, 16, 17, 21, 22, 24, 25 and 26 of its Response, because in form 22 income statements for the years 2004 to 2007, relating to the company "D…, Ltd.", NIPC …, which currently operates under the name "E…, Ltd.", for which the employees in question previously worked, there are recorded values in field 234 (tax benefits) of table 07 (calculation of taxable profit).

In fact, the regime for increasing expenses corresponding to net creation of jobs for young people can only be granted once per worker admitted to that entity or another entity with which there are special relationships pursuant to Article 63 of the Corporate Income Tax Code.

However, the Claimant has managed to prove this requirement.

Thus, employee B… had an employment relationship with the said company, as an employee, from October 2007 to December 2009.

And the same occurred with employee C… during the period from May 2002 to December 2009.

From the evidence brought to the proceedings by the Claimant (docs. nos. 5 to 14), the Arbitral Tribunal concludes, as stated in section 4.1.6 of the findings, that the values recorded in the said form 22 income statements, by way of tax benefits, pertain to other workers and not those previously mentioned, so that, regarding these, the regime provided for in no. 1 of Article 19 of the TBS has never yet been granted, except, now, in the sphere of the Claimant.

In this way, considering the provision of no. 3 of Article 19 of the TBS, according to which the maximum amount of the annual increase, per job, is the equivalent of 14 times the guaranteed minimum monthly remuneration, and that this, in the year 2011, was 485.00 €, the taxable profit of the Claimant should be corrected to the amount of 7,463.78 €, corresponding to the difference between that declared (21,043.78 €) and the said increase of 13,580.00 € (485.00 € x 14 x 2) by way of tax benefits.

The contested assessment must, accordingly, be corrected in conformity herewith.

It is thus concluded that the contested assessment suffers from the illegality that the Claimant attributes to it (defect of violation of law due to error in the factual assumptions).

5. Decision

In light of the foregoing, it is decided:

  • To judge the request for arbitral ruling admissible and to partially annul the self-assessment of CIT no. 2012…, for the year 2011, regarding the matter of the increase in expenses borne with employees B… and C…, in the amount of 13,580.00 €, as well as the decision rendered in the hierarchical appeal filed against the dismissal of gracious complaint no. …2014…, as to that part;

  • To judge the request for refund of the amount paid in excess admissible, taking into account the correction of the taxable profit to the amount of 7,463.78 €, corresponding to the difference between that declared (21,043.78 €) and the said increase of 13,580.00 € (485.00 € x 14 x 2) by way of tax benefits; and

  • To order the Respondent to pay the costs of the arbitration proceedings, cf. no. 1 of Article 527 of the Civil Procedure Code and Article 4 of the Rules for Costs in Tax Arbitration Proceedings (RCPAT).

6. Value of the Case

In accordance with the provision of Article 97-A, no. 1, paragraph a) of the CPPT and Article 3, no. 2 of the Rules for Costs in Tax Arbitration Proceedings (RCPAT), the case is valued at 2,766.45 €.

7. Costs

Pursuant to Article 22, no. 4 of the LRTM, the costs are fixed at 612.00 €, in accordance with Table I, attached to the RCPAT, to be borne by the Respondent.

Notify.

Lisbon, 11 May 2018.

The Arbitrator,

(Rui Ferreira Rodrigues)

Text prepared by computer, pursuant to Article 131, no. 5, of the Civil Procedure Code, applicable by referral of Article 29, no. 1, paragraph e) of the LRTM.

Frequently Asked Questions

Automatically Created

What is the tax benefit for net youth job creation under Article 19 of the Portuguese Tax Benefits Statute (EBF)?
Article 19 of the Portuguese Tax Benefits Statute (EBF) provides a corporate income tax (IRC) benefit for net creation of jobs for young workers. The benefit allows employers to increase their deductible costs by 50% of the employment expenses related to qualifying young employees, subject to a maximum amount per employee (€6,790 in this case). This tax incentive aims to encourage employment of young workers by reducing the effective tax burden on companies that create new positions. The benefit is calculated as an increase to costs (acréscimo ao custo) that reduces taxable profit in the IRC self-assessment. To qualify, employers must demonstrate genuine net job creation, meaning the number of employees has actually increased. Importantly, Article 19(6) establishes a critical limitation: the benefit can only be granted once per worker, whether employed by the claiming entity or another entity with which it has special relationships as defined in Article 63 of the IRC Code. This prevents duplicate claims when employees move between related companies.
How does Article 19 of the EBF apply to IRC (Corporate Income Tax) self-assessments?
Taxpayers can challenge IRC self-assessments through a multi-tiered administrative and arbitral process in Portugal. Initially, when a taxpayer identifies an error in their self-assessment (autoliquidação), they may file a gracious complaint (reclamação graciosa) under Article 131 of the IRC Code within specified timeframes. If the Tax Authority dismisses the gracious complaint, the taxpayer has the right to file a hierarchical appeal (recurso hierárquico) to a superior administrative authority within the Tax and Customs Authority. Following an unfavorable hierarchical appeal decision, taxpayers may seek arbitration through CAAD (Centro de Arbitragem Administrativa) under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). The arbitration request must be filed within the legal deadline after the hierarchical appeal decision. CAAD arbitration provides an alternative to judicial courts, offering a faster and specialized forum for resolving tax disputes. The process is governed by principles of procedural autonomy, celerity, and informality, as demonstrated in this case where the tribunal dispensed with an oral hearing pursuant to Articles 16 and 29(2) of the RJAT.
Can taxpayers challenge IRC self-assessments through hierarchical appeal and CAAD arbitration?
The requirements for claiming the net job creation tax benefit under Article 19 of the EBF involve several cumulative conditions. First, there must be genuine net creation of employment positions, meaning an actual increase in the total number of employees. Second, the positions must be filled by young workers meeting age criteria specified in the statute. Third, the employment relationship must be formalized through proper contracts and social security registrations. Fourth, and critically in this case, Article 19(6) requires that the tax benefit has never previously been granted for the same worker, whether by the claiming entity or by another entity with which special relationships exist under Article 63 of the IRC Code. This provision prevents double-dipping when employees transfer between related companies. The burden of proof rests on the taxpayer to demonstrate compliance with all requirements, including providing documentation showing the specific employees were not previously subject to benefit claims by former employers. The Tax Authority may examine declarations from previous employers, particularly field 234 (tax benefits) and field 774 of Table 07 in Form 22 declarations, to verify whether benefits were previously claimed for the workers in question.