Process: 760/2015-T

Date: March 1, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 760/2015-T) addresses a dispute concerning the classification of Category B income under Portugal's IRS (Personal Income Tax) system. The taxpayers challenged IRS assessments for 2011 and 2012 totaling €18,656.43, arguing they should remain in the organized accounting regime rather than being reclassified to the simplified regime. The core issue centered on Article 28 of CIRS: when a taxpayer's previous year turnover falls below the mandatory threshold for organized accounting (€150,000 in 2010), can the Tax Authority unilaterally reclassify them without their consent? The taxpayers contended that once classified under organized accounting, they could only change regimes by explicit option under Article 28(4)(b) CIRS. The Tax Authority argued the taxpayer automatically reverted to simplified regime when 2010 income fell below thresholds. A significant procedural complication arose: litispendência (lis pendens). A parallel administrative action was pending in the Administrative and Tax Court of Braga challenging the same regime classification. The AT invoked litispendence and requested suspension of arbitration proceedings. The arbitral tribunal repeatedly postponed conclusion of proceedings until exhausting the twelve-month statutory deadline under RJAT. This case illustrates the intersection of substantive tax law regarding regime classification and procedural issues when parallel proceedings address overlapping legal questions. It highlights the practical consequences of regime classification: different calculation methods for taxable income can result in substantially different tax liabilities. The decision also demonstrates how jurisdictional overlaps between administrative courts and tax arbitration can create procedural complexity, potentially delaying resolution of taxpayer disputes.

Full Decision

Arbitral Decision

A - Report

A…, taxpayer no. … and spouse B…, taxpayer no. …, resident at Rua de…, …, in Vila Nova de Cerveira;

pursuant to the provisions of paragraph a) of Article 2(1), paragraph b) of Article 5(2), and Article 6(1), all of Law Decree no. 10/2011, of 20 January, have come:

to request the CONSTITUTION OF AN ARBITRAL TRIBUNAL WITH A SOLE ARBITRATOR

with a view to obtaining an arbitral ruling declaring the illegality and consequent annulment of the tax acts for assessment of Personal Income Tax (IRS), corresponding to the years 2011 and 2012, with assessment no. 2015 …, in the amount of € 18,135.29 (eighteen thousand, one hundred thirty-five euros and twenty-nine cents), with respect to the year 2011, and no. 2015 …, in the amount of € 478.54 (four hundred seventy-eight euros and fifty-four cents) for the year 2012, all totalling € 18,656.43 (eighteen thousand, six hundred fifty-six euros and forty-three cents) including extraordinary surcharge (in the year 2011) and compensatory interest (for both years).

This request was filed with the Centre for Administrative Arbitration (CAAD) on 18 December 2015.

The respondent is the Tax and Customs Authority (AT).

The claimant did not proceed to appoint an arbitrator. For this purpose, the President of the Deontological Council of the Centre for Administrative Arbitration appointed the undersigned, who expressly accepted this appointment. The parties were duly notified thereof and did not express a wish to refuse it.

The arbitral tribunal was thus constituted on 2 March 2016.

The AT filed the administrative proceedings and timely presented its response, having successively argued litispendence and suspension of the proceedings and, without waiving this, contested the claim by defending the legality of the tax act in question, with the corresponding total dismissal of that claim and the consequent acquittal of the respondent.

Given that an administrative special action (proc. No. … BEBRG, Administrative and Tax Court of Braga) is pending, in which the legality of the AT's decision to classify the claimant husband in the "simplified regime" of Category B for the determination of taxable income for IRS is discussed, the conclusion of the arbitral proceedings was successively postponed, until the twelve-month deadline for the conclusion thereof provided for in the RJAT was exhausted.

The meeting referred to in Article 18 of the RJAT was opportunely dispensed with, but not the submission of arguments, all with the agreement of both parties.

The parties submitted arguments and did so simultaneously.

The Tribunal was regularly constituted and is materially competent.

The parties have legal personality, legal capacity and are entitled to bring proceedings.

The proceedings do not suffer from nullities.

Claim

The claimant contests the decision of his classification in the simplified regime of Category B of IRS, for the year 2011 and onwards, motivated by the fact that in the year 2010 he did not achieve the turnover corresponding to the minimum value for mandatory classification in the organised accounting regime (all pursuant to Article 28 of the CIRC).

And in these proceedings he comes to contest the assessment of IRS for 2011 and 2012, precisely, because of this fundamental divergence regarding his concrete classification: simplified regime (mandatory) as the respondent contends, or organised accounting regime (by option, at least implicit and resulting from the classification in force in the preceding year), as the claimant sustains.

In these terms the claimants come to contest the tax acts corresponding to the IRS assessments for the years 2011 and 2012 already identified above.

In the claim, annulment of the tax acts is requested, in summary, on the understanding that, since the claimant husband was subject to the organised accounting regime during a period, he could not be classified in a different regime (simplified), without his option, pursuant to Article 28, no. 4, paragraph b) of the CIRS, which did not occur.

From this would result a vice of error in the legal premises and consequent breach of law, with erroneous reasoning, leading to erroneous quantification of the facts and taxable income.

B - Facts

In the present proceedings, the following facts are considered proven, with relevance to the decision of the case.

The claimants submitted their annual IRS declaration for 2011 on 23/5/2012 by electronic means.

In it the income of category B of the claimant husband was quantified in accordance with the organised accounting regime of IRS.

On 28/6/2012 they were notified, by the same means, of the existence of discrepancies between the data in the declaration and the data on file.

This discrepancy corresponded to the classification of the male taxpayer for the purpose of determining taxable income from Category B of IRS under the simplified regime.

And not in the organised accounting regime in which he was classified in 2010.

The taxpayer was notified on 25/10/2012 to submit a statement of income within 30 days.

The claimant did not do so.

Having brought the action pending before the Tax Court of Braga, in which he contests the classification in the "simplified regime".

No decision was handed down therein.

The claimants also submitted their annual IRS declaration for 2012 on 29/5/2013, also by electronic means.

In it the income of category B of the claimant husband was quantified in accordance with the organised accounting regime of IRS.

On 11/6/2013 they were notified, by the same means, of the existence of discrepancies between the data in the declaration and the data on file.

This discrepancy also corresponded to the classification of the male taxpayer for the purpose of determining taxable income from Category B of IRS.

The taxpayer was also notified on 27/1/2014 to submit a statement within 30 days.

The claimants were also notified on 13/4/2015 to submit Form 3 relating to those two years.

This is because, pursuant to Ordinance 421/2012 of 21/12 (nos. 2 and 3), the AT considered the income statements for those years as being incomplete.

On 14/5/2015 the claimant submitted a request arguing that he was classified in the organised accounting regime and that the decision on this disputed issue was pending.

The AT issued a dissenting opinion on 19/8/2015.

Having subsequently proceeded to official assessment of IRS for 2011 and 2012, pursuant to Article 76, no. 1, paragraph b) of the CIRS.

In it, determining the income of Category B of IRS in accordance with the rules of the simplified regime.

This is because in the preceding year (2010), the Category B income earned by the claimant husband was less than the minimum value for mandatory classification in the organised accounting regime (150,000 euros at the time – see Article 28 of the CIRS).

Which gave rise to the above-mentioned discrepancy.

Being this the factual and legal basis of the tax acts now in question.

To the assessment of IRS for 2011 and 2012 were added compensatory interest.

All totalling € 18,656.43 (eighteen thousand, six hundred fifty-six euros and forty-three cents).

The deadline for payment was 12/10/2015 (2011) and 31/10/2015 (2012).

The claimant requested the reasoning for the tax acts, which was notified to him.

The claimants made payment of the assessments in question.

And presented this arbitral claim on the date referred to above.

The conviction flows from the documents filed by the parties and from the facts stated that are not disputed.

C - Law

Position of the Parties - Claimant

The disputed issue is related to taxation in Category B of IRS and the quantification of income in accordance with the so-called simplified regime or organised accounting regime (Article 28, no. 1 of the CIRS). More specifically, if the taxpayer does not achieve the turnover necessary for classification in the second regime in the preceding year (n-1), and the income of that year (n-1) was quantified by the accounting regime, not by express option of the taxpayer, but rather by legal obligation, must in the following year (year n) the taxation be determined on the basis of the quantification of income in accordance with the simplified regime, except if the taxpayer expressly opts for the contrary by March of that same year (n)? Or, conversely, must the same regime (accounting) of the preceding year (n-1) be followed, on the assumption that that year (n) is still comprised within the three-year period of maintenance (or extension, as would occur in this case) of the quantification regime established (Article 28, no. 5 of the CIRS)? That is, for purposes of maintenance in the organised accounting regime, is it irrelevant that the taxpayer was classified therein by legal obligation, without express adhesion on his part, if he ceases to earn the amount of income that imposed that mandatory classification?

The claimant understands that Article 28 establishes a degree of stability to the taxation regime in the framework of Category B. Once a taxpayer is classified in a particular regime, that classification would be valid for the corresponding three-year period, even though during its course the income of the preceding year does not entail the mandatory adoption of the accounting regime. Of course, if the taxpayer is classified in the so-called simplified regime, the exceeding of the annual limits of turnover in one or two consecutive years – depending on this excess – would imply automatic reclassification in the organised accounting regime (Article 28, no. 6).

Position of the Parties – Respondent

The AT, for its part, argues for the understanding that Article 28 confers only some degree of stability in inclusion in one of the taxation regimes specific to Category B, if that option has been expressed. That is, where an automatic classification occurs in the organised accounting regime, because the taxpayer was mandatorily classified therein by having exceeded the above-mentioned annual limits, there will be an automatic reclassification (so to speak, a "reversal" to) in the simplified regime (for year n), if in the preceding year (year n-1) to the taxation in question (year n), the limits on which the mandatory inclusion in the organised accounting regime depends were not met.

Thus, for the AT, differently from what the claimants understand, once a taxpayer is officially classified in the accounting regime, that classification would cease to be applicable if, in its course, the income of the preceding year (n-1) does not entail that mandatory adoption of the organised accounting regime (in year n, therefore).

From this it follows that a taxpayer could fluctuate between one and the other regime, depending on the preceding annual results, without prejudice to the right of option, three-yearly, depending on the values determined, between one or the other regime and always without prejudice to mandatory classification in the accounting regime, once its prerequisites are met.

It therefore argues for the maintenance in the legal system of the challenged acts, on the understanding that they correspond to a correct application of law to the disputed material reality.

But preliminarily the AT argues that, as the above-identified special administrative action is pending, this sole arbitral tribunal cannot pronounce on the merits of the case. This is due to litispendence, implying therefore the dismissal of the proceedings or, at least, the suspension thereof.

Reasoning

All considered, it is necessary to decide.

Preliminary Issues

Litispendence depends on the same cause of action and the same claim being pending (see CPC, Article 581, prior 498). Now, in the present case the claim is the annulment of the identified tax acts.

And that claim is not formulated in the above-mentioned proceedings, not least because the assessments had not yet been issued, which is why it is manifest that coincidence of claims is impossible. Moreover, if there were such coincidence of claims, it would relate to 2011, given that for 2012 the claimant makes no petition.

Moreover, the invitation to submit a new declaration and the contesting of the terms of the declaration submitted, or its disregard, are not immediately harmful acts, not least because the taxpayer actually submitted a declaration, whose elements may not be considered, but which should lead to an assessment, and it cannot be understood that there is no declaration submitted (see Jorge Lopes de Sousa, p.s 485, in CPPT, 6th ed., Áreas). Therefore, the cause of action and the claim will be the assessments in question and the restitution of the amounts improperly collected.

Furthermore, if the decision on classification in dispute is a severable act and may be reviewed independently, it cannot preclude the right to (independent) contest the assessment deemed unlawful, with all the arguments that may underpin that possible unlawfulness.

And nor can the demanded tribunal refuse to adjudicate.

It is added that by parity of reasoning no utility is seen in the suspension of the proceedings.

The request for extinction or suspension of the proceedings is therefore without merit.

The Main Issue

The question is therefore whether the income from category B of the male taxpayer for 2011 and 2012 should be determined by the simplified regime or by the organised accounting regime (see Tax Law, José Casalta Nabais, 2010, p.s 550 et seq).

In 2010 the organised accounting regime should be considered as the standard regime of taxation, as follows from the principle of taxation of actual tax-paying capacity, determined in accordance with income actually earned (see Tax Law, Manuel Pires and Rita Calçada Pires, 2012, 5th ed. p.s 358 in fine and 359; Manual of Tax Law, J. L. Saldanha Sanches, 3rd ed. p. 230, 3rd paragraph; Manuel Faustino, in Tax Lessons, João Ricardo Catarina and Vasco Branco Guimarães (coord.), 2012, beginning of p.167; Manual of Tax Law, Sérgio Vasques, 2011, p.s 251 et seq).

However, practical considerations imposed the possibility of, for smaller values, considering only turnover (gross income), reduced by expenses presumed as a percentage thereof. This is to reduce the costs of compliance for taxpayers and the costs of inspection by the AT.

This very fact, indeed, explains why recent reforms of the CIT and IRS have sought to popularise the simplified regime, both in IRS and in CIT.

But the legislator understands that this simplification cannot occur for values of high income. Therefore the law provides that even if the taxpayer opts for the simplified regime, that option ceases to be effective if, in the preceding year, or in the two preceding years, by reason of the value of the deviation, the gross income of the taxpayer is greater than a certain amount (because, in that case, the rough consideration of deductible expenses would make the deviation from the principle of taxation by actual income more evident).

These considerations serve to explain that if the official change of regime from "simplified" to "organised accounting" is motivated by reasons of coherence of the system, the inverse is not true (one might even say that it is contrary to that coherence, based, well or badly, on the paradigm of "actual values") – on the rules of interpretation see Manuel Henrique de Freitas Pereira, Fiscal Issues 2011, p.s 191 et seq. This without prejudice to the exercise of free option by taxpayers, but also free from "official" reclassifications with which they could not legitimately reckon.

This finding helps us to better understand the disciplinary regime of Article 28.

In his statement of commencement of activity the taxpayer may opt for the simplified regime, unless he foresees already a turnover that would preclude that option. For obvious reasons of stability and avoidance of annual choices by the option concretely most favourable, that option is three-yearly.

Having the taxpayer opted for the facility of using the "simplified" regime, that option ceases to be valid if the income assumes a magnitude that the legislator would advise against. And for that reason, the new classification is mandatory and may be officially processed by the AT.

If the variation is the inverse, whether preceded by voluntary option of the taxpayer or by automatic insertion, there is no imperative reason that imposes classification (again) in the simplified regime. It is even advisable that that option be left to the discretion of the taxpayer.

This is worth saying that, in that case, the classification may remain unchanged. And it should remain unchanged because that is the way to best guarantee the protection of the taxpayer's security (no need for confirmatory act) and not to impose on him the burden of prolonged permanence in the organised accounting regime, because by not having needed to opt for a regime, that (non) option now determines that the new option marks now the beginning of the three-year period of immutability of the regime. This without prejudice to the inverse option, there now being no ground requiring mandatory adoption of one of the optional regimes.

Moreover, the interpretation proposed, being the most consonant with the principles of income taxation and with the system of taxation thereof, has full acceptance in the letter of the law.

In this respect see the terms "alter" and "alteration" in nos. 4 and 5 of Article 28, only compatible with the interpretation proposed. As well as the explicit mention of the "official" change of regime in no. 6 of the same article, which addresses the transition from the simplified regime to the organised accounting regime, but not the inverse. Now, why would the legislator require a variation, moreover, of 25% for an immediate change in one direction, and if a variation of as little as one cent less would suffice for an inverse variation?

The AT proceeds from the principle that it is relevant, for the transition to the simplified regime, that the application of the organised accounting regime has resulted from the option of the taxpayer (i.e., not being obliged thereto, he opted for the same, in which case that option would be maintained for three years, regardless of the concrete annual values earned). Or, if on the contrary, inclusion in the regime resulted mandatorily from the law, regardless of express option of the taxpayer, with the perception of the levels of income that gave rise to the classification in "organised accounting" not being maintained, the taxpayer would be (re)classified in the simplified regime, unless he expressly declared a different option by March of the year in which such new classification should have taken place.

But that distinction is artificial and of no interpretive value, because the taxpayer's silence may well be due to his already knowing of the new "compulsive" classification in the organised accounting regime in the year following the exceeding of the limit and in which he would intend to exercise such option.

Otherwise we would have the oddity of it being necessary to expressly state (redundantly) an option for a regime that is already mandatory, to avoid the need for future option for that same regime (in case of reduction of the values of income earned in the preceding year), without the start of counting of a new three-year period of mandatory maintenance in the regime. For it must not be forgotten that, if it were necessary to opt for maintenance in the organised accounting regime, that option for "maintenance" would imply the burden of permanence in the regime for three years counted from the option for "maintenance" (i.e. from that year n mentioned above). But if the option had been earlier, that three-year period would already be running, being therefore possible a new option sooner.

For all the foregoing, the interpretation of the claimant should be upheld and not that of the respondent.

D - Compensatory Interest

The additional assessments (on the initiative of the AT, therefore) are shown to be paid, even though they are unlawful and result from error attributable to the services (erroneous classification).

The amount improperly collected should therefore be restituted, with the addition of compensatory interest, calculated from the date of payment, in accordance with the law.

E - Decision and its Reasoning

All considered, it is necessary to decide.

In summary, the claim should succeed, by error in the legal premises: the taxable income from Category B of IRS earned by the male taxpayer in the years 2011 and 2012 should have been determined in accordance with the organised accounting regime and not in accordance with the simplified regime of determination of that taxable income.

There is thus a vice of breach of law, with erroneous reasoning. From which resulted erroneous (and excessive) quantification of the tax owing by reference to those two years.

F - Award

As a result of the foregoing, it is decided to judge completely well-founded, as proven, the claim for annulment of the tax acts for IRS for 2011 and 2012.

Given that the annulled assessments and corresponding compensatory interest have been paid, the amounts collected should be restituted to the claimants, with the addition of compensatory interest, calculated at the legal rate, from the date of payment until the processing of the credit note containing them.

G - Value

The value of the disputed levy and the subject of the claim amounts to the total value of € 18,656.43 (eighteen thousand, six hundred fifty-six euros and forty-three cents), being therefore this the value of the action and of the claim.

Thus and in accordance with the provisions of Articles 306, nos. 1 and 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the aforesaid value of € 18,656.43 is fixed for the proceedings.

H - Costs

Pursuant to Article 22, no. 4, of the RJAT, the amount of costs is fixed at € 1,224.00 (one thousand, two hundred twenty-four euros), in accordance with Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, entirely at the expense of the respondent.

Lisbon, 1 March 2017

Text drafted by computer, pursuant to the Code of Civil Procedure (CPC), applicable by reference in Article 29, no. 1, paragraph e) of the RJAT, with blank verses, reviewed and signed by the undersigned arbitrator.

The Arbitrator

(Jaime Carvalho Esteves)

Frequently Asked Questions

Automatically Created

What happens when a taxpayer is placed in the IRS simplified regime instead of the accounting regime for Category B income?
When a taxpayer is placed in the IRS simplified regime instead of the accounting regime for Category B income, their taxable income is calculated using standardized coefficients applied to gross revenue rather than actual expenses. This can result in significantly different tax liabilities. Article 28 of CIRS governs regime classification: organized accounting is mandatory when turnover exceeds specified thresholds (€150,000 in the case period), while simplified regime applies below these thresholds unless the taxpayer opts for organized accounting. The dispute in this case centered on whether a taxpayer previously in organized accounting automatically reverts to simplified regime when income falls below thresholds, or whether an explicit option is required under Article 28(4)(b) CIRS.
What is lis pendens (litispendência) and how does it affect tax arbitration proceedings at CAAD?
Litispendência (lis pendens) occurs when two legal proceedings involving the same parties and the same cause of action are simultaneously pending before different courts or tribunals. In Portuguese procedural law, lis pendens can lead to suspension or dismissal of the later-filed proceeding to avoid contradictory decisions. In tax arbitration at CAAD, when the Tax Authority raises litispendence because a related case is pending in administrative courts, the arbitral tribunal must determine whether the proceedings share identical parties, cause of action, and legal basis. If established, the arbitration may be suspended until the court proceeding concludes, as occurred in this case where proceedings were repeatedly postponed due to a parallel action in the Administrative and Tax Court of Braga.
Can a tax arbitration case be suspended when a related administrative action is pending in court?
Yes, a tax arbitration case at CAAD can be suspended when a related administrative action is pending in court, particularly when litispendence is established. In Process 760/2015-T, the Tax Authority successfully argued for suspension based on a parallel proceeding in the Tax Court of Braga challenging the same regime classification issue. The arbitral tribunal repeatedly postponed the conclusion of proceedings until exhausting the twelve-month deadline for completing arbitration under Article 18 RJAT (Regime Jurídico da Arbitragem Tributária). This suspension mechanism prevents contradictory decisions and ensures procedural economy, though it can delay resolution of the taxpayer's dispute and potentially create practical difficulties when statutory deadlines approach.
How are IRS assessments for Category B income challenged through CAAD arbitration in Portugal?
IRS assessments for Category B income are challenged through CAAD arbitration by filing a request under Law Decree 10/2011. The taxpayer must identify the specific tax acts being contested (assessment numbers and amounts), state the legal grounds for annulment, and pay the arbitration fee. In this case, the taxpayers challenged official assessments for 2011 (€18,135.29) and 2012 (€478.54) issued under Article 76(1)(b) CIRS due to incomplete declarations. The Tax Authority files the administrative record and submits its response. A sole arbitrator or tribunal panel is appointed, and parties may submit written arguments. The tribunal has twelve months to decide under RJAT, though this deadline may be affected by procedural issues like litispendence, as demonstrated in this proceeding.
What are the legal grounds for annulling IRS tax assessments based on incorrect regime classification?
Legal grounds for annulling IRS tax assessments based on incorrect regime classification include: (1) error in legal premises (erro sobre os pressupostos de direito) when the Tax Authority misapplies regime classification rules under Article 28 CIRS; (2) breach of law (violação de lei) when statutory requirements for regime changes are not followed; and (3) erroneous quantification of taxable income resulting from applying the wrong regime's calculation methodology. In this case, taxpayers argued that Article 28(4)(b) CIRS requires an explicit option to change from organized accounting to simplified regime, and that unilateral reclassification by the Tax Authority without taxpayer consent constitutes illegal administrative action. The error in regime classification led to incorrect calculation of Category B income, resulting in allegedly unlawful tax assessments.