Process: 1/2017-T

Date: June 5, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitral Process 1/2017-T addresses whether Portuguese subsidiaries of an Italian parent company can retroactively apply the RETGS (Special Group Taxation Regime) to the 2013 tax year. Three Portuguese companies (A, B, and C) were taxed individually in 2013 because their indirect parent, D (an Italian company), was not Portuguese tax-resident, preventing RETGS application under the then-applicable IRC Code provisions. Following Law 82-C/2014 of December 31, 2014, which amended Articles 69 and 69-A of the IRC Code to permit groups with EU-resident parent companies to apply RETGS, the claimants submitted a request on March 31, 2015 seeking retroactive application to 2013. The claimants argued that the previous prohibition constituted an unlawful restriction on EU freedom of establishment, causing significant disadvantage. They requested: (a) annulment of the 2013 IRC assessments treating them as individual taxpayers; (b) recognition of their right to retroactively elect RETGS for 2013; (c) waiver of formal requirements non-existent at the time; and (d) validation of RETGS application with full tax consequences under Articles 69 et seq. The group structure remained unchanged since 2003, with company A showing taxable income of €1,322,634.35, company B showing €30,364.59, and company C reporting a tax loss of €2,467,656.37 for 2013. The Tax and Customs Authority opposed the request. This case raises fundamental questions about temporal application of tax regime changes, retroactive elections, EU law compliance, and whether formal requirements can be waived when they conflicted with EU freedom of establishment principles at the time of the tax period in question.

Full Decision

ARBITRAL DECISION

The arbitrators Counsellor Jorge Manuel Lopes de Sousa (presiding arbitrator), Dr. A. Sérgio de Matos and Dr. João Gonçalves da Silva (member arbitrators), designated by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 16-03-2017, hereby decide as follows:

1. Report

· A…, S.A. (hereinafter designated as "A…"), legal entity no. …, with address at Rua…, no. …, …, … - … Lisbon;

· B… S.A. (hereinafter designated as "B…"), legal entity no. …, with address at …, …, …, …-… Lisbon, and

· C… Lda. (hereinafter designated as "C…"), legal entity no. …, with address at Rua…, no. …, …, … - … Lisbon

(hereinafter collectively designated as "Claimants"), have, pursuant to the provisions of articles 2, no. 1, subparagraph a) and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters - RJAT), submitted a request for arbitral pronouncement with a view to assessing the legality of the Corporate Income Tax (IRC) assessments of the Claimants, issued on 18 June 2014 (in the case of company A…) and 4 June 2014 (with respect to companies B… and C…), by reference to the tax period of 2013, under numbers 2014 … (Document no. 1), 2014 … (Document no. 2) and 2014 … (Document no. 3), based on IRC Model 22 tax return declarations, which were identified, respectively, with identification codes …-… -… (Document no. 4), …-… -… (Document no. 5) and …-… -… (Document no. 6), documents which are attached to the request for arbitral pronouncement, the contents of which are reproduced herein.

The Claimants formulate the following requests:

a) Declaration of illegality and consequent annulment of the tax assessment acts no. 2014 …, no. 2014 … and no. 2014 …, relating to the tax period of 2013, so as to proceed with immediate and full restoration of legality;

b) Admissibility of the right to opt for the application of the RETGS to the Claimants hereto, by reference to the tax period of 2013, i.e. with retroactive effect to the entire tax period from 1 January 2013 to 31 December 2013; and

c) Waiver of the fulfilment of formal requirements non-existent at the date of commencement of the RETGS relating to the tax period of 2013, for the establishment of that same RETGS; and

d) Consider as valid the application, in the tax period of 2013, of the RETGS, proceeding to taxation, in the context of IRC, of the same, in light of articles 69 and following of the IRC Code, with all legally applicable tax-law consequences.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 13-01-2017.

Pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the duty within the applicable period.

On 27-02-2017, the parties were duly notified of this designation and did not manifest any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in conformity with the provision of subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 16-03-2017.

The Tax and Customs Authority submitted a response in which it argued that the request should be judged unfounded.

By order of 21-04-2017, it was decided to dispense with a hearing and that the proceedings should continue with written submissions.

The parties presented submissions.

The arbitral tribunal was duly constituted in accordance with the provisions of articles 2, no. 1, subparagraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented, have legal standing and capacity, are entitled to participate, and are represented (articles 4 and 10, no. 2, of the same decree-law and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are free from nullities.

2. Facts

2.1. Proven Facts

Based on the elements on file in the proceedings and the administrative file attached to the record, the following facts are considered proven:

a) The Claimants are Portuguese companies subject to the general taxation regime for IRC purposes, with their tax period coinciding with the calendar year;

b) By reference to the tax period of 2013, the Claimants submitted the corresponding IRC Model 22 tax return declarations (Documents nos. 4, 5 and 6).

c) A… and B… both determined, for the year 2013, taxable income in the amounts of Euro 1,322,634.35 (one million, three hundred and twenty-two thousand, six hundred and thirty-four euros and thirty-five cents), and Euro 30,364.59 (thirty thousand, three hundred and sixty-four euros and fifty-nine cents), respectively (Documents nos. 4 and 5 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

d) C… determined, for the year 2013, a tax loss in the amount of Euro 2,467,656.37 (two million, four hundred and sixty-seven thousand, six hundred and fifty-six euros and thirty-seven cents) (document no. 6 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

e) The capital of the Claimants, in the year 2013, was held indirectly by D…, a company under Italian law and resident for tax purposes in Italy, through E… S.A., and F… S.p.A., entities with tax residence in Member States of the European Union, in the manner that follows:

f) The structure of the group remained unchanged since 2003 (article 29 of the request for arbitral pronouncement, not disputed);

g) In 2013, the Claimants did not form part of a group taxed in Portugal under the special group taxation regime (RETGS), and no request to that effect was submitted, because D… was not resident for tax purposes in Portuguese territory;

h) The Claimants were taxed under IRC as individual companies, for the year 2013;

i) Following the entry into force of Law no. 82-C/2014, of 31 December, and in accordance with the provisions of articles 69 and 69-A of the IRC Code, on 31-03-2015, D… and the Claimants hereto submitted to the Tax and Customs Authority a request to be taxed with the application of the RETGS, with D… as the parent company of the group (document no. 7 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

j) In points 12 and 13 of the request referred to in the preceding subparagraph, the Claimants stated the following:

Additionally, it is important to note from the outset that the Claimants request that the provisions of article 69 of the IRC Code be applied to them for previous tax periods, through a different procedural means from this request and to be submitted for such purpose, to the extent that the change provided for in article 69-A reiterates that the impossibility of consolidation at the level of the parent company, as a non-resident company, which was previously provided for, constituted a restriction on the freedom of establishment, resulting in a significant disadvantage for the Claimants.

Thus, notwithstanding the present request being made by reference to the tax period of 2015, it is important to note that the remaining requirements were already met in previous years, and therefore the option for the application of the RETGS in those periods should not be disregarded, pursuant to article 69 of the IRC Code, with the submission of the present request.

k) An order was issued on 30-11-2015 regarding the request referred to in the preceding subparagraphs, the transcript of which is contained in document no. 15 attached to the request for arbitral pronouncement, the contents of which are reproduced herein, in which it states, among other things, the following:

  1. It is confirmed, through the International Exchange of Information reports relating to the period of 2013, that company A… is held directly at 100% by E…, SA (Luxembourg) for more than one year, and indirectly by D… also for more than one year, and holds directly at 100% company B… for more than one year. It is also confirmed that company C… is held at 100% by F… S.p.A. Italy for more than one year and indirectly by D… S.p.A. also for more than one year. In fact, as the applicant states, D… S.p.A. holds 100%, directly F… S.p.A and E… SA since its establishment (cf. Point 19).

  2. In these terms, the conditions required in art. 69-A of the CIRC are verified for the non-resident company to be qualified as dominant, specifically the requirements set out in no. 2 and 6 of art. 69 and in subparagraph b) of art. 69-A both of the IRC Code.

  3. On the other hand, pursuant to subparagraph c) of no. 4 of art. 69 of the CIRC, companies that, at the commencement of application of the regime, record tax losses in the three periods prior to commencement, cannot be part of the group, except, in the case of subsidiary companies, if the holding has already been held by the parent company for more than two years.

  4. In this respect, it is found that company C… recorded losses in the three periods prior to the commencement of application of the regime (2012, 2013 and 2014). However, in accordance with the elements referred to in the proceedings (Point 23), this company is held by the non-resident company, indirectly, for more than two years. Therefore, this company may be part of the group.

  5. As for the verification of the other requirements provided for in art. 69 of the CIRC, we will not pronounce ourselves, as responsibility lies with the taxpayer.

  6. Finally, with regard to what is mentioned in points 12 and 13 of the request, to the effect that the option for the application of the RETGS should not be disregarded pursuant to art. 69 of the CIRC, relating to tax periods prior to 2015, it is hereby stated that this possibility cannot arise since the options were not made within the deadline established in subparagraph a) of no. 7 of art. 69 nor was any request to that effect submitted in due time.

l) On 09-05-2016, A… Portugal submitted an administrative review claiming the self-assessment relating to the year 2013 (document no. 9 attached to the request for arbitral pronouncement, with full text in the administrative file, the contents of which are reproduced herein);

m) On 10-05-2016, B… submitted an administrative review claiming the self-assessment relating to the year 2013 (document no. 10 attached to the request for arbitral pronouncement, with full text in the administrative file, the contents of which are reproduced herein);

n) On 09-05-2016, C… submitted an administrative review claiming the self-assessment relating to the year 2013 (document no. 11 attached to the request for arbitral pronouncement, with full text in the administrative file, the contents of which are reproduced herein);

o) In the administrative reviews, the Claimants argued, among other things, the following:

With regard to the appropriateness of the submission of the present Administrative Review by the Claimant, having in view its taxation in the tax period of 2013, in accordance with the special taxation regime provided for in article 69 of the IRC Code, it behoves the Claimant to clarify that, at the time of fulfilling its obligation of self-assessment of IRC relating to the tax period of 2013, in May 2014, it had not yet had the opportunity to formally join the RETGS A….

Now, given the practical and legal impossibility of, by 31 March 2013, having formally created the RETGS A… and registered such a change with the Tax Authority, either by itself or by its parent company, the Tax Authority's computer system would not, consequently, allow the submission of a tax return by the Claimant as a company forming part of a RETGS and treating it in accordance with the provisions of articles 70 and 71 of the IRC Code.

p) In the said administrative reviews, the Claimants made the following requests, in addition to a request for annulment of the respective individual self-assessments:

a) Consider as valid the exercise of the option for the application of RETGS A… by reference to the tax period of 2013, i.e. with retroactive effect to the entire tax period from 1 January 2013 to 31 December 2013; and

b) Waive the fulfilment of formal requirements non-existent at the date of commencement of RETGS A… relating to the tax period of 2013, for the establishment of that same RETGS; and

c) Consider as valid the existence, in the tax period of 2013, of the above-described RETGS A…, proceeding to taxation, in the context of IRC, of the same, in light of articles 69 and following of the IRC Code, with all legally applicable tax-law consequences, ensuring that RETGS A… determined a tax loss of 1,114,657.43 (one million, one hundred and fourteen thousand, six hundred and fifty-seven euros and forty-three cents), reportable by it in future tax periods, and consequently determine the reimbursement of Euro 254,224.35 (two hundred and fifty-four thousand two hundred and twenty-four euros and thirty-five cents);

q) The administrative reviews referred to were dismissed by orders of 30-09-2016, in the terms set out in documents nos. 12, 13 and 14 attached to the request for arbitral pronouncement, the contents of which are reproduced herein);

r) In the reasoning of the decisions dismissing the administrative reviews, the following is stated, among other things:

II - Grounds for the Claim

The Claimant invokes, in summary:

1- That, as of 2015/01/01, D… S.P.A. (parent company) held indirectly the following companies resident for tax purposes in Portugal:

–> The Claimant, C… LDA, NIF…;

–> A…, S.A., NIF…; and

–> B…, S.A, NIF….

2- On 2015/03/31, the Claimant and the remaining companies forming part of RETGS A…, submitted, in accordance with and for the purposes of articles 69 and 69-A of the CIRC, notification and request for such special taxation regime to be applicable in the tax period, which was approved by the Tax Authority, with retroactive effect to 01/01/2015.

3- That the percentage of shares held by D… S.P.A. in the said companies remains unchanged since 01/01/2003, and therefore the organizational structure presented in art. 5 of the petition was already applicable from that date, and that, with reference to the year of taxation 2013, despite intending to apply the RETGS to its Portuguese subsidiaries and meeting the requirements for such purpose, this was not permitted to it in view of the provisions of art. 69 of the CIRC, which it considers to be a restriction violating the principle of Freedom of Establishment enshrined in art. 49 of the TFEU, being this norm illegal and non-compliant with European Union law, defending the retroactive application of art. 69-A of the CIRC with the possibility of horizontal consolidation.

4- To support its reasoning, the Claimant invokes case law emanating from the CJEU in the context of cases C39/13, C40/13 and C41/13, which pronounced on articles 49 and 54 of the Treaty on the Functioning of the European Union and the primacy of Community law, defending the direct applicability of the possibility of horizontal consolidation, as it understands to result from the Van Genden & Loos rulings (Case C-26/62, of 05/02/63) and Simmenthal (Case C-106/11, of 09/03/78), the ruling handed down by CAAD no. 280/2014-T of 2015/01/12, and also the provisions of article 8 of the Constitution of the Portuguese Republic.

5- For the foregoing, it requests the annulment of said self-assessment and taxation, in the year 2013, under the RETGS regime provided for, at that time, by article 69 of the CIRC, now, articles 69 and 69-A of the CIRC, considering as valid the exercise of the option for the application of RETGS A… by reference to the tax period of 2013, that is, with retroactive effect, with the appropriate consequences.

(...)

IV - Analysis of the Request

1- On 2014/05/27, the Claimant submitted the IRC Model 22 declaration for the year 2013 no. …-2014-… -…, and made payment in the amount of € 2,454.80 as self-assessment of IRC, as evidenced in assessment no. 2014 … of 2014/06/04 (cf. pp. 35 to 41, 43 and 130 to 131).

2- From consultation of the Tax Registry Management and Registration System, it is verified that the Claimant is classified for IRC taxation purposes under the general regime and not under the RETGS (cf. pp. 132 v.) which was also confirmed by the Claimant itself in the footnote of the petition.

3- As to what is invoked by the Claimant, namely as to the retroactive application of art. 69-A of the CIRC, it must be said the following:

a) By means of Law no. 82-C/2014, of 31/12 (article 3) art. 69-A was added to the CIRC providing for the possibility of a company, which does not have its seat or effective management in Portuguese territory, being considered a parent company of a group, provided that it is resident in an EU or EEA Member State and meets the requirements provided for therein.

b) But, as article 5 of said law states, the production of its effects occurs in the tax periods that commence on or after 01 January 2015.

c) In this way, the legislature expressly defined the moment from which it is possible to establish groups whose parent company is based in an EU or EEA Member State, which prevents the possibility of applying retroactively to the group for periods prior to 2015.

d) This interpretation is confirmed by an order dated 2015/06/01 of the Deputy General Director (Case no. 347/15).

e) It is further stated that, as to the alleged violation of the principle of freedom of establishment due to Portuguese legislation not being in line with the decisions of the CJEU, it is incumbent upon the tax administration to interpret and apply the national provisions in force, based on their wording at the date of the facts.

f) Emphasizing that the decisions of said Court result from an interpretation of community law in light of the provisions of national law specific to each Member State, and therefore, in each case at issue, there are specific characteristics of the same.

g) As such, it is not incumbent upon the Tax Authority to assess the conformity of internal legal norms with the European Union treaty, nor to accept directly and automatically, for the resolution of concrete cases, the interpretative guidance emanating from the case law of the CJEU, especially when this has not, in its genesis, the assessment of the compatibility of specific provisions of Portuguese national law.

4- It should further be noted that, since the prerequisites of no. 1 of article 43 of the General Tax Law are not met in this case, the assessment of the right to compensatory interest is prejudiced.

5- For the foregoing, the present administrative review should be dismissed.

V - Conclusion and Decision Proposal

In view of the facts and legal grounds, I am of the opinion that the present administrative review should be dismissed, and the interested party should be notified for purposes of exercising the right to be heard, pursuant to subparagraph b) of no. 1 of article 60 of the General Tax Law.

VI - Supplementary Information - Prior Hearing

In view of the facts and legal grounds mentioned above, an order was issued on 2016/09/05 to the effect of dismissal of the present request, by the Head of the Administrative Justice Division, in substitution and by subdelegation, and the Claimant was notified in accordance with and for the purposes of subparagraph b) of no. 1 of article 60 of the General Tax Law, via postal mail, completed on 2016/09/09.

Since, up to the present date, the Claimant has not exercised its right and the deadline for such purpose has already expired, the draft decision should be confirmed in which dismissal of the petition is proposed, and the interested party should be notified of the right to appeal hierarchically or to challenge the decision judicially, pursuant to articles 66 and 99 of the Code of Proceedings in Tax Matters.

VII - Conclusion and Decision Proposal

In view of the foregoing, taking into account the facts and legal grounds, I am of the opinion that the decision of dismissal should be maintained, and the draft decision should become final.

s) On 30-12-2016, the Claimants submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Facts Not Proven

It was not proven that it was because article 69 of the CIRC, in the version in force in 2013, did not permit the Claimants to opt for the application of the RETGS that the Claimants did not request that application for the year 2013.

This negative finding is justified because the version then in force did permit the application of the RETGS as regards Companies A… Portugal and B…, and they did not request that application.

On the other hand, there was no obstacle to the Claimants hereto having requested in 2013 the application of the RETGS in the terms in which they requested it in 2015, with retroactive effect, and, in the event of hypothetical dismissal, having contested it on the grounds of violation of European Union law, as they defend.

2.3. Rationale for the Determination of Facts

The proven facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement.

3. Law

3.1. Positions of the Parties

In 2014, each of the Claimants submitted to the Tax and Customs Authority a Model 22 declaration relating to their respective year 2013, and made the respective self-assessment of IRC.

On 31-03-2015, the Claimants, together with D… S.p.A, submitted a request for application of the RETGS, with D… S.p.A. as the parent company of the group.

In that request, it was stated that "notwithstanding the present request being made by reference to the tax period of 2015, it is important to note that the remaining requirements were already met in previous years, and therefore the option for the application of the RETGS in those periods should not be disregarded, pursuant to article 69 of the IRC Code, with the submission of the present request".

By order of 30-11-2015, the Tax and Customs Authority approved the request with effect from 01-01-2015, stating, as to the intention to apply the regime to earlier periods, that "this possibility cannot arise since the options were not made within the deadline established in subparagraph a) of no. 7 of art. 69 nor was any request to that effect submitted in due time".

The Claimants, in May 2016, submitted administrative reviews of their respective IRC self-assessments for the year 2013, stating, in summary, that, in light of European Union law, as interpreted by the CJEU in a ruling of 12-06-2014, handed down in joined cases nos. C-39/13, C-40/13 and C-41/13, they met the requirements to be taxed in that year under the RETGS.

The Claimants further stated in the administrative reviews the following:

With regard to the appropriateness of the submission of the present Administrative Review by the Claimant, having in view its taxation in the tax period of 2013, in accordance with the special taxation regime provided for in article 69 of the IRC Code, it behoves the Claimant to clarify that, at the time of fulfilling its obligation of self-assessment of IRC relating to the tax period of 2013, in May 2014, it had not yet had the opportunity to formally join the RETGS A….

Now, given the practical and legal impossibility of, by 31 March 2013, having formally created the RETGS A… and registered such a change with the Tax Authority, either by itself or by its parent company, the Tax Authority's computer system would not, consequently, allow the submission of a tax return by the Claimant as a company forming part of a RETGS and treating it in accordance with the provisions of articles 70 and 71 of the IRC Code.

The Claimants further defend, in summary, that, by force of the principle of the supremacy of European Union law, the regime that was introduced in the CIRC by Law no. 82-C/2014, of 31 December, which amended article 69 and added article 69-A to the CIRC, should already have been applied to the year 2013.

In the present proceedings, the Tax and Customs Authority defends that, in summary:

– the RETGS is of optional application, the option must be communicated through the declaration of changes by the end of the 3rd month of the tax period in which it is intended to commence application (subparagraph a) of no. 7 of art. 69), all constituent companies of the group must satisfy the requirements set out in numbers 3 and 4 of art. 69;

– the Claimants did not make that option, for the year 2013, although article 69 of the CIRC permitted the application of that regime to Companies A…, S.A. and B…, S.A. and could contest any eventual dismissal of the inclusion of C… within the scope of the group;

– the adaptation of Portuguese law to the cited case law was not late;

– the regime introduced by Law no. 82-C/2014, of 31 December, which amended article 69 and added article 69-A to the CIRC, is applicable only to the years from 01-01-2015 onwards.

Both parties pronounce themselves to the effect that, should there be doubts about the application of European Union law, a preliminary ruling should be made to the CJEU, but they propose different questions.

The Tax and Customs Authority proposes the following question:

"Can the interpretation of articles 49 and 54 of the TFEU, based on specific provisions of the tax legislation of a Member State relating to the tax regime of groups of companies, different in some respects from the legislation of the Portuguese State, be applied to legal situations arising before the ruling handed down in the preliminary ruling, even when the interested parties have not complied with the legal obligation to communicate the option for the tax regime of groups in the years in question?"

The Claimants, in their submissions, propose the following question:

"Does subparagraph a) of number 3 of article 69 of the IRC Code with the wording in force in the year 2013 constitute a restriction on the freedom of establishment, within the meaning of article 49, in conjunction with article 54, both of the Treaty on the Functioning of the European Union, by the fact of preventing the application of the special regime for determining the taxable income of groups of companies - RETGS -, provided for in article 69 of the IRC Code, to companies with seat or effective management in Portuguese territory, for the sole reason that the parent company has its seat or effective management in a Member State different from the European Union?"

3.2. Legislation and Case Law of the CJEU Invoked

Articles 49 and 54 of the Treaty on the Functioning of the European Union establish the following:

Article 49

(formerly article 43 TEC)

Within the framework of the following provisions, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State are prohibited. This prohibition shall also apply to restrictions on the setting up of agencies, branches or subsidiaries by nationals of a Member State established in the territory of another Member State.

Article 54

(formerly article 48 TEC)

Companies or firms constituted under the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of the provisions of this Chapter, be treated in the same way as natural persons who are nationals of Member States.

For the purpose of this Chapter, "companies or firms" means any legal entity under public or private law, save for those which pursue non-profit-making objectives.

In the year 2013, article 69 of the CIRC was in force in the version of Decree-Law no. 159/2009, of 13 July, which establishes, among other things, the following regarding the scope and conditions for application of the RETGS:

1 - Where there is a group of companies, the parent company may opt for the application of the special regime for determining the taxable income in relation to all companies in the group.

2 - There is a group of companies where a company, called parent company, holds, directly or indirectly, at least 90% of the capital of one or more other companies called subsidiary companies, provided that such holding confers on it more than 50% of the voting rights.

3 - The option for the application of the special regime for taxation of groups of companies may only be formulated when the following requirements are cumulatively met:

a) The companies belonging to the group all have their seat and effective management in Portuguese territory and all of their income is subject to the general taxation regime in IRC, at the highest normal rate;

b) The parent company has held the holding in the subsidiary company for more than one year, by reference to the date on which the regime commences application;

c) The parent company is not considered a subsidiary of any other company resident in Portuguese territory which meets the requirements to be qualified as a parent company.

d) The parent company has not waived the application of the regime in the three years preceding, by reference to the date on which the regime commences application.

4 - The following companies cannot be part of the group:

a) Those which have been inactive for more than one year or have been dissolved;

b) Those against which a special procedure for recovery or bankruptcy has been initiated in which an order for continuation of the action has been issued;

c) Those which record tax losses in the three years preceding the commencement of the regime, except, in the case of subsidiary companies, if the holding has already been held by the parent company for more than two years;

d) Those which are subject to an IRC rate lower than the highest normal rate and do not waive its application;

e) Those which adopt a tax period not coinciding with that of the parent company;

f) The level of holding required of at least 90% is obtained indirectly through an entity that does not meet the legally required requirements to be part of the group;

g) Those which do not assume the legal form of a private company, joint-stock company or partnership limited by shares, except as provided in no. 12.

In accordance with the provisions of subparagraph a) of no. 3 and subparagraph f) of no. 4, the Claimants could not opt to be taxed under this regime, as the parent company and the capital holders did not have their seat nor effective management in Portuguese territory.

The CJEU, in a ruling of 12-06-2014, handed down in joined cases nos. C-39/13, C-40/13 and C-41/13, decided the following:

  1. In cases C‑39/13 and C‑41/13, articles 49 TFEU and 54 TFEU must be interpreted to the effect that they preclude legislation of a Member State pursuant to which a resident parent company may form a fiscal unity with a resident subsidiary when it holds it through one or more resident companies, but may not form such fiscal unity when it holds the subsidiary through non-resident companies which do not have a permanent establishment in that Member State.

  2. In case C‑40/13, articles 49 TFEU and 54 TFEU must be interpreted to the effect that they preclude legislation of a Member State pursuant to which the fiscal unity regime may be granted to a resident parent company holding resident subsidiaries, but not to resident sister companies whose common parent company does not have its seat in that Member State, nor does it have a permanent establishment there.

Following the redaction given to the CIRC by Law no. 82-C/2014, of 31 December, the provisions of article 69 of the CIRC now have the following wording:

1 - Where there is a group of companies, the parent company may opt for the application of the special regime for determining the taxable income in relation to all companies in the group.

2 - There is a group of companies where a company, called parent company, holds, directly or indirectly, at least 75% of the capital of one or more other companies called subsidiary companies, provided that such holding confers on it more than 50% of the voting rights.

3 - The option for the application of the special regime for taxation of groups of companies may only be formulated when the following requirements are cumulatively met:

a) The companies belonging to the group all have their seat and effective management in Portuguese territory and all of their income is subject to the general taxation regime in IRC, at the highest normal rate;

b) The parent company has held the holding in the subsidiary company for more than one year, by reference to the date on which the regime commences application;

c) The parent company is not considered a subsidiary of any other company resident in Portuguese territory which meets the requirements to be qualified as a parent company;

d) The parent company has not waived the application of the regime in the three years preceding, by reference to the date on which the regime commences application.

4 - The following companies cannot be part of the group:

a) Those which are inactive for more than one year or have been dissolved;

b) Those against which a special procedure for recovery or bankruptcy has been initiated in which an order for continuation of the action has been issued;

c) Those which record tax losses in the three years preceding the commencement of the regime, except, in the case of subsidiary companies, if the holding has already been held by the parent company for more than two years;

d) Those which are subject to an IRC rate lower than the highest normal rate and do not waive its application;

e) Those which adopt a tax period not coinciding with that of the parent company;

f) (Repealed.)

g) Those which do not assume the legal form of a private company, joint-stock company or partnership limited by shares, except as provided in no. 11. (Rectified by Rectification Statement 18/2014, of 13 March)

Furthermore, the same Law no. 82-C/2014 added to the CIRC article 69-A, with the following wording:

Article 69-A

Parent company with seat or effective management in another Member State of the European Union or the European Economic Area

1 – The parent company, as such qualified in accordance with no. 2 of the preceding article, which does not have its seat or effective management in Portuguese territory, may also opt for the application of the special regime for taxation of groups of companies provided for in the present subsection, provided that it cumulatively meets the following conditions:

a) It is resident in a Member State of the European Union or the European Economic Area which is bound by administrative cooperation in the area of taxation equivalent to that established within the framework of the European Union;

b) It has held the holding in the subsidiary companies for more than one year, by reference to the date on which the regime commences application;

c) It is not held, directly or indirectly, at least in 75% of the capital, by a company resident in Portuguese territory which meets the requirements set out in the preceding article to be qualified as a parent company, provided that such holding confers on it more than 50% of the voting rights, in accordance with no. 6 of the preceding article;

d) It has not waived the application of the regime in the three years preceding, by reference to the date on which the regime commences application;

e) It is subject to and not exempt from a tax referred to in article 2 of Directive no. 2011/96/EU, of the Council, of 30 November, or a tax of a nature identical or similar to IRC;

f) It has the form of a limited liability company;

g) Where it holds a permanent establishment in Portuguese territory through which the holdings in the subsidiary companies are held and no situation provided for in subparagraphs a), c), d) or e) of no. 4 of the preceding article applies to it, with the necessary adaptations.

2 – The option provided for in the preceding number determines the application of the special regime for taxation of groups of companies in relation to all subsidiary companies with seat and effective management in Portuguese territory in relation to which the conditions established in nos. 3 and 4 of the preceding article are met, as well as to the permanent establishment of the parent company situated in this territory through which the holdings are held.

3 – The option for the regime in accordance with the present article depends on notification to the Tax and Customs Authority, in the declaration referred to in no. 7 of the preceding article, of which company with seat and effective management in this territory belonging to the group is designated to assume responsibility for the fulfilment of all obligations incumbent on the parent company in accordance with the present Code, without prejudice to the joint and several liability of the parent company and the other companies belonging to the group for the payment of tax, in accordance with article 115.

4 – In cases where the parent company has a permanent establishment in Portuguese territory through which the holdings in the subsidiary companies are held, the provision of the preceding number is necessarily observed by this.

5 – In everything not provided for in the present article, the provision of the preceding article applies, with the necessary adaptations.

In light of the aforementioned case law of the CJEU, it appears clear that restrictions on the taxation of groups under a fiscal unity regime arising from the parent company not being resident in Portugal are not compatible with European Union law.

In any event, in addition to it appearing clear that the question raised by the Claimants has the affirmative answer they intend, the preliminary ruling sought by the Claimants is not justified, since, in the case at hand, the condition they invoke is not met, namely that the refusal to apply the group taxation regime had as its "sole reason that the parent company has its seat or effective management in a Member State different from the European Union". In fact, the dismissal of the application of the RETGS was based on the fact that the Claimants did not communicate the option for the application of that regime within the applicable period provided for in article 69, no. 7, of the CIRC.

As to the preliminary ruling sought by the Tax and Customs Authority, it is also not justified, since articles 49 and 54 of the Treaty on the Functioning of the European Union concern the equivalence between domestic companies and companies with registered office, central administration or principal place of business in the Union, and not the need or otherwise for compliance with the obligation to timely communicate the option for the taxation regime as a fiscal unity, which was the basis for the dismissal of the request for application of that regime.

For this reason, the requests for preliminary rulings are dismissed.

3.3. Assessment of the Question

The Tax and Customs Authority, in the order issued on 30-11-2015, concluded by the verification of all the requirements for application of the RETGS as regards the year 2015.

As to the preceding periods, the Tax and Customs Authority did not invoke in the said order that the requirements whose verification was incumbent upon the Tax and Customs Authority were not met, limiting itself to invoke as an obstacle the fact that the options for the application of the RETGS were not formulated within the period established in subparagraph a) of no. 7 of article 69 of the CIRC nor was any request to that effect submitted in due time.

The Claimants did not challenge what was decided in the said order by any other means than the submission of the administrative reviews and the present proceedings.

In the administrative reviews, the Claimants requested, in summary, in addition to the annulment of the self-assessments, that they be taxed, in the year 2013, under the RETGS regime provided for, at that time, by article 69 of the CIRC, waiving the fulfilment of formal requirements for the establishment of that same RETGS in 2013, and considering as valid the exercise of the option for the application of the RETGS made in 2015 by A… by reference to the tax period of 2013, that is, with retroactive effect.

Thus, what is at issue is not properly the legality or illegality of the self-assessments, which were made in accordance with the respective Model 22 declarations and the conditions then existing (no option for RETGS in the year 2013), but rather whether the Tax and Customs Authority, faced with the option for such regime formulated in 2015, should have decided the application of that regime to the group formed by the Claimant and D… S.p.A.

It is questionable whether the administrative reviews constitute an appropriate procedural means to challenge what was decided in the said order of 30-11-2015 regarding the infeasibility of applying the RETGS to periods prior to 2015, motivated by the fact that "the options were not made within the period established in subparagraph a) of no. 7 of art. 69 nor was any request to that effect submitted in due time".

However, since the Tax and Customs Authority did not raise any objection and assessed the administrative reviews of the self-assessments, it is on the basis of this procedural context existing (decisions on administrative reviews) that the legality or otherwise of the refusal to apply that regime should be assessed in the present proceedings.

It is manifest that the self-assessments do not present any error of fact or law as regards the premises on which they are based.

In fact, "the determination of taxable income shall be made on the basis of declarations by the taxpayers, provided that they submit them in the manner provided for in law and furnish the tax administration with the essential elements for the verification of their tax situation" (article 59, no. 2, of the Code of Procedures in Tax Matters) and that is precisely what occurred.

The application of the RETGS to the year 2013 does not depend solely on the verification of the legal requirements for its application, as it is an optional regime, applicable only following an option by the parent company, made in advance of the end of the first year in which its application is intended (in the case at hand, "by the end of the 3rd month of the tax period in which its application is intended to commence", in accordance with no. 7 of article 69 of the CIRC).

The admissibility of the option by IRC taxpayers for the application of the RETGS, with the possibility of obtaining tax advantages for these and consequent loss of tax revenues, is justified by extrafiscal purposes, namely to facilitate "the restructuring of the business structure and the recovery of economic groups, through the promotion of synergies between companies integrated in a group, strengthening and consolidating the business structure, in order to achieve greater competitiveness and promote competition", not being justifiable for obtaining "purposes exclusively fiscal" (ruling of the Supreme Administrative Court of 29-12-2012, case no. 021/12).

In this light, the imposition of the obligation to opt for the application of this regime before the results of its application are known is in harmony with this legislative purpose of making it difficult to use the regime for purposes exclusively fiscal, which would be viable with the possibility of retroactive application, with first determining the results fiscal and only subsequent choice of the most advantageous tax regime.

Thus, such option within the prescribed period must be manifested by the parent company (and not by some or all of the subsidiary companies), being such manifestation essential because, among other things, it entails for it the assumption of fiscal responsibilities (article 115 of the CIRC), in addition to declaratory obligations.

In the case at hand, no request for the option for taxation under the RETGS was submitted in 2013 either by D… S.p.A., the parent company of the group, or by any of the Claimants.

On the other hand, A… Portugal, S.A. and B… S.A. could have opted for taxation under the RETGS, in view of the relationship of control of the latter over the latter, on the assumption that the remaining required conditions were met (as the Claimants assert in the present proceedings).

For this reason, it cannot be concluded even that, in 2013, the Claimants intended to be taxed under the RETGS and merely failed to request it due to the legal obstacle they invoke, arising from the version then in force of article 69 of the CIRC.

On the other hand, as the Tax and Customs Authority rightly notes in its Response, "as regards the inclusion of company C… within the scope of the RETGS, if the Claimants, as they now seek to allege, were convinced that national legislation was illegal and non-compliant with community law by not permitting horizontal fiscal consolidation, as was subsequently embodied in articles 69 and 69-A of the IRC Code through Law no. 82-C/2014, it will always be said that nothing prevented them from raising such inclusion with the Tax Authority, which would necessarily have to pronounce itself on the matter" and "in the event of any refusal by the Tax Authority, they could always contest it before national judicial bodies, raising the supremacy of community law before a Portuguese court, on the grounds of any non-compliance of that provision of the IRC Code with articles 49 and 54 of the TFEU".

In any event, since the application of the RETGS is not automatic and no option was made for its application, the individual self-assessments do not suffer from any error, either in respect of the premises of fact or of law, as the applicable regime was the individualized taxation of each of the Claimants.

On the other hand, the Tax and Customs Authority could not, within the scope of the administrative reviews, and neither can this Arbitral Tribunal, fictionally presume that in 2013 the parent company made an option for the application of the RETGS or dispense with the fulfilment of the obligation of timely communication of the option.

Finally, it is clear that the new regime provided for in article 69-A of the CIRC, introduced by Law no. 82-C/2014, is applicable only to tax periods commencing on or after 01-10-2015, as is expressly established in no. 1 of its article 5, in harmony with the basic principle on the application in time of tax norms, set out in no. 1 of article 12 of the General Tax Law.

In conclusion, in summary, it is concluded that:

– the option made in 2015 for the application of the RETGS with respect to the year 2013 is not admissible;

– the requirement of lack of notification to the Tax and Customs Authority of the option for the application of the RETGS cannot be waived by this Arbitral Tribunal, as it must be made within the period provided for in no. 7 of article 69 of the CIRC;

– without such option having been timely communicated, the application of the RETGS in the tax period of 2013 is not feasible;

– the assessments challenged, made in consonance with the declarations submitted by the Claimants, do not suffer from any illegality, and therefore their annulment is not justified.

4. Decision

In these terms, this Arbitral Tribunal hereby decides as follows:

a) To judge the request for arbitral pronouncement unfounded;

b) To dismiss the Tax and Customs Authority from all requests.

5. Value of the Case

In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, subparagraph a), of the Code of Procedures in Tax Matters and 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 271,722.53.

6. Costs

Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at € 4,896.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Claimants.

Lisbon, 05-06-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Sérgio de Matos)

(João Gonçalves da Silva)

Frequently Asked Questions

Automatically Created

What is the RETGS (Regime Especial de Tributação dos Grupos de Sociedades) under Portuguese IRC law?
RETGS (Regime Especial de Tributação dos Grupos de Sociedades) is the Special Group Taxation Regime under Portuguese IRC law that allows corporate groups meeting specific requirements to be taxed on a consolidated basis rather than as individual companies. Prior to Law 82-C/2014, RETGS required the parent company to be Portuguese tax-resident. Article 69-A, introduced by that law, extended RETGS eligibility to groups with parent companies resident in other EU Member States, addressing EU freedom of establishment concerns.
Can companies retroactively elect to apply the RETGS group taxation regime for a prior tax period?
The central issue in Process 1/2017-T was whether companies could retroactively elect RETGS for 2013 after Law 82-C/2014 removed the Portuguese residency requirement for parent companies. The claimants argued that the prior restriction violated EU freedom of establishment, creating significant disadvantage, and that retroactive application should be permitted once the discriminatory barrier was removed. The Tax Authority contested this retroactive application, though the final tribunal ruling is not included in this excerpt.
What are the formal requirements for constituting a RETGS group under Articles 69 et seq. of the IRC Code?
Under Articles 69 et seq. of the IRC Code, RETGS requires: (1) a parent company holding directly or indirectly at least the requisite ownership percentage in subsidiaries; (2) all group companies subject to IRC; (3) tax periods coinciding with the calendar year; (4) formal request submitted within specified deadlines; and (5) since Law 82-C/2014, the parent company may be resident in any EU Member State (previously restricted to Portuguese residents). Additional requirements concern accounting standards, continuous ownership, and absence of tax arrears.
How did the CAAD arbitral tribunal rule on the legality of the 2013 IRC tax assessments in Process 1/2017-T?
The excerpt from Process 1/2017-T shows the arbitral tribunal was properly constituted on March 16, 2017, comprising three arbitrators. The proceedings addressed the legality of 2013 IRC assessments for three Portuguese subsidiaries of an Italian parent. The Tax Authority argued the claim should be rejected. The tribunal dispensed with oral hearings and proceeded with written submissions. The actual decision on whether the 2013 assessments should be annulled and RETGS retroactively applied is not included in this excerpt, which ends before the merits analysis and ruling.
What happens when formal requirements for RETGS did not exist at the time of the group's formation?
When formal requirements for RETGS did not exist at the time of group formation—specifically, the prohibition against non-resident EU parent companies prior to Law 82-C/2014—the claimants requested waiver of those requirements, arguing they constituted unlawful restrictions on EU freedom of establishment. This raises complex questions about temporal application of tax law changes, whether discriminatory provisions can prevent retroactive elections once removed, and the scope of EU law's primacy over domestic tax requirements. The resolution depends on whether the original restriction's incompatibility with EU law permits retroactive correction.