New understanding of what “staff costs” are and their consequences

Binding Generic TA Guidelines

New understanding of what “staff costs” are and their consequences

Under the tax laws, it is for the Tax Authority (“TA”), in the person of its senior manager, to issue generic guidelines aimed at standardizing the interpretation and application of tax rules, through circulars or other similar normative instruments, binding on the services.

In this context, the TA came through the publication of a doctrinal statement last July – Binding Information (2020 000289) process sanctioned by Order of the Secretary of State for Tax Affairs (“SEAF”) (227/2020) – to reverse what was for several years, its position on the concept of “staff costs”, relevant for the purposes of calculating the number of costs or losses accepted in a given tax year, relating to social utility charges (personal accident, life, sickness or health insurance, contributions to pension funds and similar schemes or to any supplementary social security schemes in favour of their employees) borne by undertaking for the benefit of their employees.

The rule providing for the deduction of these expenses as a cost for the fiscal year is article 43, no. 2, of the Corporate Income Tax Code (“CIRC”), and does so in the following terms:


Article 43
Accomplishments of social utility

1 – (…)

2- It shall also be deemed expenses of the taxable period, up to the limit of 15% of the staff costs expenses accounted for as remuneration, wages, or salaries for the taxable period, those incurred with:

  1. a) Personal accident, life, sickness or health insurance, contributions to pension funds and similar schemes or to any supplementary social security schemes, which exclusively guarantee the benefit of retirement, pre-retirement, supplementary retirement, post-employment health benefits, disability or survivor’s pensions in favour of the company’s employees;
  2. b) Sickness or health insurance contracts for the benefit of employees, pensioners, or their families.


Contrary to what is unanimously advocated by case law, TA considers that “staff costs recorded as remuneration, wages or salaries” referred to in the rule, and which constitute the basis for calculating the deductible ceiling of these expenses, would only be those subject to mandatory social security contributions or to any other contribution scheme. TA’s interpretation in force until now had the effect of increasing the amount of IRC due, since it reduced the calculation basis of the percentage accepted as a tax cost. Conversely, the position of the case law allowed for a greater deduction of costs as social utility achievements and therefore resulted in less tax to be paid by taxpayers.

The now revoked understanding, dating back to 21 June 1996, was also sanctioned by SEAF at the time.

Several judgments of the Supreme Administrative Court have since unequivocally ruled that the TA’s interpretation was merely conclusive and did not set out arguments to support it, and that it was clear from a reading of the rule that the legislator had in mind all remunerations recorded as such in the taxpayer’s accounts, regardless of whether or not they were subject to compulsory social security deductions. Such a restrictive interpretation, which could influence the determination of the taxable income and determine the non-acceptance of a tax cost, would only be admissible if it were minimally authorized by an expression contained in the wording of the law, and the Tax Authorities do not have the discretion to introduce such criterion for the application of the standard.

The same rule, being as it is, of tax incidence (those that establish the assumptions whose combination gives rise to the tax obligation, such as those that determine the subject, the taxable amount, and the tax rate) concerns an area where the principle of typicality is in force – which, being a consequence of the principle of legality (art. 103/2 of the Constitution of the Portuguese Republic – “CRP”) requires that all elements necessary for the characterization and enforcement of taxes must be created by law and provided for therein.

However, these conclusions, which are drawn from the perfectly uniform jurisprudence of the higher courts, in numerous situations in which TA has additionally assessed CIT to taxpayers due to the arbitrary restriction of the concept of staff costs, dated back to 2015/2016 (AC. STA 12.10.2016 appeal 0797/15).

The question that may arise is, therefore, why it took so many years of unfavorable court decisions, with the inherent costs of litigation, both for the State and for taxpayers, for the TA to finally recognize the evidence.

In this, as in other situations, TA has shown some inability to maintain internal departments that, in a timely manner, analyze the relevance of its positions and make them compatible with those that are being consolidated in the jurisprudence of higher courts.

The insufficient coordination in this area has yet another aspect reflected in the fact that the TA is obliged to review, ex officio, the liquidation acts it has performed based on an error that is attributable to it.

In fact, the General Tax Law (“GTL”) (art. 78) establishes that the revision of tax acts by the entity that practiced them may be done on the TA‘s initiative, within 4 years after the assessment, or at any time, if the tax has not yet been paid, on grounds of error attributable to the services.

This institute of ex-officio review is the concretization of TA’s duty to revoke illegal acts in cases where there are errors in the liquidations that result in the collection of more tax than legally provided for. The principles of justice, equality, and legality impose this correction.

The ex officio review of tax acts “at the initiative of the tax administration”, if not promoted by this entity, may be carried out at the “taxpayer’s request” and thus, somehow “forced” by the taxpayer and the express or implied rejection of such request for revision subject to litigation (art. 95/1 and 2 al. d) of the GTL and 97/1al. d) CTPP).

In practice, we are faced with a complementary means of administrative and contentious tax act challenge that taxpayers have at their disposal, with a substantially longer period of 4 years, and its use is not prejudiced by the fact that the request is filed long after the normal deadlines for those means of an administrative and contentious challenge have expired. In this case, the basis must necessarily be the “error attributable to the services”, with such an error being understood as a material or factual error, but also an error of law, such as that resulting from an illegal interpretation of legal rules, an example of which is the understanding now revoked by the TA.

If there is an error of law in a liquidation made by the TA’s services and this misapplication of the law does not result from any information or declaration by the taxpayer, the error in question is attributable to the services under the provisions of the Constitution of the Portuguese Republic (art. 266/2) and also the GTL (art. 55), which establish a general obligation for the TA to act in full compliance with the law.

Therefore, and in this case, in order to return the overpaid tax to the taxpayers, TA is obliged to provide, on its own initiative, the correction of all assessments it has made in contradiction with the current interpretation of the concept of “staff costs” – “all costs that must be recorded as “remuneration, wages or salaries” “since there is no other criterion in the law that allows only expenses that are subject to social security deductions to be considered”, as can be read in the doctrinal statement now disclosed.

But if it fails to do so, taxpayers who have been adversely affected by additional tax assessments in the last 4 years, based on that previous, illegal interpretation and who have not contested such corrections within the time limits and through the proper means, may also take the initiative of ex-officio review, a challenge in court the omission thereof and the tax assessment act itself, and thus recover the amounts overpaid.

In short, while we welcome the revocation of a position we have always considered illegal, it seems urgent to us that TA definitively allocate resources and give priority to issues of analysis, coordination, interpretation of tax law, and its application compatible with the increasingly assertive, swift and specialized jurisprudential guidelines, whether taken in the courts or in the field of tax arbitration so that we can move towards reducing litigation and the values of certainty, security and taxpayer confidence in the tax system prevail.

Vera Calheiros, Of Counsel at BAS Advogados

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