The question of taxation of the compensation for termination of employment is provided for in Article 2, no. 4 of the Portuguese Personal Income Tax Code (PIT Code). Accordingly, the compensation received by the employee upon termination of the employment contract is not subject to taxation for the part that stays below the threshold resulting from the calculation set forth in paragraph 2(b) (not applicable to the compensation of directors, which is fully subject to taxation). The part that exceeds such threshold is taxed as employment income.
The compensation for termination of an employment contract is not subject to taxation in the part that does not exceed “the amount corresponding to the average value of regular remuneration of a salary nature subject to tax, received in the last 12 months, multiplied by the number of years or fraction of seniority or performance of duties in the employer, in other cases“.
The non-subjection to taxation does not apply if, in the following 24 months, a new professional or business contract is signed, irrespective of its nature, with the same entity, in which case the amounts will be taxed in their entirety.
However, it is important to analyse how seniority is determined for the purposes of applying this criterion.
The Supreme Administrative Court (STA) issued a decision in the Judgment for Uniformity of Jurisprudence no. 0407/18.7BALSB, of 5 August 2019, which ruled that only the time worked in the last employer (with whom the employment contract was terminated) would be relevant for the calculation of the compensation. However, this decision does not specifically address situations in which the worker performed different functions in entities belonging to the same corporate group.
This understanding was somewhat supported by a decision of the Centre for Administrative Arbitration (CAAD) Ruling no. 657/2018-T, of 16 September 2019, which introduced a quasi-anti-abuse element, considering that only the time of work in the last employer should be relevant to prevent the worker who receives compensation in view of the many years of seniority in a group, and simultaneously has already received previously (perhaps abroad and paid by other entities of the group) another compensation also not subject to taxation, in view of the same years of seniority.
However, a decision was rendered in another CAAD Ruling no. 290/2020-T, of 5 November 2020, therefore subsequent to the Uniformity Decision of the STA, which determines that seniority should be taken as seniority within a corporate group. This ruling decides in such a direction possibly based on the fact that the Uniformity Ruling does not specifically address the situation of seniority within the same group. There is also a Tax Ruling no. 1818/2010 from the Tax Authority, which was issued well before the Uniformity Decision, but which shares the same understanding as this latest CAAD decision.
Analysing other applicable legislation, article 2(4)(10) of the PIT Code clearly defines an employer as “any entity that pays or makes available remuneration which, under the terms of this article, constitutes income from employment, and any other entity with which it is in a group, control or mere participation relationship, regardless of its geographical location, is equivalent to it“.
Regarding the combination of the inhibitory requirement of no. 4 (b), together with the broadening of the scope of the concept of employer in no. 10, it is uncontested that, in the event that the employee terminates a contract with an entity and signs a new contract with an entity of the same corporate group within 24 months, his severance pay received will be fully subject to taxation.
However, the same assessment based on no. 10, where the concept of employer clearly encompasses the various entities within the same corporate group, should also apply for the determination of the seniority of the employment relationship.
Nevertheless, this requirement in Article 2(4)(b) is not without room for manoeuvre. There are no reasons, at least from the point of view of a literal interpretation of the legal provision, for example, that the assumption of a new employment relationship with an entity of the same group prior to the termination of the current employment relationship entitling the worker to severance pay fulfils the requirement in that subparagraph, and that the severance pay received should still not be subject to taxation because, in practice, no new employment relationship within the same group has been assumed in the subsequent 24 months.
In this sense, the Judgement of the STA no. 032/10, of 27 June 2010, decides that this is clearly possible in cases of members of statutory bodies, which, although qualifying as employment come, still has some intrinsic differences compared to employment contracts per se. This Judgement also predates the Uniformity Decision, which may somewhat deprive it of strength, and increase the risk as to the subsequent taxation of the compensation.
However, by way of conclusion, it is not clear how the law, especially after the autonomisation of the requirement of no. 10, could not provide for the counting of seniority within the same company group, which the Uniformity Decision did not specifically target, but in which it made clear that only the time worked with the last employer should be counted.
An interpretation based on the systematic and literal elements, and also not disregarding the teleological element, since the legislator’s intention was undoubtedly to equate corporate groups to the concept of employer, considering their universality of composite entities, does not allow us, however, to consider the Uniformity Decision and that equation as being antagonistic.
In fact, the conclusion which legally and hermeneutically seems to correspond to the law in force is that seniority, for calculation purposes, should be assessed taking into account the time worked in the last employer and also that, according to Article 2(10) of the PIT Code, the concept of employer should encompass a corporate group reality, where there may have been the mobility of the same worker within the group.
José Miguel Saraiva