CAAD Ruling 91/2018-T: IRS Tax on Employment Termination Compensation and Seniority Years

ARBITRAL DECISION

I. Report

1. The taxpayers A..., with tax identification number..., jointly with his wife B..., with tax identification number... (hereinafter referred to as "Claimants"), both resident at Street..., no...., ...-... Marco de Canaveses, filed, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, i.e., Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for establishment of an Arbitral Tribunal, in order to declare illegal the dismissal of the Hierarchical Appeal and the Gracious Complaint filed with a view to annulling the assessment of Personal Income Tax ("IRS") for the tax year 2013, with the Tax and Customs Authority ("Respondent" or "AT") being sued.

A) Establishment of the Arbitral Tribunal

1. In accordance with the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the Deontological Council of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the single-arbitrator tribunal, who communicated acceptance of the charge within the applicable time limit, and notified the parties of this appointment on 3 May 2018.

2. Thus, in conformity with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, and through communication from the President of the Deontological Council of CAAD, the Single Arbitral Tribunal was constituted on 23 May 2018.

B) Procedural History

1. In the request for arbitral decision, the Claimants petition the illegality of the dismissal of the Hierarchical Appeal and the Gracious Complaint, both filed with a view to annulling the IRS assessment no. 2016..., issued in respect to the tax year 2013, and further petition the reimbursement of the amount of Euro 21,471.24 paid as tax and increased by the respective compensatory interest.

2. The AT presented a response, petitioning, in turn, the dismissal of the request for arbitral decision, as there is no defect constituting a violation of law, requesting that the tax act under review, as it does not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 23 October 2018, the Single Arbitral Tribunal, under the provision of subparagraph c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to conduct the meeting referred to in Article 18 of the RJAT, as a result of the simplicity of the issues at hand, as well as considering that it had in its possession all the necessary elements to render a clear and impartial decision.

4. Both parties having been duly notified to exercise the right of contradiction, the Respondent opted to timely submit additional arguments, which need not be referenced here as they merely serve to reinforce the position already supported in the document attached upon presentation of the Response to this Request for Arbitral Decision.

5. The present Arbitral Tribunal decided, in accordance with paragraph 2 of Article 18 of the RJAT, that oral argument was not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set the end of November 2018 as the deadline for the arbitral decision.

6. The Arbitral Tribunal was duly constituted and is competent to examine the issues indicated (Article 2, paragraph 1, subparagraph a) of the RJAT), the parties have legal personality and capacity and possess full standing (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March). No nullities occur and no exceptions were raised, and therefore nothing prevents judgment on the merits.

7. The present case is thus in conditions for a final decision to be rendered.

II. Question to be Decided

1. The central question to be examined and decided regarding the merits of the case, as derived from the procedural documents of the parties, is to determine what portion of the compensation amount received by Claimant A... for the termination of his functions in his employment entity would, in light of the wording of subparagraph b) of paragraph 4 of Article 2 of the IRS Code, be exempt from taxation.

III. Determination of Factual Matters and its Reasoning

1. Having examined the documentary evidence produced, the present tribunal finds as proven, with relevance to the decision of the case, the following facts:

I. Claimant A... commenced employment at Bank C..., the entity where he worked until 10 June 2007.

II. Subsequently, still in the course of June 2007, the Claimant commenced employment with Company D... – Branch in Portugal ("D...").

III. On 14 June 2013, the Claimant terminated his contractual relationship with Bank D..., having received, as compensation, the gross amount of Euro 89,020.17, previously stipulated in the Agreement for Termination of Employment Contract executed between both parties.

IV. It should be noted, for additional information, that both Claimant A... and Bank D... are signatories to the Collective Labour Agreement of the Banking Sector (hereinafter "CLA of the Banking Sector").

V. In the context of an inspection action carried out by the Inspection Services of the Finance Directorate of Porto with respect to Company D... – Branch in Portugal ("D...") for reference to the tax year 2013, the Claimants were notified of Service Order no. OI2016..., in which the Respondent proceeded to alter the taxable income of the Claimants in the context of IRS.

VI. As the basis for the present alteration, the Respondent considered that subparagraph b) of paragraph 4 of Article 2 of the IRS Code was being wrongly applied by the parties, and that, consequently, for the purposes of calculating the portion of the compensation that should be excluded from IRS taxation, only the number of years or fraction of seniority or of exercise of functions in the last entity owing the income should have been taken into account.

VII. From the amount of Euro 89,020.17, the Respondent thus understood that the amount of Euro 61,456.41 should be subject to taxation, instead of the amount initially considered by the Claimants in their Tax Return Model 3, of Euro 14,204.25.

VIII. Following the said Service Order, the Claimants were notified to file a replacement Tax Return Model 3, where should appear, in section 4-A, the corrected amount of Euro 47,252.16 corresponding to the value of the compensation that was not taxed in the past; or, alternatively, present the Right to Hearing in response to these corrections.

IX. Owing to the failure to submit the said replacement Declaration or the Right to Hearing, the Respondent proceeded to issue the additional IRS assessment no. 2016..., in the amount of Euro 21,471.24.

X. Notified of the said assessment, and dissatisfied therewith, the Claimants filed a Gracious Complaint in which they argued for its annulment, on the grounds that the Respondent was not including all years of service in banking entities rendered by Claimant A... in the calculation of the portion of the compensation that would be excluded from IRS taxation.

XI. Upon this Gracious Complaint, the Respondent issued its dismissal through an order notified to the Claimant on 2 November 2017.

XII. In this context, the Claimant opted to pay the tax owed, while nevertheless proceeding by the available administrative means for the annulment of the said assessment, having filed a Hierarchical Appeal on 27 November 2017, which was dismissed after examination by the competent authorities.

XIII. Taking into account the factual framework set out above, the Claimants came to request that the present Arbitral Tribunal decide on the illegality of the orders dismissing the Hierarchical Appeal and the Gracious Complaint, both filed with a view to annulling the IRS assessment no. 2016..., and that the amount of Euro 21,471.24 paid as tax and increased by the respective compensatory interest be reimbursed.

1. The conviction of the present tribunal regarding the facts found as proven resulted from the documents attached to the case file and contained in the request and uncontested allegations of the parties, as specified in the points of factual matters enumerated above.

2. There is no factual matter relevant to the decision of the case found as unproven.

IV. On the Law

A) Legal Framework

1. Given that the legal question to be decided in the present case requires interpretation of the relevant legal texts, it is important, first, to enumerate the rules that compose the relevant legal framework, as of the date of occurrence of the facts.

2. In this sense, focusing on the subject matter of the present case, it is necessary to pay attention to the wording of paragraph 4 of Article 2 of the IRS Code, which provided, as of the date of the facts, as follows:

"4 - When, in any manner, the contracts underlying the situations referred to in subparagraphs a), b) and c) of paragraph 1 cease, but without prejudice to the provision of subparagraph d) of the same paragraph, concerning benefits that continue to be owed even if the employment contract does not subsist, or when there is a cessation of the functions of public manager, administrator or manager of a legal entity, as well as of representative of a permanent establishment of a non-resident entity, the amounts earned, in any capacity, are always subject to taxation:

(a) In their entirety, in the case of public manager, administrator or manager of a legal entity, as well as representative of a permanent establishment of a non-resident entity;

(b) In the part exceeding the value corresponding to the average of regular remuneration in the nature of compensation subject to tax, earned in the last 12 months, multiplied by the number of years or fraction of seniority or of exercise of functions in the entity owing the payment, in other 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 subject to taxation in their entirety." (emphasis ours).

1. Indeed, the disputed question in the present case, as we shall set forth below, will concern, above all, the interpretation of subparagraph b) of the aforementioned paragraph 4 of Article 2 of the IRS Code, namely regarding the intent of the legislator in using the disjunctive conjunction "or" as the connecting element between "the number of years," "fraction of seniority" and "exercise of functions in the entity owing the payment."

2. Given its particular relevance to the question at hand, it is also necessary to transcribe Clause 17 of the CLA of the Banking Sector, of which Claimant A... and Bank D... are signatories.

3. The said Clause (under the heading "Determination of Seniority") provides on the seniority of workers as follows: "For all purposes provided for in this agreement, the seniority of the worker shall be determined by counting service time rendered in the following terms: a) All years of service, rendered in Portugal, in Credit Institutions with activity in Portuguese territory" (emphasis ours).

4. Keeping this legislative framework in mind, we shall now examine the arguments presented by the Parties.

B) Arguments of the Parties

1. In the present request for arbitral decision, the Claimants argue, in summary, that the IRS assessment that it is now sought to annul is defective due to illegality, for violation of the norm contained in subparagraph b) of paragraph 4 of Article 2 of the IRS Code.

2. In support of their position, the Claimants contend that the AT erred in its interpretation of the said normative provision by considering that, for the calculation of the portion of the compensation exempt from IRS, only the years in the entity owing such income should be relevant.

3. To this end, they argue that the application of the said norm depends essentially on the concept of "seniority," a concept which remains undefined in Tax Law and whose concretization should be sought in the other branches of Law, namely in Labour Law.

4. In this regard, the Claimants cite the CLA of the Banking Sector, which provides on the concept of seniority by framing it as encompassing "all years of service, rendered in Portugal, in Credit Institutions with activity in Portuguese territory."

5. The Claimants argue that it was this concept of seniority that was considered for the calculation of the compensation paid by Bank D... for termination of the employment contract of Claimant A..., so much so that the citation of the said clause of the CLA is present in the Agreement for Termination.

6. With this in mind, the Claimants argue that the portion exempt from IRS of the compensation paid by Bank D... should correspond to the calculation of the value of the compensation exceeding the average monthly remuneration earned in the last 12 months, multiplied by the total years of service, in Portugal, in banking entities with activity in Portuguese territory.

7. In order to give substance to their position, the Claimants further note that the AT itself, specifically the Finance Directorates of Santarém and Leiria, has already pronounced itself in identical cases (in the context of inspection of Bank D...) to the effect of understanding that the concept of seniority, for the purposes of applying subparagraph b) of paragraph 4 of Article 2 of the IRS Code, is that which is defined in the branch of Labour Law.

8. In this regard, and given that the AT had previously pronounced itself favourably to the taxpayers in similar circumstances, through the aforementioned orders issued by the Finance Directorates of Santarém and Leiria, the Claimants consider that they are faced with a violation of the constitutional principle of equality.

9. The Claimants further emphasize that "on the part of the AT, there is a manifest abuse of law in the form of 'venire contra factum proprium', since, before the same facts, the AT cannot exercise a legal position and contradict the conduct assumed in equal situations." (Article 101 of the Request for Arbitral Decision).

10. Supplementarily, the Claimants further argued that, given the mechanism of tax substitution, the responsibility for payment of any additional amount owed as IRS respecting the compensation for termination of the employment contract rests with Bank D..., and not with the Claimants themselves.

11. The Claimants further argue that the act of alteration of income could not be carried out by the Chief of the Division of the Tax Inspection Services of the Finance Directorate of Porto, and therefore suffers from incompetence.

12. Finally, and on the grounds that they are faced with an error attributable to the services, the Claimants request that compensatory interest be charged to the AT on the amount of tax paid.

13. For its part, the Respondent, duly notified for this purpose, presented its response in which, in summary, it sustained its main thesis that the seniority to be counted, for the purposes of paragraph 4 of Article 2 of the IRS Code, is the seniority in the entity owing the compensation for termination of employment.

14. The Respondent argues that in the application of the said legal provision, the seniority in a previous employing entity should not be considered, even if the worker and the new employing entity have agreed to consider it in any future "compensations," by employment contract or that results from collective regulation instruments.

15. Therefore, it should be "on the basis of the 7 years of seniority that the amount of compensation excluded from IRS taxation is calculated, inasmuch as this is the period of service rendered with the last employing entity, upon which the duty to pay the compensation falls" (Article 10 of the Response).

16. In support of its position, the Respondent argues that the concept of seniority in the labour context does not carry particular scientific density that would distance it significantly from the sense of ordinary language: translating, as in other legal contexts, an interval that is legally relevant, with diverse effects, between a determined initial term and a determined final term.

17. Additionally, analyzing the content of collective labour agreements of the banking sector, the Respondent concludes that such instruments "do not concern compensations / indemnities for lapse of the employment contract, for dismissal or for termination of the contract by the worker on the grounds of unlawful act of the employer, or by agreement of distress / termination of the employment contract – matters which, properly viewed, are therefore removed from the normative effects arising from said Clause 17... (…)" (Article 16 of the Response).

18. The Respondent further refers to its interpretation of paragraph 4 of Article 2 of the IRS Code, understanding that it contains a clear anti-abuse purpose, as it would in any case not be acceptable for agreements that provided on labour seniority recognizing merely artificial seniorities and imposing such recognition for the purposes of delimiting the negative incidence of tax, and therefore the legal transaction effected by the parties cannot bind the AT.

19. Additionally, the Respondent emphasizes that the literal element of legal interpretation permits confirmation, from a perspective of syntactic correctness, that the seniority provided for in subparagraph b) of paragraph 4 of Article 2 of the IRS Code is the seniority in the "entity owing the payment," corresponding to "seniority in the company," and,

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

21. In response to the Claimants' allegations regarding tax substitution, the Respondent invokes paragraph 2 of Article 28 of the General Tax Law ("LGT"), when the withholding at source has the nature of payment on account of the final tax owed, the original responsibility for tax not withheld falls on the substituted party (the Claimants).

22. Regarding the allegations of incompetence for the performance of the act by the Chief of the Division of Tax Inspection Services of the Finance Directorate of Porto, the Respondent upholds the legitimacy that derives from the order of delegation of authority, published in the Official Journal.

23. Finally, the Respondent concludes that the act of additional assessment, in issue in these proceedings, does not suffer from any defect that calls into question its legality and validity, and therefore there is no basis for payment of any compensatory interest.

C) Tribunal's Appraisal

1. By way of preliminary remark, it should be noted that, in the view of this Arbitral Tribunal, the question to be decided concerns the interpretation of subparagraph b) of paragraph 4 of Article 2 of the IRS Code, and it is important to know, in particular, whether from the same it results that the counting of the seniority of Claimant A..., for the purposes of IRS incidence, should be made taking into account:

• The period of service rendered in the banking sector in Portugal (thus including, therefore, the period of service previously rendered with another banking institution with activity in Portugal), or if, on the contrary,

• Only the period of work rendered with the entity with which the Claimant terminated the employment contract should be considered.

1. Being primarily a question of interpretation, it is necessary to cite Articles 11, paragraphs 1 and 2 of the LGT, which provide as follows:

"1 - In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2 - Whenever in tax norms terms specific to other branches of law are employed, they must be interpreted in the same sense that they have there, unless otherwise directly results from the law."

1. For its part, and regarding the general rules of interpretation, Article 9 of the Civil Code provides as follows:

"1. Interpretation must not be confined to the letter of the law, but must reconstitute from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

1. The interpreter cannot, however, be considered the legislative thought which does not have in the letter of the law a minimum of verbal correspondence, albeit imperfectly expressed." (emphasis ours).

2. In this context, it is without doubt that it is on the basis of the interpretation rules cited that the meaning of the concept of "seniority" used by the legislator in subparagraph b) of paragraph 4 of Article 2 of the IRS Code will be concretized.

3. In light of the normative provisions mentioned above, the starting point of the interpretation must be the text of the norm itself.

4. In this regard, it is necessary to take a position: the present Arbitral Tribunal does not discern from the letter of the law any mention that points to the existence of two distinct situations, and it is not possible to separate the number of years or fraction of seniority (in all cases) from the exercise of functions in the entity owing the payment.

5. Indeed, the only reading that makes sense, in terms of syntax, is that the expression "in the entity owing the payment" refers to the expression that precedes it, namely "number of years or fraction of seniority or of exercise of functions."

6. This understanding is not impeded by the inclusion, between commas, following the expression "or of exercise of functions," of the term "in other cases."

7. In the arbitral award rendered in process no. 230/2016-T, cited by the Claimants, it is argued that "the norm adds following the last expression (or exercise of functions in the entity owing the payment): 'in other cases,' leading to the perception that it contains two distinct mechanisms to obtain the multiplier, in the alternative, thus existing, at least, 'two' distinct cases, contained in the provision of the norm."

8. What happens is that when the text of subparagraph b) of paragraph 4 of Article 2 of the IRS Code refers to other cases, it is to encompass all those that do not fall within subparagraph a); that is, the amounts referred to in Article 2, paragraph 4 of the IRS Code are subject to taxation:

i. In their entirety when earned by public manager, administrator or manager of a legal entity, as well as representative of a permanent establishment of a non-resident entity [subparagraph a)]; and

ii. Only in the amount exceeding the limit calculated in accordance with subparagraph b), in other cases.

1. In this manner, the reference to other cases does not permit the interpreter to conclude, as does the arbitral tribunal in process no. 230/2016-T, that the provision under analysis "contains two distinct mechanisms to obtain the multiplier."

2. In this sense, the present Arbitral Tribunal supports the position expressed in the arbitral award rendered in process no. 323/2017-T, in the sense that it considers that "an interpretation that considered that the expression 'in the entity owing the payment,' contained in subparagraph b) of paragraph 4 of Article 2 of the CIRS, refers only to the expression 'exercise of functions,' would imply accepting that the legislator, in this provision, delimited the scope in which the exercise of functions assumes relevance in the application of the calculation method provided for there, but left undetermined the scope in which seniority operates."[1]

3. Such an interpretation would also result in the acceptance of different criteria applicable to "seniority" and "exercise of functions," without apparent justifying reason.

4. Thus, if we presume, as provided in paragraph 3 of Article 9 of the Civil Code, that the legislator "enshrined the most correct solutions and knew how to express his thought in adequate terms," then we must conclude that, with coherence and in accordance with an identifiable and objective criterion, the legislator delimited the scope in which "seniority" or "exercise of functions" assume relevance for the purposes of application of subparagraph b) of paragraph 4 of Article 2 of the IRS Code, through the use of the expression "in the entity owing the payment."

5. This interpretative result, according to which the seniority to which the legislator refers in subparagraph b) of paragraph 4 of Article 2 of the IRS Code is seniority in the entity owing the payment, reflects a declarative interpretation, in which this Tribunal merely "chooses one of the meanings that the text directly and clearly bears, because it is that which corresponds to the legislative thought."[2]

6. This Tribunal does not, therefore, follow the jurisprudence of the Central Administrative Court South, which has assumed that the tax legislator does not define, for the purpose of applying subparagraph b) of paragraph 4 of Article 2 of the IRS Code, the concept of worker seniority (cfr., to this effect, the following judgments of the TCAS: judgment of 11/05/2004, rendered in process no. 06002/01; judgment of 21/09/2010, rendered in process no. 03748/10; judgment of 12/03/2013, rendered in process no. 05971/12), nor does it follow the jurisprudence of CAAD that has adopted the same line of reasoning (cfr. the arbitral decisions rendered in processes nos. 616/2015-T and 230/2016-T).

7. It results, therefore, from the text of subparagraph b) of paragraph 4 of Article 2 of the IRS Code that the tax legislator expressly refers, for the purpose of its application, to seniority in the entity owing the payment, and there is no discernible reason to inquire as to the meaning which the concept of seniority assumes in labour law.

8. Thus, in the case under review, in the calculation of the portion of the compensation for termination of the employment contract of Claimant A... exempt from IRS, only seniority in Bank D..., amounting to 7 years, should be considered.

9. Additionally, and merely for the sake of academic exercise, it should be noted that we would reach the same conclusion if we applied the concept of seniority that prevails in labour law.

10. That is, even if we followed the interpretative path traced by the jurisprudence cited by the Claimants, we would reach a result opposite to that affirmed in such jurisprudence, as we shall see below.

11. On this matter, we subscribe to the content of the judgment of the Supreme Court of Justice of 01/10/2014, rendered in process no. 1202/11.0TTMTS.P1S1,[3] approved unanimously, in the excerpt which follows:

"The aforementioned Labour Code, as was the case with previous legislation, does not expressly explain directly the concept of seniority, which, in a general sense, refers to seniority in the company, but which can also refer to a specific professional situation, such as seniority in the activity or in the category.

It is thus appropriate, in order to clarify the legal meaning of seniority, to examine the legal provisions that refer to that particular figure of labour law dogmatics.

(…)

The legal meaning of seniority, in its general sense, reduces to the time of integration of a worker in an employing organization, a legal situation which is relevant, specifically, for the purposes of promotion, of allocation of long-service bonuses, of fixing the length of notice with respect to the date of termination of the contract and of determination of the value of compensation / indemnity, in case of dismissal or of termination of the employment contract at the initiative of the worker.

This, moreover, is the understanding accepted, generally, by legal scholarship.

According to BERNARDO DA GAMA LOBO XAVIER and OTHERS (Manual of Labour Law, 2nd edition, revised and updated, Verbo, Babel, Lisbon, 2014, pp. 432-433), "[t]he continuity of service of the worker, normally referenced to the same company, determines for him a certain seniority computed in years of service, which gives a special concrete physiognomy to the rights of the worker, enhancing them," effects which "are based on the progressive involvement of the worker in the company [...] rewarded by the recognition of a more favourable status and by the special protection of the stability of the contract, thus corresponding to the 'expectation of security' of the worker (an aspect which today is reflected, essentially, in the protection that older workers benefit from in certain cases of dismissal: in the length of notice periods — indemnities).

(…)

In this same line of thinking, ANTÓNIO MONTEIRO FERNANDES (Labour Law, 16th edition, Almedina, Coimbra, 2012, p. 191 et seq.) notes that "[t]he labour relationship is not exhausted in a moment, in an instantaneous performance. Whatever its duration, it always implies some continuity, a 'state of fact that indicates the more or less prolonged insertion of a worker in an employing organization'. Continuity determines, in the legal sphere of the worker, seniority. [...] From the standpoint of the worker, it relates intimately with the risk of rupture: the greater the duration of the contract, the more profound the psychological integration of the worker in the company, the more undesirable or disruptive, therefore, the possibility of termination of the contract. Thus, seniority creates and progressively increases an expectation of security in the worker. As far as the interests of the employer are concerned, it means that the company was able to realize, over a certain period, the availability of labour it required, keeping incorporated an element of whose integration in the objectives of the company that same period of ties is a guarantee. For this reason it is understood that the seniority scheme only fully adapts to situations of work in the company.'

The aforementioned AUTHOR, following the transcribed passage, emphasizes that '[i]t is the moment of the effective admission of the worker, that is, that moment in which the worker really comes to be 'at the service' of the company [...], that must be relevant for the purposes of counting seniority. This is not thus identical, properly speaking, with the 'duration of effective work,' but with the duration of 'belonging to the company' which begins, not with the execution of the contract, but with incorporation into the company.'

Identical conceptual framing is adopted by MARIA DO ROSÁRIO PALMA RAMALHO (TREATISE ON LABOUR LAW, PART II – INDIVIDUAL LABOUR SITUATIONS, 5th edition, Almedina, Coimbra, 2014, pp. 492-494), in noting that '[t]he concept of seniority expresses the special relevance of the continuous character of the employment contract and of the element of organizational insertion of the worker that inheres in the labour link,' namely, '[s]eniority values the integration or the bond of belonging of the worker to a given organization, from the start of execution of the employment contract until its termination' and it is '[b]ecause seniority values the element of organizational insertion of the labour link and not the effective performance of work, that one understands that its counting does not interrupt in normal situations of non-performance of work (during the worker's weekly rest and vacations) and even in the generality of situations of suspension of the employment contract [...]; and it is still this scope that justifies that the seniority of the worker in one employment contract can be made use of in the contract that succeeds the first with the same company — this is what happens in the case of renewal of a fixed-term employment contract and in its conversion into an indefinite-term employment contract (Articles 147, paragraph 3, and 149, paragraph 4).'

All to conclude that the legal notion of seniority adopted in matters of termination of the employment contract, whether for fixing the length of notice with respect to the date of contract termination, whether for determination of the amount of compensation, in case of collective dismissal, is that of seniority in the company."

1. In this judgment of the Supreme Court of Justice, the concept of seniority is analyzed for the purpose of fixing the length of notice with respect to the date of termination of employment, as well as for the purpose of determining the amount of compensation owed to the worker in case of collective dismissal.

2. Despite the differences with respect to the case under review, the reasoning contained in the cited judgment, and the conclusions reached by the Supreme Court of Justice, are transposable to the analysis of the concept of seniority in case of termination of employment by agreement between the employing entity and the worker.

3. The judgment of the Supreme Court of Justice cited permits us to extract the following conclusions, with relevance to the matter being discussed in the case under review:

• The Labour Code does not expressly explain directly the concept of seniority, but various provisions it contains point to a legal meaning of seniority which, in its general sense, reduces to the time of integration of a worker in an employing organization;

• In the same sense – that of seniority in the company – goes labour law scholarship;

• Thus, the legal notion of seniority adopted in matters of termination of the employment contract is that of seniority in the company (whether in the case analyzed in the STJ judgment – of collective dismissal – or in other cases of termination of employment).

1. Thus, even if it were necessary to resort to labour law for the purpose of applying subparagraph b) of paragraph 4 of Article 2 of the IRS Code, we would always conclude, as did the Supreme Court of Justice in the cited judgment, that the general sense recognized there is that of seniority in the company, and that Clause 17 of the CLA of the Banking Sector is not applicable, inasmuch as this does not regulate the matter relating to compensations paid to the worker for termination of the employment contract.

2. Even if discussing the legal consequence of the parties recognizing, by agreement, a seniority that goes beyond seniority in the company – as is the case with Claimant A... and Bank D... – we would still say that, before the interpretation that this Tribunal makes of subparagraph b) of paragraph 4 of Article 2 of the IRS Code, it is irrelevant, for the purposes of this norm, the agreement between the parties to the effect of recognizing a broader seniority, that goes beyond seniority in the company, by force of the principle of the prevalence of law.

3. What is at issue is not the exercise of contractual freedom by the parties, which may legitimately agree on the recognition of a broader seniority; what cannot happen, because the tax legislator does not permit, is that from such agreement there result tax consequences, specifically the reduction of the tax to be paid.

4. It should finally be noted that the interpretative result reached here is also the most coherent with the constitutional principles of legality, legal certainty and equality itself, insofar as the criteria for determining the extent of taxation result from law (including the criteria for exclusion of incidence), and do not depend on vicissitudes, such as the fact that workers are or are not unionized and which union, nor on the fact that the employing entity has or has not entered into a Collective Labour Agreement, or on the circumstance that the worker exercised his functions in a particular sector of activity or another, or still on what may have been agreed between the parties.

5. In this regard, it is necessary to take a position on the argument raised by the Claimants that the AT would have violated the principle of equality, acting under cover of abuse of law, namely by "venire contra factum proprium."

Now,

1. The present Tribunal understands that we are not faced with any abuse of law, and the interpretation of the Respondent, as argued above, is the one that best accords with the principle of equality.

2. Notwithstanding, the figure of venire contra factum proprium would never be subsumed within the facts alleged by the Claimants, inasmuch as we are not faced with any bad faith action on the part of the Respondent, in which it took a conduct (which here would be the issuance of the Orders by the Finance Directorates of Santarém and Leiria) with the clear intent to mislead the Claimants.

3. Indeed, venire contra factum proprium finds support in situations where a person, for a certain period of time, conducts itself in a determined manner, generating expectations in another that its conduct will remain unaltered.

4. In view of that conduct, there is an investment, confidence that the conduct will be that previously adopted, but after said time period, it is altered by conduct contrary to the initial one, thereby breaking objective good faith (trust).

5. In the case under review we are not faced with conduct by the AT with the intent of creating expectations in the Claimants only to frustrate them with the intention of obtaining an advantage, but merely the desire to restore the legal order in the case of the Claimants.

6. Indeed, Circular Law, which includes the Orders issued by the Finance Directorates, could never bind the taxpayer – or the Courts – to an understanding contrary to the Law,

7. Which is precisely the type of understanding that the Orders cited by the Claimants are promoting.

8. In this context, it is the decision of the present Tribunal that the tax act of additional assessment contested in these proceedings does not suffer from any defect constituting a violation of law, and therefore the request for annulment of that act is dismissed and consequently also dismissed is the request for condemning the Respondent to payment of costs and other charges with the case.

9. Finally, as regards the defect of incompetence of the Chief of the Division of Tax Inspection Services of the Finance Directorate of Porto for the performance of the assessment act, as well as the arguments raised by the Claimants against the mechanism of tax substitution, the present Tribunal supports the position of the Respondent in this regard, including the legal provisions cited for this purpose, concluding that none of these arguments is valid.

V. Decision

1. For these reasons, this Arbitral Tribunal decides to completely dismiss the request for arbitral decision and absolves the Respondent from the claim, with all legal consequences.

VI. Value of the Case

1. The value of the case is fixed at Euro 21,471.24, in accordance with Article 97-A, paragraph 1, subparagraph a), of the CPPT, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT").

VII. Costs

1. In accordance with the provision of Article 22, paragraph 4, of the RJAT, the amount of the arbitration fee is fixed at Euro 1,224.00, in accordance with Table I of the aforementioned Regulation, to be borne by the Claimants, given the complete dismissal of the claim.

Notify.

Lisbon, CAAD, 16 November 2018

The Arbitrator

(Sérgio Santos Pereira)

[1] https://caad.org.pt/tributario/decisoes/decisao.php?s_processo=323%2F2017-T&s_data_ini=&s_data_fim=&s_resumo=&s_artigos=&s_texto=&id=3517&ccsForm=record%3AEdit

[2] (cfr. JOÃO BAPTISTA MACHADO, Introduction to Law and Legitimating Discourse, Coimbra, Almedina, 2008, p. 185)

[3] http://www.dgsi.pt/jstj.nsf/954f0ce6ad9dd8b980256b5f003fa814/49e51575cc2545fb80257d640051cf1e?OpenDocument