IRS Tax Arbitration on Employment Seniority in Group Companies – CAAD Case 657/2018-T

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (arbitrator-president), Ricardo Marques Candeias and Jónatas Machado (arbitrator-members), designated by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form the present Arbitral Tribunal, agree as follows:

I. Report

1. A..., taxpayer no...., and B..., taxpayer no...., with residence at Rua ..., no...., ..., ...-... Cascais, (hereinafter "Claimants") notified of the order issued by the Tax Office of Lisbon, Administrative Justice Division, regarding the dismissal of the administrative review of the Personal Income Tax (IRS) assessment for the year 2016, with no. 2017..., dated 29 July 2017, in the total amount of € 1,330.68 (one thousand, three hundred and thirty euros and sixty-eight cents), hereby, in accordance with and for the purposes of paragraph a) of no. 1 of article 2, paragraph a) of no. 1 of article 10, in fine, both of Decree-Law no. 10/2011 of 20 January (Legal Regime of Tax Arbitration (RJAT)), request the establishment of a Collective Arbitral Tribunal designated in accordance with paragraph a) of no. 2 of article 6 and paragraph a) of no. 3 of article 5 of the RJAT.

2. The request for establishment of the arbitral tribunal was accepted on 21 December 2018 by the President of CAAD and automatically notified to the Respondent.

3. The Claimants did not proceed to appoint an arbitrator, wherefore, in accordance with paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal on 8 February 2019, and they communicated acceptance of the assignment within the applicable time limit.

4. The parties were duly notified of such designation on 8 February 2019 and did not manifest any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b), of the RJAT and articles 6 and 7 of the Deontological Code.

5. In compliance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, the Arbitral Tribunal was established on 28 February 2019.

6. In its Reply, submitted on 10 April 2019, the Tax and Customs Authority (hereinafter AT or Respondent) came to argue the lack of merit of the present action, as unproven, and should be absolved of the claim, with the legal consequences thereof.

7. To substantiate the present claim, the Claimants come before the record to assert, in summary, the following:

• On 4 September 1997 the Claimant (A...), of Spanish nationality, hereinafter referred to only as Claimant, entered into an employment contract with company C... SL., ... in ... of the same nationality;[1]

• On 1 August 2010 the Claimant entered into a new contract,[2] on a commission basis, with the Portuguese company "D..., Lda.", with registered office at ..., ..., ...-..., ..., NIF..., forming part of the same group as the Spanish company with which the employment relationship arising from the first contract was established;

• Clause 4 of the second contract recognizes the Claimant's seniority from 4 September 1997, from his entry into company C... SL, forming part of the same economic group as "D..., Lda.", the C... Group;

• Under Clause 16 of the second contract, the relationship established thereby replaced the first contractual relationship, as well as all previous agreements and undertakings between the Claimant and the companies of the C... Group, which constitutes the express admission of the existence of a previous connection of the worker to the same economic unit, understood as the corporate group in which "D..., Lda." is integrated;

• On 16 November 2018 a joint declaration is issued by the companies C... SL, of Spain, and "D..., Lda.", of Portugal, recognizing the integration of both in the international C... group;

• As the legal requirements were met, when entering into that second contract, the Claimant registered himself with the Tax and Customs Authority (AT) as a non-habitual resident in Portugal, in accordance with article 16, nos. 6 and 7 of the CIRS, Code 802 of Ordinance no. 12/2010 of 7 January of the Minister of Finance and Circular no. 7/2010 of DGCI, acquiring the right to be taxed in that capacity for a period of 10 consecutive years, provided that in each of those 10 years he be considered resident therein. The members of the Claimant's family unit continued to be, and continue to be, residents in Portugal for IRS purposes;

• The Claimant occupied functions of senior management at "D..., Lda.", with powers of direction and representation of the company, which is why he would benefit from the status of non-habitual resident;

• In view of the non-habitual resident status acquired, the Claimant came to benefit from withholding through the application of the special rate of 20% to net income from dependent employment earned, regardless of whether these were fixed or variable, as results from article 72, no. 6 of the CIRS, without prejudice to the option for aggregation, in accordance with no. 7 of that legal provision, from which the rule-regime of the liberatory nature of this special rate results;

• On 31 March 2016 the employment relationship between the Claimant and "D..., Lda." ceased by virtue of the latter, in accordance with article 246 of the Labour Code and Clause 13, no. 1 of the second contract, having unilaterally terminated the commission and the Claimant having opted not to continue in the service of the same economic group;

• The Claimant received compensation due to the termination of the second employment contract, in accordance with no. 1 of the respective Clause 14 and article 366 of the Labour Code, in the amount of € 547,000.00 which would be added to the fixed income earned in that year;

• "D..., Lda." withheld the amount of € 85,027.00, which it delivered to the State on 20 April 2016, applying the special liberatory rate of 20%, to the compensation considered by it as non-exempt, in the value of € 425,138.8;[3]

• The calculations made by the employer to determine the amount to be withheld as IRS for the year 2016, in light of the compensation for the termination of the Claimant's employment contract, are not correct, which had consequences on the assessment act under review;

• For this reason, in accordance with no. 4 of article 2 of the CIRS, the indemnity received could only be taxed in the part exceeding the amount corresponding to the average value of regular remuneration with the character of remuneration subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority with the debtor entity, and not in its entirety;

• If the legal norm had been correctly applied, the withholding would have been € 24,214.89 (twenty-four thousand, two hundred and fourteen euros and eighty-nine cents) and not € 85,027.00 (eighty-five thousand and twenty-seven euros), by reason of the average value of regular remuneration with the character of remuneration subject to tax, earned by the Claimant in the last 12 months having been € 22,417.14 (twenty-two thousand, four hundred and seventeen euros and fourteen cents);[4]

• The withholding effected, by oversight or excessive caution by "D..., Lda.", did not take into account, for purposes of the tax exclusion provided for in article 2, no. 4 of the CIRS, the effective seniority of the worker within the group;

• The seniority which, in accordance with the mentioned Clause 14 no. 1 of the second contract, was taken into account in determining the indemnity paid – the product of applying the base salary and the monthly average of extra-salary incentives received in the last year by the years of seniority – was not considered in determining the amount to be withheld, that is, in the calculation of the tax exclusion provided for in article 2, no. 4 of the CIRS, resulting in a duality of criteria;

• The companies for which the Claimant worked are in a relationship of domination or group, in accordance with article 489, no. 1 of the Commercial Companies Code, as declared in the joint declaration issued by C... SL, Spanish, and "D..., Lda.", Portuguese;

• The Directive of the Director-General of Taxes, in Case no. 1818/10, of 10 October, would recognize, for purposes of the tax exclusion provided for in article 2, no. 4 of the CIRS, that, by the criterion of economic substance and having regard to article 285 of the Labour Code, the seniority of the worker encompasses service rendered to companies that are in a relationship of domination or group;[5]

• Article 334 of the Labour Code establishes the joint and several liability of group members for labour debts to workers, a necessary consequence of the legal equation between employer entity, understood as the entity owing the income, and any entity in a relationship of domination or group or, more broadly, that is part of the same economic unit;

• The change of legal status of the employer within the group, through the conclusion of an employment contract with another company in the same group, does not prevent, in accordance with the law and administrative guidance, that, by virtue of article 2, no. 4 of the CIRS, in the compensation received for termination of the employment contract the years of work with both entities be considered, an understanding not followed by the withholding entity;

• Tax Courts have an understanding of even greater scope and which adheres to the concept of seniority developed by the best doctrine, according to which the seniority to be considered for purposes of the exclusion of article 2 no. 4 of the CIRS is not limited to the time of service rendered in entities in a relationship of domination or group, and may encompass the time dedicated to entities engaged in an activity identical to that of the employer, provided this results from an employment contract or collective labour agreement;

• This results from the fact that the Labour Code does not expressly define the concept of worker seniority and from the provision of article 11, no. 2 of the General Tax Law (LGT), according to which, whenever tax law uses terms employed in other branches of law, it should be considered that they are employed in the same sense as they have therein unless otherwise directly results from the law, which is not the case;

• Given that labour legislation does not expressly define seniority, this may encompass, for purposes of article 2, no. 4 of the CIRS, the time of service achieved in another company, provided that such has been expressly stipulated in the labour contract by the debtor entity;

• As it does not result from the law that the concept of seniority is strictly limited to the time of service rendered with the debtor entity and nothing justifying a restrictive interpretation of this incidence norm, this broad notion of seniority should be accepted for IRS purposes;

• Seniority is not necessarily counted from the employment contract, but corresponds to the effective duration of service rendered, which may have been initiated later and not simultaneously with the conclusion of the employment contract, or prior to that contract in the same economic group or in the exercise of identical functions;

• For purposes of defining the perimeter of this economic area, the fact that the dominant company is located abroad is not relevant, under penalty of violation of the principle of non-discrimination established in community law;

• What matters for this purpose, in accordance with article 39 of the Commercial Companies Code, is the personal law applicable to "D..., Lda.";

• Otherwise, the absurd consequence would occur of the non-applicability of articles 285, no. 5 and 334 of the Labour Code to corporate groups based abroad, but which carry out their activity in Portugal through a company dominated by them, with the resulting lack of protection of workers' rights in case of transmission of the establishment and failure to pay the remuneration owed, a solution that would in any case violate, as far as groups based in the European Union are concerned, the principles of non-discrimination and freedom of movement of persons still in force in Europe;

• The employer would thus apply, in the calculation of withholding, a notion of seniority totally alien to labour law and from which resulted the tax withheld, on a liberatory basis, being of an amount much higher than what should have been;

• After clarifying the concept of "seniority" present in no. 4 of article 2 of the CIRS, it is now necessary to elucidate on the concept of "regular remuneration with the character of remuneration subject to tax earned in the last 12 months", for its importance;

• According to Miguel Primaz, in Conference of the Portuguese Tax Association of Lisbon, on 22.11.2018, on the topic "ARTICLE 2, NO. 4 OF THE CIRS - TAX ISSUES INHERENT TO THE TERMINATION OF EMPLOYMENT RELATIONSHIP" – the concept of REGULAR REMUNERATION encompasses "all remuneration components susceptible to having the character of regularity (even if only in the abstract) and in respect of which the worker has the expectation of receiving;"

• By regularity of a benefit should be understood "periodicity in its attribution" and not "regularity of its amount";

• The expression "with the character of remuneration" comprises everything that, in accordance with the contract, the rules governing it or practices, the worker is entitled to as consideration for his work, presuming that any and all benefit from the employer to the worker constitutes remuneration, including base remuneration and all other regular and periodic benefits, in cash or in kind and the forms of remuneration certain, variable or mixed;

• Part of the concept of "regular remuneration with the character of remuneration" are monthly salaries and bonuses; holidays and holiday allowance; Christmas allowance; allowances for risk or isolation, for shift or night work; gratifications arising from the contract/rules governing it or from practices which by their regularity and permanence should be considered as part of remuneration; commissions; travel allowances (in the part exceeding the "normal limits" set or not meeting the requirements for their award); meal allowance or use of personal vehicle in service of the employer (in the part exceeding the "normal limits" set or not meeting the requirements for their award); remuneration for exemption from working hours; allowance for representation expenses (without accounting);

• Not part of that concept are: remuneration for overtime work (unless regular and periodic); extraordinary gratifications granted as reward/prize for good services (with animus donandi); seniority bonus; profit sharing, provided the worker is assured by contract of certain, variable or mixed remuneration; travel allowances (in the part not exceeding the "normal limits" set); allowance for representation expenses (actually used as such); family allowances, study allowances, co-payment of health expenses; meal allowance or use of personal vehicle in service of the employer (in the part not exceeding the "normal limits" set);

• Remuneration includes everything that is configured as direct consideration for work, which is regular and periodic and which does not have the nature of a gratuity, compensation for costs incurred on behalf of the employer or social benefit;

• The expression "subject to tax" does not encompass regular remuneration with the character of remuneration completely excluded from taxation and those partially excluded from taxation (in the excluded part only), but instead encompasses the non-excluded part – examples: meal allowance, travel allowances, expenses for the use of personal vehicle in service of the company. The same includes regular remuneration with the character of remuneration exempt from taxation (whether totally or partially, objectively or subjectively, integrally or with progressivity), and those which, regardless of the form of taxation, are subject (i.e. progressive rate, proportional liberatory rate or special proportional rate);

• In the expression "earned in the last 12 months" "earned" means regular remuneration with the character of remuneration that have been effectively "paid" or "made available" to the taxpayer, not encompassing accrued credits, even if they may already have been processed, which have not been effectively paid or made available to their beneficiary (e.g. overdue salaries do not count towards fixing the exclusion limit);

• As possible quantitative criteria for counting the following are indicated: the criterion based on effective termination: counting from the last effective day of production of effects of the employment relationship or – specific criterion in case of revocation agreement: counting from the day the agreement was concluded. – criterion usable: counting from the end of the month prior to effective termination.

In light of the foregoing, the Claimant comes to petition that the present arbitral action be adjudged meritorious, as proven, revoking the decision dismissing the administrative review of the Personal Income Tax (IRS) assessment for the year 2016, with no. 2017..., dated 29 July 2017, in the total amount of € 1,330.68 (one thousand, three hundred and thirty euros and sixty-eight cents), relating to the year 2016, under review, and that the same be annulled and replaced by another which properly takes into account the correct values for purposes of determining said tax, by virtue of the vices above identified, all with the further legal consequences, namely the payment of indemnitary interest, all in accordance with article 43 of the LGT.

1. The Respondent replied, by opposition, arguing that the present claim should be adjudged without merit, with the following grounds:

• No elements are found in the record that permit assessment of the effective shareholder relationship or any qualified participation between C... SL and "D..., Lda." beyond an identity in the area of functional activity and exchange of interests that permit full understanding of clause 4 of the second employment contract, in which the contributor is recognized as having seniority acquired since 1997;

• The employer "D..., Lda." made available to the Claimant, in March 2016, on a compensatory basis, the amount of 547,000.00€ without documentary elements being found that permit assessment of the assumptions underlying the calculation of this amount;

• The same employer determined in accordance with the provision of article 2, no 4 paragraph b) of the CIRS which value would benefit fiscally from exclusion from IRS taxation, making the remaining amount, which the Claimant identifies as 425,138.81€, subject to the withholding tax rate and delivering to the State coffers the amount of 85,027.00€;

• These values were declared by "D..., Lda.", in compliance with its declarative obligations, as results from consultation of the DMR, as was entered in IRS Form 3, submitted by the contributor on 31.05.2017, for the year 2016;

• The tax benefit provided for in article 2, no 4 paragraph b) of the CIRS, translated in the exclusion of subjection to taxation in the part not exceeding the amount determined in accordance with the terms made explicit in the provision, should be subject to delimited, rigorous and restrictive interpretation;

• The seniority to be counted, for purposes of no. 4 of article 2 of the CIRS, is the seniority with the debtor entity of the compensation for termination of the employment contract, – in the case D..., Lda.", identified under NIF..., being equivalent thereto any other entity that is in a relationship of domination or group in accordance with the provision of no. 10 of article 2 of the CIRS – and not being appropriate to consider, in the application of the said legal provision, seniority with a prior employer, even if the worker and the new employer have agreed to it being considered in any future "indemnities", by employment contract;

• The documents brought to the record do not permit concrete assessment of the correctness of the various accountings made, and it cannot be concluded with full certainty and clarity the values that were considered for purposes of determining the quantitative limit of the negative delimitation provided for in the mentioned article 2, no 4 paragraph b) of the CIRS;

• The legal regime of article 2, no. 4 of the CIRS underlies a notable anti-abuse vocation, proper to special clauses preventive of tax evasion – a vocation which has special reason to exist, as it would not in any case be acceptable agreements that disposed regarding labour seniority recognizing merely artificial seniorities and imposing such recognition for purposes of negative delimitation of the incidence of tax;

• The concept of seniority of which the legal provisions regarding termination of the employment contract and which establish criteria for definition of indemnities or compensations are used is seniority with the company, and it is not appropriate to consider, in such definition or indemnitary calculation, additional periods of duration of the relationship that may have been recognized by the employer by mere effect of contractual consensus or even by unilateral admission;

• The concept of seniority relevant for purposes of indemnities or compensations must result directly from the application of legal or collective labour convention norms that have as consequence such extension, such as occurs in cases of cession of contractual position, transmission of ownership or operation of company, establishment or economic unit, merger, division or others that collective labour agreements may provide for;

• The said concept corresponds to the number of years or fraction of seniority with the employer entity with which the contract terminates at the origin of the amounts paid (with the reservation of seniority verified in other entities in a relationship of domination or group with that by virtue of the extension of the concept operated by no. 10 of article 2 of the CIRS);

• Resort to the provision of article 11, no. 2 of the LGT presupposes – in light of the expression "unless otherwise directly results from the law" – the non-existence in the legal provision (paragraph b) of no. 4 of article 2 of the IRS Code) of any proper sense of seniority, and the same would always imply, as is logical, the prior assumption of a methodologically valid criterion that would permit choosing one of the multiple qualifications of seniority existing within the labour field, with the exclusion of all others;

• As the AT is not bound by the qualification of the legal transaction or the negotiated object made by the parties, the solution to be given to the question depends on the legal interpretation to be given to all the normative applicable by the expression "number of years or fraction of seniority or exercise of functions with the debtor entity", contained in paragraph b) of no. 4 of article 2 of the IRS Code;

• Once the legal mandatory limits regarding compensations or indemnities for termination of the employment contract are respected, it is not naturally at issue the full legitimacy of legal negotiated instruments binding the debtor entity to pecuniary compensations/indemnities exceeding the amount corresponding to the negative delimitation of the fiscal incidence provided for in paragraph b) of no. 4 of article 2 of the IRS Code;

• The spirit of the law demands an interpretation in literal terms of the expression "number of years or fraction of seniority or exercise of functions with the debtor entity" referenced to the "debtor entity", not admitting that in "seniority with the debtor entity" are considered, beyond the seniority inherent to the effective duration of the contractual relationship granted by that entity, increases resulting from legal negotiated instruments;

• The literal element of legal interpretation permits confirming, in a perspective of syntactic correctness, that the seniority provided for in paragraph b) of no. 4 of article 2 of the IRS Code is seniority with the "debtor entity", corresponding to "seniority in the company" which, by virtue of the historical-systematic element inherent to the provision of current no. 10 of the same article, corresponds to the "employer/patron entity", with the scope resulting from this provision, as well as from situations of succession in the position of this entity, most notably by effect of the equation inherent to article 285 of the 2009 Labour Code;

• Individual contracts or normative acts of a non-legislative nature, including collective labour agreements, cannot alter a negative incidence norm such as that established in paragraph b) of no. 4 of article 2 of the CIRS, under penalty of violation of the principle of legality of administration (articles 103 and 112 of the CRP), in its dimensions of reserva de lei and typicity of laws, and of the principle of equality (article 13 of the CRP);

• The reason why the legislator combined, alternatively and inclusively, the expressions "seniority" or "exercise of functions" has to do with the need for a comprehensive normative provision, so as to capture the multiple situations generating income from dependent employment, respectively the employment contract or the provision of services, on the one hand, and the exercise of public function, service or office, on the other;

• Various are the historical-systematic and teleological elements which, at the infra-constitutional level, are only compatible, whether with "seniority with the debtor entity", or with the inadmissibility of consideration in this seniority, corresponding to the effective duration of the contractual relationship granted by that entity, of increases resulting from legal negotiated instruments;

• The constitutional principles of equality and legality in matters of fiscal incidence, whose corollaries of equality, responsibility and security demand an intense determinability, presuppose, in paragraph b) of no. 4 of article 2 of the CIRS, a "seniority" referenced to the "debtor entity" and which do not admit, in light of the teleological element assessed by the purpose of the exclusion of fiscal incidence established in that same provision, that legal negotiated instruments be permitted, through increases in seniority inherent to the effective duration of the contractual relationship granted by that entity, to voluntarily delimit the scope of that exclusion of fiscal incidence;

• The "debtor entity" to which no. 4 of article 2 refers must be the "patron entity" mentioned in no. 10 of the same legal provision, which becomes explicit when in no. 4 the exclusion of taxation is conditioned to the non-creation of a new professional or business relationship within 24 months with the same "entity";

• The alleged relationship of group between C..., Spanish entity with the CIF ... and D..., Lda. — NIF ... does not appear to be in the least proven as was above stated, whereby it is not concluded in what sense the IRS assessment for 2016 now under challenge appears to be affected by illegality inasmuch as it was issued attending to the income that the Claimant declared, the amount of withholding delivered to the State coffers and which, in the face of the lack of elements of proof that permit concluding otherwise, appears to be in accordance with the provisions of the legal norms applicable to the matter under consideration, more concretely article 2, no 4 paragraph b), article 72, no 6 of the CIRS and by reason of the Claimant's personal situation as non-habitual resident.

1. By order issued on 03-05-2019 the holding of a trial hearing was ordered, under article 18 of the RJAT, for 31 May 2019, and the request for amendment of the list of witnesses submitted by the Claimant was granted.

2. By petition dated 16-05-2019 the Claimant came to attach 11 documents to the record, and on 29-05-2019, requested the substitution of a witness for being a lawyer and being barred from testifying in view of the content of the order dismissing the request for lifting of professional secrecy.

3. On 31-05-2019 the hearing of this Arbitral Tribunal took place, with the questioning of the summoned witnesses, which proceeded in accordance with minutes drawn up for that purpose, the parties being notified at the end of the hearing to submit written arguments within 15 days and it was also decided that the final decision would be rendered by the end of the period fixed in article 21, 1 of the RJAT. The Tribunal, with the agreement of the Respondent, decided to admit the attachment to the record of documents presented by the representative of the Claimants on 16 May 2019. By order of 24 August the period for rendering the Decision was extended, fixing for that purpose the day 27 October.

4. The Claimants and the Respondent submitted arguments reiterating the arguments presented in the previous procedural documents.

II. CLEANSING

1. The arbitral tribunal was regularly established and is materially competent, as provided in articles 2, no. 1, paragraph a), and 4, both of the RJAT.

2. The parties enjoy legal personality and capacity, are legitimate and are represented (see articles 4 and 10, no. 2, of the same statute, and articles 1 to 3 of Ordinance no. 112-A/2011 of 22 March).

III. On the Merits

III.1.1. Proven Facts

The following facts are considered proven:

• On 4 September 1997 an employment contract for an indefinite term was concluded between the Claimant, of Spanish nationality, and the commercial company C..., SL, ... ..., with domicile in Valencia, Spain (Document no. 2)

• On 1 August 2010 the Claimant concluded, on a commission basis, an employment contract with the commercial company "D..., Lda.", registered in Sintra, Portugal, to perform the functions of "Country Managing Director Portugal" and reporting directly to the "General Manager Western Europe" (Document no. 3);

• The employment contract referred to in the previous paragraph recognizes, in clause four, the Claimant's seniority from 4 September 1997 (Documents no. 2 and no. 3);

• Under the provisions of clause thirteen any of the parties could terminate the commission, at any time, termination which would consequently determine the termination of the employment contract;

• Under the provisions of clause sixteen of the aforementioned contract, any agreements and undertakings, oral or written, between the Claimant and the companies of the C... GROUP are revoked, wholly or in part, related to the object of the second contract (Document no. 3);

• By permanent certification valid until 03-09-2013 it results that in 2010 the capital of D..., Lda, was 798,077 euros, represented by two quotas, one with the nominal value of 797,977 euros, held by C..., SA, registered in Belgium, NIPC ..., and another with the nominal value of 100 euros, held by E... (Document no. 1 of the petition submitted on 16-05-2019);

• By document dated 30.06.2016 D..., Lda., declared that C..., SL, .... .., mentioned in a), and itself, the declarant, mentioned in b), form part of the C... GROUP, the parent company of which, C... INC, is registered in the United States of America (Document no. 4);

• The C... GROUP was constituted by an Iberian management that exercised its competencies in Spain, Portugal, Greece and Italy (Documents nos. 5, 6, 7, 8, 9, 10 and 11 of the petition submitted on 16-05-2019);

• D..., Lda., registered in Sintra, Portugal, reported to C..., SL, ..., both acting as if they were a single economic unit (Documents nos. 5, 6, 7, 8, 9, 10 and 11 of the petition submitted on 16-05-2019);

• The employees of D..., Lda. and the employees of C..., SL, ..., had regular meetings in Spain and Portugal, where business plans were discussed, as if they were a single economic unit (Documents nos. 5, 6, 7, 8, 9, 10 and 11 of the petition submitted on 16-05-2019);

• The Claimant worked for the companies mentioned in a) and b), between 4 September 1997 and 30 March 2016, that is, for 18 years and 7 months; (Documents no. 2, no. 3, no. 6 and no. 9)

• The gross remuneration earned by the Claimant in the last 12 months were as follows (Document 9):

| April 2015 | € 13,644.36 |
| May 2015 | € 13,537.22 |
| June 2015 | € 19,616.76 |
| July 2015 | € 13,644.36 |
| August 2015 | € 13,498.26 |
| September 2015 | € 13,644.36 |
| October 2015 | € 13,566.44 |
| November 2015 | € 194,874.25 |
| December 2015 | € 56,911.88 |
| January 2016 | € 32,373.36 |
| February 2016 | € 12,398.96 |
| March 2016 | € 46,426.28 |
| TOTAL | € 269,005.62 |

• The Claimant is registered with the Tax and Customs Authority (AT) as a non-habitual resident in Portugal, in accordance with article 16, no. 6 of the Personal Income Tax Code (CIRS), Code 802 of Ordinance no. 12/2010 of 7 January of the Minister of Finance and Circular no. 7/2010 of DGCI; (Annexes I and II, Statement of Income and Demonstration of IRS Assessment for 2016);

• The members of the Claimant's family unit continued to be residents in Portugal for IRS purposes (Annexes I and II, Statement of Income and Demonstration of IRS Assessment for 2016);

• On 31 March 2016 the employment legal relationship between the Claimant and "D..., Lda." ceased, by virtue of the latter having unilaterally terminated the commission and the Claimant having opted not to continue in the service of the same economic group (Documents no. 5, no. 6 and no. 9);

• The Claimant received compensation due to the termination of the employment contract in question, in accordance with no. 1 of Clause Fourteen of the contract attached as Doc. no. 3 and article 366 of the Labour Code, in the amount of € 547,000.00 (five hundred and forty-seven thousand euros), which would increase the fixed income earned in that year (Document no. 6);

• "D..., Lda." withheld, applying the said special liberatory rate of 20%, to the compensation considered by it as non-exempt of € 425,138.81 (four hundred and twenty-five thousand, one hundred and thirty-eight euros and eighty-one cents) the amount of € 85,027.00 (eighty-five thousand and twenty-seven euros), which it delivered on 20 April 2016 to the State coffers[6] (Document no. 6 and no. 7);

• The Claimant on 31.05.2017 submitted his IRS Form 3 return relating to the year 2016, of which the following annexes were an integral part: – One (1) Annex A – income from dependent employment, – One (1) Annex G – income from capital gains and other patrimonial increases; – One (1) Annex H – Tax benefits and deductions from tax due; – Two (2) Annexes J – income obtained abroad, – One (1) Annex L – non-habitual resident;

• The Claimant in the year 2016 earned, as Category A income, the amount of € 575,909.83 and contributed to Social Security in the amount of € 15,421.85;

• The employer withheld from the Claimant in the year 2016 the amount of € 115,591.74 (Annex II);

• The Claimant was notified of the IRS assessment no. 2017..., relating to the year 2016, dated 29.07.2017, from which resulted the tax to be paid in the total amount of € 1,330.68;

• The Claimant made payment of the amount of € 1,330.68 as IRS for the year 2016;

• On 28.10.2017, the Claimant submitted an administrative review against the aforementioned assessment, which was dismissed on 27.09.2018.

III.1.2. Unproven Facts

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

III.1.3. Justification of the Fixing of the Factual Matter

The Tribunal need not pronounce on all details of the factual matter that was alleged by the parties, it being incumbent upon it to have the duty to select the facts that matter to the decision and to distinguish the facts deemed proven and declare those it considers unproven (cfr. article 123, no. 2 of the CPPT, and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e) of the RJAT);

Thus, the pertinent facts for judgment of the case are selected and shaped according to their legal relevance, which is established in consideration of the various solutions to the object of the dispute in applicable law (see article 596, no. 1 of the CPC, applicable ex vi article 29, no. 1, paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of the provision of article 110, no. 7 of the CPPT, the documentary and testimonial evidence presented, as well as the statement by the party that was given, the above-listed facts are considered proven, with relevance to the decision.

III.2. MATTERS OF LAW

III.2.1. As to the Legality of the Dismissal of the Administrative Review

The disputed question concerns the meaning and scope of article 2, no. 4, paragraph b) of the CIRS, in particular the concept of "seniority" or "exercise of functions with the debtor entity" and the exclusion from taxation regarding benefits paid due to termination of the employment contract concluded between the Claimant and D..., Lda., more specifically in the part exceeding the amount corresponding to the average value of regular remuneration with the character of remuneration subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions with the debtor entity.

The Claimant alleges that he occupied functions of senior management at "D..., Lda." with powers of direction and representation of the company, whereby "the indemnity received could only be taxed in the part exceeding the amount corresponding to the average value of regular remuneration with the character of remuneration subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority with the debtor entity, and not in its entirety – in accordance with the provision of the initial part of paragraph b) of no. 4 of article 2 of the CIRS."

Thus, according to the Claimant, "the calculations made by the employer to determine the amount to be withheld as IRS for the year 2016, in light of the amount made available as compensation for the termination of the employment contract, do not appear correct in that the entirety of professional seniority in the C... group to be counted from 1997 would not have been considered," which determines the illegality of the assessment, by violation of the provision of article 2, no. 4, paragraph b) of the CIRS.

In turn, for the Respondent entity "the seniority to be counted, for purposes of no. 4 of article 2 of the CIRS, is the seniority with the debtor entity of the compensation for termination of the employment contract – in the case the entity identified under NIF..., being equivalent thereto any other entity that is in a relationship of domination or group in accordance with the provision of no. 10 of article 2 of the CIRS – and not being appropriate to consider, in the application of the said legal provision, seniority with a prior employer, even if the worker and the new employer have agreed to it being considered in any future "indemnities" by employment contract."

The Respondent alleges the lack of documents that permit assessment in concrete of the correctness of the various accountings made, "(...) and it cannot be concluded with full certainty and clarity the values that were considered for purposes of determining the quantitative limit of the negative delimitation provided for in the mentioned article 2, no. 4 paragraph b)."

In particular, the Respondent argues that "The alleged relationship of group between C..., Spanish entity with CIF... and D..., Lda. — NIF... does not appear to be in the least proven (...), whereby it is not concluded in what sense the IRS assessment for 2016 now under challenge appears to be affected by illegality inasmuch as it was issued attending to the income that the Claimant declared, the amount of withholding delivered to the State coffers and which, in the face of the lack of elements of proof that permit concluding otherwise, appears to be in accordance with the provisions of the legal norms applicable to the matter under consideration (...)".

In summary, the Respondent alleges, in the dismissal of the administrative review, that the Claimant failed to fulfill the burden of proof that falls upon it, in accordance with article 74, no. 4 of the LGT, since documents were not presented for purposes of verifying seniority, as well as no documents whatever were presented regarding the entities paying the income, and it is not possible to assess the alleged matter.

Let us see.

With regard to the fact that the Claimant exercised functions within the scope of business entities comprised in the same corporate group, having regard to the facts considered proven, it appears that the contracts concluded represent the legal relationship that always linked him to the companies of the C... Group since 4 September 1997, constituting the express admission of the existence of a connection of the worker to the same economic unit, understood as the corporate group in which both the Spanish company and "D..., Lda." were integrated, the entity where he assumed the position of General Director of Portugal, based on an employment contract, but exercising those functions on a commission basis.

Either from the facts considered proven or from the rules of experience, and having regard to the context in which the worker exercised functions, everything combines to show that those functions were exercised within a business group and with reference to employment contracts concluded with companies of the Group since 4 September 1997.

The question is whether the mere fact that the Claimant proved having exercised functions within the same Business Group is sufficient in itself to determine the counting of the totality of seniority, as he claims, for purposes of indemnification due to termination of the labour relationship.

The provisions of the Personal Income Tax Code ("CIRS"), which are relevant to the question under examination, have had the following wording since 2011.

Article 2 – Income from Category A

1 – Income from dependent employment comprises all remuneration paid or made available to its holder deriving from:

a) Work for another rendered under an individual employment contract or another legally equivalent thereto;

(...)

1. The following are also deemed income from dependent employment:

e) Any indemnities resulting from the constitution, extinction or modification of a legal relationship that gives rise to dependent employment income, including those relating to breach of contractual conditions or due to change of place of work, without prejudice to the provision in the following number and in paragraph f) of no. 1 of the following article;

(...)

1. When, in any manner, the contracts underlying the situations referred to in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provision in paragraph d) of the same number, as to benefits that continue to be owed even though the employment contract does not subsist, or the cessation of the functions of public manager, administrator or manager of a legal person, as well as of representative of a permanent establishment of a non-resident entity, the amounts earned at any title are always subject to taxation:

a) In their entirety, in the part corresponding to the exercise of functions of public manager, administrator or manager of a legal person, as well as of representative of a permanent establishment of a non-resident entity;

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

10 – Any entity is deemed an employer that pays or makes available remuneration which, in accordance with this article, constitute dependent employment income, being equivalent thereto any other entity that with it is in a relationship of group, domination or simple participation, regardless of its geographic location.

The problem posed revolves essentially around the meaning and scope of the provisions of nos. 4 and 10.

Starting with the first, it is important to note that it establishes the criteria for total or partial exclusion of the amounts paid as indemnification due to termination of the exercise of functions or termination of the employment contract [article 2, no. 4, paragraph b)], to be determined as a function of remuneration of the average value of remuneration with the character of remuneration earned in the last twelve months and of seniority with the "debtor entity".

It should be noted that the expression used by the legislator is "debtor entity" and not "employer entity".

It will be said, and rightly, that it was to include therein the diversity of situations referred to in the body of the article, which include, namely, functions not exercised, or susceptible of being exercised, under an employment contract, such as those of public manager, administrator or manager of a legal person. And legally, an "employer entity" only exists, today more generically referenced as "employer entity" when between it and the worker an employment contract or a contract legally equivalent thereto is concluded.

These are, however, concepts whose interchangeability does not appear to be automatic, given the anti-abuse function of the norm in which the concept of "debtor entity" is integrated.

The immediately prior wording to that introduced to the provision by Law no. 30-G/2000 of 29/12, given by Law 3-B/2000 of 4 April and which in the part that matters maintained the original wording, was as follows:

4 – When, in any manner, the contracts underlying the situations provided for in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provision in paragraph d) of the same number, as to benefits that continue to be owed even though the employment contract does not subsist, or the cessation of the functions of manager, administrator or manager of a legal person, the amounts received at any title are always subject to taxation in the part exceeding the amount corresponding to one and one-half times the average remuneration of the last 12 months multiplied by the number of years or fraction of seniority or exercise of functions with the debtor entity, except when within the 12 months following a new relationship is created with the same entity or another that with it is in a relationship of domination or group, in which case the amounts shall be taxed in their entirety.

This same Law no. 3-B/2000 added to article 2 no. 10 with the following wording:

10 – For purposes of nos. 2 and 3, any other entity that with it is in a relationship of domination or group is deemed equivalent to the employer entity, regardless of its geographic location.

The wording of no. 4 was altered, in the part that matters for the theme,[7] by Law no. 30-G/2000 of 29 December (Pina Moura Reform) becoming as follows:

4 – When, in any manner, the contracts underlying the situations provided for in paragraphs a), b) and c) of no. 1 cease, but without prejudice to the provision in paragraph d) of the same number, as to benefits that continue to be owed even though the employment contract does not subsist, or the cessation of the functions of manager, administrator or manager of a legal person, the amounts earned at any title are always subject to taxation in the part exceeding the amount corresponding to one and one-half times the average value of fixed remuneration subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or exercise of functions with the debtor entity, except when within the 24 months following a new professional or business relationship is created, regardless of its nature, with the same entity, in which case the amounts shall be taxed in their entirety.

For its part, no. 10 came to have the following wording:

10 – For purposes of this tax, any entity is deemed an employer that pays or makes available remuneration that constitute dependent employment income in accordance with this article, being equivalent thereto any other entity that with it is in a relationship of domination or group, regardless of its geographic location.

As for the current wording of no. 10 results from Law 82-E/2014 of 31/12:

10 – Any entity is deemed an employer that pays or makes available remuneration which, in accordance with this article, constitute dependent employment income in accordance with this article, being equivalent thereto any other entity that with it is in a relationship of domination or group, regardless of its geographic location.

From the legislative evolution mentioned thus results, on the one hand, that the seniority relevant regarding amounts owed at any title due to the termination of the employment contract or the exercise of functions is the seniority with the debtor entity [paragraph b)] a concept which as is known is with unanimity interpreted by courts in a restrictive manner.

On the other hand, the conclusion of another contract with the "same entity" is a subsequent conclusion, and only functions as a resolutive condition of the non-taxation that occurred previously.

As to no. 10 of the same provision, this has as its function to define what should be understood as debtor entity fictionalizing for that purpose as employer entity that "pays or makes available remuneration which, in accordance with this article, constitute dependent employment income, being equivalent thereto any other entity that with it is in a relationship of group, domination or simple participation, regardless of its geographic location".

The Claimant alleges that, by virtue of this provision, the mere fact of proving having concluded dependent employment contracts within the scope of companies in a relationship of Group or domination grants him as of right the right to the calculation of the totality of seniority corresponding to the contracts concluded within the Group.

Now, the determination of the meaning and scope of the legal fiction that no. 10 of article 2 of the CIRS establishes cannot be limited to the literal and isolated interpretation of the same. The correct interpretation must be that which, starting from the letter of the same, attends to the global meaning established in the remaining nos. of the provision, to its literal evolution, as well as to its reason for being.

Considered globally, we have that article 2 aims to qualify dependent employment income for taxation purposes.

For its part, as we have seen, from no. 4 results that the seniority to be counted is the seniority with the "debtor entity" of the compensation for termination of the employment contract, that is, with the entity that pays dependent employment income.

Thus, no. 10 aims only to equate the "debtor entity", being able to be admitted that also for purposes of calculating seniority, any and all entity that pays or makes available remuneration that constitute dependent employment income, including entities integrated within the scope of a relationship of group, domination or simple participation and regardless of their geographic location.

The said provision thus has as its fundamental presupposition of its application that only the entity that pays or makes available remuneration that can be qualified as dependent employment income is deemed equivalent to the employer entity.

Indeed, the antecedents of this norm point to the fact that at its origin was the fact that with the internationalization of companies, many times workers in Portugal received from parent companies located outside Portuguese territory remuneration (e.g. Stock options) which would otherwise be difficult to tax there (see no. 8 of article 119 of the CIRS).

The "extraterritoriality" inherent in article 10 is only relevant for purposes of qualification of income from "the group," or for some effects (those provided for in article 2) of intragroup contracts (as occurs, moreover, with a merely internal group).

The question of seniority within a merely internal group is not resolved – in the sense of being accepted ipso facto – by tax law, namely by article 2 of the CIRS. The orientation of doctrine goes in the direction that with each employment contract concluded (even if it concerns companies of the same group) the seniority for purposes of no. 4 corresponds to the time of service that the worker has rendered in each one. And that clauses are not opposable to the tax administration, for reasons of public law and anti-evasion motives, through which the new employer entity assumes "for all purposes" the seniority that the worker has with prior employer entity or entities.[8]

It should be emphasized that even in the banking sector where apparently and exclusively for reasons of guarantee of unified retirement pension given the particular social security regime that covered the sector until 2011 sector the portability of seniority between credit institutions was stipulated in the ACTV, it is today settled, including in jurisprudence, in accordance with the Decision of the STA for uniformization of jurisprudence of 8 May 2019, Case no. 0407/18.7 BALSB that for tax purposes, whether the ACTV clause guaranteeing portability, or clauses of identical sign in individual employment contracts do not produce effects.

Applying the aforesaid to the case at hand, it is not known whether the worker in question, when the contract ceased outside Portuguese territory, earned or did not earn any indemnification, whether he obtained or benefited or did not benefit from any more favorable tax regime for that reason and whether, having benefited, the fact that he concluded a new contract with an entity of the group would maintain or extinguish the non-taxation. For being he now being subjected to taxation in accordance with the law of Portuguese law, the circumstance cannot fail to be considered of the same benefit being obtained twice for the same seniority.

Now, it is verified that the record does not contain elements that demonstrate whether the Spanish Entity, now at the date of termination of the contract, paid or did not pay the Claimant income that in accordance with no. 4 of article 2 of the CIRS can be considered as indemnification due to termination of the employment contract, with a view to the provision of no. 10 of article 2. From the evidence produced, only the payment made by its employer entity in Portuguese territory results.

Thus, the Respondent is right when it alleges in the dismissal of the administrative review, the considered relevant for purposes of assessing its legality that "documents were not presented for purposes of constituting the proof for purposes of verifying seniority, as well as no documents whatever were presented regarding the entities paying the income."

The Claimant alleges the teaching document (binding information) issued in Case no. 1818/10, with an order of concordance from the Legal Substitute of the Director-General of 2010-10-10, but to which this Tribunal cannot give weight.

Indeed, having been issued for a specific case and not having been transformed into generic guidance, it is irrelevant outside the process in which it was issued, by having already lapsed (article 68, no. 15 of the LGT).

In these terms, it is concluded that the Respondent is right, as the Claimant failed to fulfill the burden of proof that fell upon it.

The arbitral claim should thus be dismissed, which determines the maintenance in the legal order of the decision dismissing the administrative review and consequently the maintenance of the IRS assessment with no. 2017..., relating to the year 2016.

III.2.2. Request for Restitution of Amount Paid and Indemnitary Interest

The principal claim being dismissed, the claims regarding restitution of the amount unduly paid and respective indemnitary interest are likewise dismissed.

IV. DECISION

In light of the foregoing, this Collective Tribunal decides:

1. To adjudge without merit the arbitral claim for declaration of illegality of the decision dismissing the administrative review relating to IRS for the year 2016;

2. To maintain in the legal order the said decision dismissing and consequently to maintain the IRS assessment with no. 2017..., relating to the year 2016, now impugned.

3. To absolve the Respondent as to the claims for restitution of tax unduly paid and the corresponding indemnitary interest.

V. VALUE OF THE CASE

The value of the case is fixed at €64,306.26 (sixty-one thousand four hundred and thirty-three euros and thirty-three cents), in accordance with the provision of article 32 of the CPTA and article 97-A of the CPPT applicable by virtue of the provision of article 29, no. 1, paragraphs a) and b) of the RJAT, and of article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. COSTS

In accordance with Table I attached to the RCPAT, the costs are in the amount of €2,448.00 (two thousand four hundred and forty-eight euros), borne by the Claimants in accordance with the provision of articles 12, no. 2, and 22, no. 4 of the RJAT, and article 4, no. 5 of the RCPAT.

Notify thereof.

Lisbon, 16 September 2019.

The Arbitrator-President

(Fernanda Maçãs)

The Arbitrator-Member

(Jónatas Machado)

The Arbitrator-Member

(Ricardo Marques Candeias)

Text drawn up by computer, in accordance with the provision of article 131, no. 5 of the CPC, applicable by remission of article 29, no. 1, paragraph e) of the RJAT.

The drafting of this decision is governed by orthography prior to the Spelling Agreement of 1990.

[1] This contract drawn up in Spanish, therefore in a non-official language – Portuguese – as mentioned in the order of dismissal of the administrative review. However, the Claimants consider it appropriate to note that although the same were not accompanied by translation, the truth is that it is drawn up in Spanish, which is admittedly a language that might be considered known to all procedural participants, namely the Tax and Customs Authority.

[2] This contract drawn up in English, therefore in a non-official language – Portuguese – as mentioned in the order of dismissal of the administrative review. However, the Claimants consider it appropriate to note that although the same were not accompanied by translation, the truth is that it is drawn up in English, which is admittedly a language that might be considered known to all procedural participants, namely the Tax and Customs Authority. Indeed, the terms in which such documents are drawn up cannot but be considered perfectly perceptible and understandable, no special knowledge of foreign languages being necessary or required for their correct interpretation.

[3] The documents evidencing the withholding and delivery of this amount constitute respectively Documents nos. 7 and 8 attached to the present petition for establishment of the arbitral tribunal and Document no. 95.

[4] See receipts presented in Document no. 9.

[5] Document no. 10.

[6] The documents evidencing the withholding and delivery of this amount constitute respectively Documents nos. 7 and 8 attached to the present petition for establishment of the arbitral tribunal and Document no. 95.

[7] The introduction of two paragraphs to no. 4 is done by Law no. 100/2009 of 7 September passing to the last segment of paragraph b) the phrase that is in question.

[8] FAUSTINO, Manuel, On the meaning and scope of the new wording of no. 4 of article 2 of the IRS Code: taxation of amounts received due to termination of the contractual relationship with the employer entity, Fiscalidade, Revista de Direito e Gestão, no. 13/14 (2003), pages 5 et seq. and Tax Framework of Remuneration, Revista de Direito e Estudos Sociais, Year 57 (30 of the 2nd Series), no. 14, 2016, pp. 209-244. FRAUSTO DA SILVA, Filipe and DUARTE, Cláudia Reis, Annotation to the Decision of the TCA of 11 May 2004, Case 03748/10, Boletim da Ordem dos Advogados, year 72, Vol. I, Jan/Mar 2012, pages 421-475.