Process: 80/2018-T

Date: September 21, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 80/2018-T) addresses a critical issue in Portuguese IRS taxation: how to calculate seniority (antiguidade) when determining tax exemption limits for employment termination compensation. The Claimant received compensation after terminating an employment contract with Bank B in 2013, having worked there since 2006. The dispute centered on whether seniority for IRS exemption purposes under Article 2(4) of the CIRS should include the Claimant's prior service with other banking institutions, or only service with the final employer. The Claimant argued that seniority should encompass all banking sector employment, citing the Banking Sector Collective Labor Agreement (Article 17) and Article 11(2) of the LGT, which allows recourse to other legal branches when tax law lacks specific definitions. The Tax Authority contended that Article 2(4)(b) of CIRS explicitly requires seniority to be calculated based solely on service with the entity paying the compensation, not aggregate sector experience. The AT maintained that labor agreements govern employment relationships but cannot override express tax law provisions. The fundamental legal question was whether collective labor agreements defining seniority for compensation calculation purposes could modify the tax treatment specified in CIRS. This case illustrates the tension between labor law concepts incorporated into employment termination agreements and specific tax law requirements for determining exemption thresholds on severance payments, with significant implications for banking sector employees and tax treatment of termination compensation across Portugal.

Full Decision

ARBITRAL DECISION

The arbitrator, Dr. Henrique Nogueira Nunes, designated by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to form the Arbitral Tribunal, constituted on 17 May 2018, agrees as follows:

1. REPORT

1.1. A..., with the personal identification number ..., resident at Rua ..., no. ..., ..., Bragança, hereinafter referred to as the "Claimant", requested, on 5 March 2018, the constitution of the Arbitral Tribunal pursuant to articles 2, no. 1, paragraph a) and 10 of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

1.2. The request for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD and notified to the Tax and Customs Authority on 12 March 2018.

1.3. The request for arbitral pronouncement has as its object the declaration of illegality of the tax act embodied in the additional assessment of Personal Income Tax ("IRS") no. 2016..., which resulted in a value to be paid of € 26,242.47.

The arbitral tribunal was regularly constituted and is materially competent in accordance with the provisions of articles 2, no. 1, paragraph a) and 30, no. 1 of RJAT.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, nor was any matter of exception invoked.

1.4. To substantiate its request, the Claimant imputes, in summary, the following defects:

(i) That the said additional IRS assessment suffers from the defect of violation of law, since it cannot be considered otherwise than that seniority, for purposes of IRS incidence in the case of compensation for termination of the employment contract, should be understood by reference to all the time of service rendered - in the case - in the banking sector, even though rendered to different employer entities, wherefore this broader notion of seniority should be the one adopted by the Tax Administration for calculating the amount subject to taxation under IRS.

(ii) And that "seniority" should be assessed in the manner defined in the instrument of collective labour regulation and always in accordance with the jurisprudence and arbitration it identifies in its Arbitral Petition, since seniority is not regulated in tax law, recourse must be had to the regime of article 11, no. 2 of the LGT, within the scope of the Collective Labour Agreement of the Banking Sector, more specifically in its article 17, no. 1, paragraph a).

(iii) Concluding that in light of no. 4, of article 2 of CIRS, the compensation received for termination of the employment contract is excluded from taxation.

(iv) Contends for the allowance of the request for annulment of the additional IRS assessment identified in the file.

1.5. The Tax and Customs Authority, hereinafter referred to as the "Respondent" or "AT", replied, in summary, as follows:

(i) It comes to defend itself by means of contestation.

(ii) It understands that the seniority to be calculated, for purposes of no. 4 of article 2 of CIRS, is the seniority in the entity owing the compensation for termination of the employment contract, with no consideration being given, in the application of the said legal provision, to seniority in a previous employer entity, even if the worker and the new employer entity agreed to consider it in any future "compensations" arising from employment contract or from instruments of collective labour regulation.

(iii) It contends that it results clearly from the letter of tax law that the negative delimitation of IRS tax incidence is established using as a multiplying factor the seniority in the entity owing the income in question (and not the seniority provided for in a contractual clause or in an instrument of collective labour regulation or even in a termination agreement).

(iv) And that the Claimant, during the inspection procedure, did not demonstrate that it had been recognized by Bank B..., at the time of formalizing the employment relationship, for all legal purposes the right to seniority in previous employer entities, the mere invocation that: "at the time I was a union member", without any pertinent reason that demonstrates the lack of proof of that status serving to show anything whatsoever.

(v) All the more so, it states, that the collective labour agreement of the banking sector or of any other sector is intended to regulate the labour relations of workers covered by it, being norms of mandatory application in relations that exist between the parties, in accordance with the contractual freedom provided for in article 405 of the Civil Code.

(vi) Not finding in the Tax Law any specific norm for application to the banking sector, that is, in this case CIRS should be applied equally to all taxpayers and that the employment contract cannot override CIRS. It further states that the collective labour contract does not provide for any norm of non-subjection to IRS, but merely refers to the compensatory value, for the calculation of which it takes into account the time spent in the banking sector.

(vii) And requiring tax law, specifically and expressly, in paragraph b) of no. 4 of article 2 of CIRS that the seniority or exercise of functions be that relating to the entity owing (compensating) and not the seniority in previous employer entity or entities, it cannot take into account all the time of work, with tax law not being derogated if both parties in the revocation agreement intended that the value of the compensation be calculated by seniority in the sector and that it was this circumstance that determined the formation of their will.

(viii) Wherefore it contends for the total dismissal of the present request for arbitral pronouncement, with the tax act of contested assessment remaining in the legal order and being absolved accordingly from the request, all with the due and legal consequences.

1.6. The Tribunal deemed it appropriate to dispense with the holding of the first meeting of the Arbitral Tribunal, in accordance with the provisions of article 18 of RJAT, having notified the parties to, if they so wished, present pleadings, with both having presented Pleadings whereby they reinforced their positions.

Furthermore, the Claimant was notified for payment of the subsequent arbitral fee and its communication to CAAD.

A deadline was fixed for the delivery of the arbitral decision until the end of the legal deadline.

* * *

1.7. The Tribunal was regularly constituted and is competent ratione materiae in accordance with article 2 of RJAT.

The parties possess legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No nullities were identified in the proceedings.

2. ISSUES TO BE DECIDED

In its arbitral petition the Claimant formulates the following question for which it requested the present arbitral pronouncement, namely, whether the counting of seniority, for purposes of IRS incidence, in the case of compensation for termination of the employment contract, should be carried out taking into account all the time of service previously rendered to other banking institutions, or, conversely, only the time of work rendered to the entity with which it terminated the employment contract, which gave rise to the right to compensation, that is, in this case, Bank B....

3. MATTERS OF FACT

With relevance to the assessment and decision on the merits, the following facts are taken as proven:

A) The Claimant was subject to an inspection action credited by Service Order no. OI2016..., in which the AT ascertained that the Claimant terminated, by mutual agreement, with date of 14 May 2013 the employment contract that it had entered into on 02 August 2006 with banking entity B..., carried out by the inspection services of the Finance Directorate of ..., from which resulted corrections, under IRS, with respect to the year 2013, through assessment no. 2016... (Administrative File submitted by the Respondent).

B) Not agreeing with the said assessment the Claimant presented an application for reconsideration, to which was assigned the application case no. ...2016... (Document no. 2 submitted by the Claimant and Administrative File submitted by the Respondent).

C) Following notification of the draft dismissal of the application for reconsideration presented, the Claimant exercised its right to prior hearing (Document no. 3 submitted by the Claimant).

D) Subsequently the Claimant was notified of the dismissal of the application for reconsideration presented (Document no. 4 submitted by the Claimant).

E) The Claimant worked at Bank B... between 02/08/2006 to 14/06/2013 (Fact invoked by the Respondent and not contested by the Claimant).

F) On 14/05/2013, and within the scope of a restructuring plan for the Iberian business of Bank B..., Bank B... and the Claimant signed an employment contract revocation agreement in which it was established in no. 2 of the respective Clause 15:

"Having regard to the applicable terms of Clause 17 of the ACT of the Banking Sector ("ACT") and given the interpretation sustained in the judgements of the Central Administrative Court South of 11 May 2004 (Case 06002/01) and, in particular, of 21 September 2010 (Case 03478/10), both parties hereto mutually agree on the determination of the Employee's seniority by counting his time of service in banking entities indicated in the said clause of the ACT, for purposes of the provision of paragraph b) of no. 4 of article 2 of the Personal Income Tax Code, in the wording given to it by article 108 of Law no. 64B/2011, of 30 December". (Document no. 1 submitted by the Claimant).

G) A compensation of € 100,316.98 was paid to the Claimant for the revocation of the employment contract. (cf. Document no. 1 submitted by the Claimant).

H) The said compensation was calculated on the basis of the Claimant's seniority since 03.04.1996 and not only at Bank B... (where he was employed for less than 8 years), but also at other financial institutions where he had previously worked (Fact invoked by the Respondent and not contested by the Claimant).

I) In 2013, Clause 2 of the ACT of the banking sector established that:

"This Collective Labour Agreement applies throughout the national territory, within the banking sector, and binds the Credit Institutions and Financial Societies that subscribe to it (hereinafter generically referred to as Credit Institutions or Institutions), as well as all workers employed by it affiliated with the Unions of Bankers of the Centre, North and South and Islands, represented by the signatory FEBASE – Federation of the Financial Sector and hereinafter referred to as Unions, encompassing 26 employers and estimating 54,300 the workers covered".

Bank B... subscribed to the ACT with the following reservation:

"In counting the time of service for any purposes arising from the ACT, shall only count the time of service rendered to the Institutions themselves signatories of this reservation, plus possibly the time of service rendered to other institutions signatory to this reservation, plus possibly the time of service rendered to other entities or companies, but in this case, only provided that such results from individual agreement between such and the worker".

J) The Claimant is affiliated with the Union of Senior Management and Technical Staff of the Banking Sector (Document submitted by the Claimant with its Pleadings).

K) On 05-03-2018 the Claimant submitted a request for constitution of the Arbitral Tribunal to CAAD – cf. electronic request in the CAAD system.

4. UNPROVEN FACTS

There are no facts with relevance to the decision of the case that have not been proven.

5. REASONING ON THE MATTERS OF FACT

As to the essential facts, the agreed matters are conformably shaped identically by both parties and the Tribunal's conviction was formed on the basis of the official documentary elements attached to the file and discriminated above, whose authenticity and veracity were not questioned by either party.

6. ON THE LAW

In accordance with the question enunciated, which appears in point no. 2 of this Decision, and taking into account the matters of fact established in point no. 3, it is now necessary to determine the applicable law.

The present arbitral proceedings fall within contentious matters relating to the tax treatment, under IRS, of compensations paid to workers by their respective employer entities.

Within the scope of proceedings that have been processed under the aegis of CAAD and that have dealt with this matter, we can identify, by way of mere example, proceedings 126/2017-T, 158/2017-T; 227/2017-T; 280/2017-T; 349/2017-T; 353/2017-T, 357/2017-T and more recently proceedings 513/2017-T and 599/2017-T, the direction of whose decision and respective reasoning have varied.

Specifically, it concerns the exemption of the compensation received (in this case in full, but in other cases only partial) and the concept of seniority referred to in no. 4 of article 2 of the IRS Code.

The majority jurisprudence of the Courts of Justice and Arbitral Tribunals on this matter has come to accept that the concept of seniority should include previous labour relationships provided these have occurred in the same activity and there exist Collective Labour Agreements (ACT) in that sense.

As Nuno Oliveira Garcia says in proceedings 126/2017-T, "That is to say, that all jurisprudence – from the STA to CAAD – attributes relevance, for purposes of the said IRS exemption, to the time of service rendered by the worker to entities in the same sector, whenever the following requirements are verified cumulatively; namely:

- The new employer entity has subscribed to the ACT of the respective sector;

- There exists individual agreement between the worker and the new employer entity (as a rule, the employment contract) to the effect that the time of service rendered to entities in the same sector is relevant; and,

- The worker is affiliated with the respective union."

And this Arbitral Tribunal shares the same opinion, all the more so that in this case, as we saw in the matters of fact, the ACT subscribed by Bank B... makes relevant the "time of service rendered to other institutions signatory [to the ACT]" but only "provided that such results from individual agreement between such and the worker".

From the matters of fact given as proven it is established that the entity paying the compensation, Bank B..., subscribed to the ACT of the respective sector, and that the Claimant was affiliated with the relevant union, two of the essential requirements for seniority of the worker in the sector relating to previous employers to be recognized.

The remaining requirement – imposed by the ACT itself subscribed by Bank B... – relates to the existence of individual agreement between the worker and the employer entity to the effect that the time of service rendered to entities in the same sector is relevant.

As to this last point, the file only shows proof resulting from the employment contract revocation agreement which, in 2013, documented the terms of the termination of the employment contract entered into between the Claimant and Bank B..., the Claimant not having submitted the employment contract itself which, in 2006, documented the beginning of the labour relationship and which would last until 13 June 2013.

In any event, it is necessary to determine which of the agreements is relevant for the proper application of law to facts, a circumstance all the more relevant when, as likewise results from the file, the relevance attributed to seniority in the sector differs depending on the agreement in analysis, such that, in this case, only can it be discerned that in the employment contract revocation agreement, and for purposes of calculating the value of the compensation, seniority in the sector was considered.

In this regard we follow the position expressed by Carla Trindade in proceedings 616/2015-T, followed by Nuno Oliveira Garcia in proceedings 126/2017-T, in cases similar to the present, in which it was considered that the concept of seniority for purposes of counting time rendered to other employer entities cannot stem from the execution of an employment contract revocation agreement, since this does not represent any addendum to the individual employment contract. Now, since the Claimant did not submit to the file the individual employment contract entered into with Bank B..., the Tribunal cannot ascertain whether the time rendered to other and previous banking entities for purposes of calculating the compensation would have been provided for therein, reason for which not all the indispensable requirements are gathered to ensure that the concept of seniority encompasses the period of service rendered in the previous banking institutions.

And since the burden of proof rests with the Claimant.

Terms in which the arbitral request is dismissed.

7. DECISION

In light of the foregoing, this Single Arbitral Tribunal agrees to:

- Dismiss the request for arbitral pronouncement.

* * *

The value of the proceedings is fixed at Euro 26,242.47, in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, paragraph a) of CPPT and 297 of CPC.

The amount of costs is fixed at Euro 1,530.00, pursuant to article 22, no. 4 of RJAT and Table I annexed to RCPAT, to be borne by the Claimant, in accordance with the provisions of articles 12, no. 2 of RJAT and 4, no. 4 of RCPAT.

Let it be notified.

Lisbon, 21 September 2018.

The Arbitrator,

Dr. Henrique Nogueira Nunes

Text prepared by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, paragraph e) of RJAT.

The drafting of the present arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

How is seniority (antiguidade) calculated for IRS tax exemption on employment termination compensation in Portugal?
For IRS tax exemption purposes on employment termination compensation in Portugal, seniority (antiguidade) is calculated based exclusively on the period of service with the entity paying the compensation, as specified in Article 2(4)(b) of the CIRS. The Tax Authority maintains that this calculation considers only the time worked for the employer terminating the contract, not cumulative service across multiple employers. The exemption threshold is determined by multiplying the legally established compensation amounts by the years of seniority with that specific employer. This interpretation applies even when the employment contract or termination agreement references broader seniority concepts.
Can seniority for IRS purposes include service time across different employers in the same banking sector?
No, seniority for IRS exemption purposes generally cannot include service time across different employers, even within the same banking sector. While the Banking Sector Collective Labor Agreement (ACT) Article 17(1)(a) may recognize cumulative sector experience for calculating compensation amounts in employment relationships, Article 2(4)(b) of the CIRS explicitly requires that seniority for tax exemption calculation be measured in relation to 'the entity owing' the compensation. The Tax Authority consistently holds that labor agreements regulate employment relationships but cannot override express tax law provisions. Unless the new employer formally recognized prior service for all legal purposes at contract inception—with proper documentation—only service with the terminating employer counts for IRS exemption calculation.
What does Article 2(4) of the Portuguese IRS Code say about exclusion of termination compensation from taxation?
Article 2(4) of the Portuguese IRS Code (CIRS) provides a partial exemption from taxation for employment termination compensation. Specifically, it excludes from IRS taxation the portion of compensation that does not exceed the amount established in general labor law or collective agreements, calculated based on seniority. However, Article 2(4)(b) crucially specifies that this seniority must be 'with the entity owing the income'—meaning the employer paying the compensation. The exemption applies only to the statutory minimum compensation calculated using this specific seniority measure. Any compensation exceeding this threshold becomes taxable income. This provision aims to protect workers receiving mandatory severance while ensuring taxation of amounts beyond legal minimums.
How does the Collective Labor Agreement for the Banking Sector (ACT) define seniority under Article 17(1)(a)?
Article 17(1)(a) of the Banking Sector Collective Labor Agreement (ACT) defines seniority broadly to include all service time within the banking sector, even across different banking institutions. This labor law provision governs how compensation amounts are calculated in employment relationships within the sector, allowing workers to accumulate seniority throughout their banking careers. However, this labor law definition of seniority serves a different purpose than tax law definitions. The ACT establishes employment rights and compensation calculations between employers and employees, but it does not directly determine tax treatment. The conflict arises when this broader labor law concept of seniority, used to calculate compensation amounts, differs from the narrower tax law concept used to determine exemption thresholds under CIRS.
What happens when Portuguese tax law does not define a concept like seniority — does Article 11(2) of the LGT apply?
When Portuguese tax law does not explicitly define a concept, Article 11(2) of the LGT (Lei Geral Tributária - General Tax Law) allows recourse to other branches of law, including civil law and labor law. However, this supplementary application only occurs when tax legislation genuinely lacks a definition or applicable rule. In cases where tax law contains express provisions—as Article 2(4)(b) of CIRS does regarding seniority for compensation exemption—those specific tax rules prevail. The Tax Authority argues that CIRS explicitly defines seniority as service 'with the entity owing' the income, making Article 11(2) LGT inapplicable. Courts and arbitration tribunals must determine whether tax law sufficiently addresses the concept before importing definitions from labor law or collective agreements. The hierarchy places specific tax provisions above general labor law concepts when calculating tax obligations.