Process: 102/2019-T

Date: September 25, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Case 102/2019-T) addresses the tax treatment of payments made by a Portuguese real estate brokerage company to entities in tax havens (Hong Kong and UAE) for services related to Golden Visa transactions. The Portuguese Tax Authority (AT) issued an additional IRC assessment of €52,568.52 for the 2014 tax year, making two key corrections: (i) denying the deductibility of €81,500 in expenses paid to non-residents in privileged tax regimes under Article 23-A of the IRC Code, and (ii) applying autonomous taxation of €28,525 under Article 88(8) of the IRC Code. The claimant company challenged these corrections, arguing erroneous quantification and qualification of taxable matter. The case involves payments to entities in Hong Kong (€55,000 for marketing and promotional services related to Golden Visa programs) and UAE for real estate transactions involving foreign buyers seeking Portuguese residence permits through property investment. The arbitral tribunal must determine whether the AT correctly applied the tax haven rules, which generally treat expenses paid to entities in privileged tax jurisdictions as non-deductible unless the taxpayer proves the expenses correspond to actual operations and were not used primarily for tax evasion purposes. The case also examines whether autonomous taxation rates (typically higher for payments to tax havens) were properly applied, representing an important precedent for Portuguese companies engaging international intermediaries in cross-border real estate transactions.

Full Decision

ARBITRAL TAX JURISPRUDENCE

ARBITRAL DECISION

Case No. 102/2019-T

Date of Decision: 2019-09-25

Corporate Income Tax (IRC)

Value of the Claim: €52,568.52

Subject Matter: IRC - tax havens; IRC; taxable income; autonomous taxation; payment to non-resident; non-deductible expense.

ARBITRAL DECISION (consult full version in PDF)

I - REPORT

  1. On 14 February 2019, A..., LDA., holder of Tax Number..., with registered office at..., No...,...-... Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as "RJAT"), seeking a declaration of illegality of the additional assessment of Corporate Income Tax (hereinafter, abbreviated as "IRC") No. 2017..., in the amount of €52,568.52. The additional assessment in question concerns the tax year 2014 and contains corrections (i) to the taxable base, in the amount of €81,500, and (ii) to autonomous taxation, in the amount of €28,525, both cases related to payments made to entities headquartered in territories with privileged tax regimes (Hong Kong and United Arab Emirates).

  2. To support its claim, the Claimant alleges, in summary, the illegality of the corrections made by the Tax and Customs Authority (hereinafter, abbreviated as "AT"), due to erroneous quantification and qualification of the taxable matter.

  3. On 15-02-2019, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

  4. The Claimant failed to appoint an arbitrator, therefore, pursuant to the provisions of Article 6, paragraph 2, subparagraph a) and Article 11, paragraph 1, subparagraph a) of the RJAT, the President of the CAAD Deontological Council designated the undersigned as arbitrator of the singular arbitral tribunal, having accepted the appointment within the applicable deadline.

  5. On 04-04-2019, the Parties were notified of this designation and expressed no intention to challenge it.

  6. In accordance with the provisions of Article 11, paragraph 1, subparagraph c) of the RJAT, the singular Arbitral Tribunal was constituted on 26-04-2019.

  7. On 31-05-2019, the Respondent, duly notified for this purpose, presented a response to the arbitral claim filed, defending the inadmissibility of the claim, given its complete lack of legal support, with the administrative file (hereinafter "PAT") attached to the record on 06-06-2019.

  8. Considering that (i) there was no need for additional evidence production beyond the documentary evidence attached to the record (no witnesses were called), (ii) there were no exceptional matters on which the parties should pronounce themselves, and (iii) the principle of procedural economy applies in arbitral proceedings, the Parties were notified to indicate whether they waived the hearing referred to in Article 18 of the RJAT and, if so, whether they waived the presentation of arguments or wished to present them in writing.

  9. The Parties waived the hearing referred to in Article 18 of the RJAT, as well as the presentation of arguments.

  10. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5, and 6, paragraph 2, subparagraph a) of the RJAT.

  11. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Portaria No. 112-A/2011, of 22 March.

The proceedings are not subject to any nullities.

Thus, there is no obstacle to the examination of the case.

All matters considered, it is necessary to decide:

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

  1. The Claimant is a commercial company engaged in real estate brokerage activities.

  2. The Claimant was subject to an inspection procedure for the tax year 2014, of partial scope, which focused on IRC.

  3. From this procedure resulted corrections to the IRC taxable base, based on the improper deduction of expenses not accepted fiscally, by application of Article 23-A, paragraph 1, subparagraph r) and paragraph 7 of the IRC Code, and on the failure to apply the autonomous taxation rates provided for in Article 88, paragraph 8 of the IRC Code.

  4. The following invoices are at issue, as appears from page 10 of the Tax Inspection Report:

  5. On 29 March 2017 and 29 May 2017, the Claimant was personally notified and requested to provide clarifications regarding the aforementioned invoices.

  6. The Claimant responded to the said clarification requests through the letters attached to pages 7 and 58 of the PAT, having enclosed copies of the related invoices, copies of the deeds of purchase and sale of the real properties inherent to the transactions, copies of proof of payment to non-resident entities, and a copy of the commercial protocol established with B... .

  7. It results from the Tax Inspection Report (pages 11 et seq.) that:

  8. Regulatory Decree No. 15-A/2015, of 2 September, which made the third amendment to Regulatory Decree No. 84/2007, of 5 November, which regulates the legal regime for foreigners on national territory, established the procedural and normative framework to which applicants for Residence Authorization for Investment (commonly referred to as "Golden Visa") must adhere.

  9. On 16 July 2014, before notary C..., a deed of purchase and sale was executed, through which the company D..., S.A., for the price of €550,000.00, sold the autonomous fraction designated by the letter S, a storage unit No. 2 and six automatic parking spaces, of the property located at ..., No. ... to ... and ..., Street No. ... to..., in Lisbon, registered in the urban property registry under article ..., of the parish of ... .

  10. The buyer of the property was E..., of Chinese nationality, not resident in Portugal at the date, with the deed being subscribed by his attorney F... .

  11. On 16-07-2014, the Claimant invoiced the seller of this property (D..., S.A.) in the amount of €121,951.22, plus VAT at the legal rate in effect, for a total of €150,000, with the invoice description being "Real Estate Brokerage Services".

  12. On 22-07-2014, G... issued an invoice to the Claimant in the amount of €55,000, with the following description: "Services fee for the Marketing and Promotional of the Golden Visa in China and Hong Kong".

  13. On 30-07-2014, H..., R.L. invoiced the Claimant in the amount of €11,000, plus VAT at the legal rate, for a total amount of €13,530, with the invoice description being "Legal Advisory Services".

  14. On 04-10-2014, the company I..., Sole Proprietor Company, Ltd., issued an invoice to the Claimant in the amount of €41,984.96, plus VAT at the legal rate, for a total amount of €51,649.50, which had the description "Real Estate Services".

  15. On 26 May 2014, before notary J..., a deed of purchase and sale was executed, through which K... and L..., for the price of €530,000.00, sold the autonomous fraction designated by the letters EF, intended for housing, with exclusive right to use two parking spaces designated by Nos. ... and ... and a storage unit No..., all of the property located at ..., lot 1.19.03A to lot 1.19.03M, in Lisbon, registered in the urban property registry under article ..., of the parish of ... .

  16. The buyer of the property was M..., of Indian nationality, resident in Dubai at the date, with the deed being subscribed by her attorney N... .

  17. On 16-04-2014, the Claimant invoiced the seller of this property (L...) in the amount of €13,250, plus VAT at the legal rate in effect, for a total amount of €16,297.50, with the invoice description being "Real Estate Brokerage Services – Referring to 50% of the sale of the property located at ..., ..., in the parish of ..., municipality of Lisbon".

  18. On 26-04-2014, the Claimant invoiced the seller of this property (K...) in the amount of €13,250, plus VAT at the legal rate in effect, for a total amount of €16,297.50, with the invoice description being "Real Estate Brokerage Services – Referring to 50% of the sale of the property located at ..., lot..., ..., in the parish of ..., municipality of Lisbon".

  19. On 03-06-2014, O..., Ltd. invoiced the Claimant in the amount of €4,967.63, plus VAT at the legal rate, for a total amount of €6,110.18, with the invoice description being "Provision of Real Estate Services".

  20. On 11-06-2014, P... Sole Proprietor, Ltd. invoiced the Claimant in the amount of €4,158, plus VAT at the legal rate, for a total amount of €5,114.34, with the invoice description being "Real Estate Commissions".

  21. On 26-06-2014, Q..., Ltd. invoiced the Claimant in the amount of €3,693.63, plus VAT at the legal rate, for a total amount of €4,543.16, with the invoice description being "Real Estate Commissions".

  22. On 29-04-2014, B… invoiced the Claimant in the amount of €13,250, with the invoice description being "First instalment of the service fees for the Marketing and Promotional of the Golden Visa in the GCC countries and the handling of the process with Mr. M…".

  23. On 08-06-2014, B… invoiced the Claimant in the amount of €13,250, with the invoice description being "Second instalment of the service fees for the Marketing and Promotional of the Golden Visa in the GCC countries and the handling of the process with Mr. M…".

  24. The Claimant, on 28 August 2017, filed a gracious complaint against the aforementioned additional tax assessment.

  25. By letter dated 8 February 2019, the Claimant was notified of the decision issued by the Director of Finance of Lisbon, which dismissed the gracious complaint.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of the Proven and Not Proven Matters of Fact

With regard to matters of fact, the Tribunal does not need to pronounce itself on everything alleged by the parties; rather, it is incumbent upon it to select the facts that are relevant to the decision and to distinguish the proven from the unproven matters (cf. Article 123, paragraph 2 of the CPPT and Article 607, paragraph 3 of the Civil Procedure Code (hereinafter "CPC"), applicable ex vi Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

In this manner, the facts relevant to the judgment of the case are chosen and selected based on their legal relevance, which is established in view of the various plausible solutions of the legal issue(s) (cf. former Article 511, paragraph 1 of the CPC, corresponding to current Article 596, applicable ex vi Article 29, paragraph 1, subparagraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110/7 of the CPPT, and the documentary evidence attached to the record, the facts listed above were considered proven, with relevance to the decision.

B. ON THE LAW

As already mentioned, the Claimant contends that the corrections made by the AT are illegal due to erroneous quantification and qualification of the taxable matter.

These corrections were based on the following:

  • Improper deduction of expenses not accepted fiscally, by application of Article 23-A, paragraph 1, subparagraph r) of the IRC Code and paragraph 7 of the same legal provision;

  • Failure to apply autonomous taxation, in accordance with Article 88, paragraph 8 of the IRC Code.

Regarding the Improper Deduction of Expenses Not Accepted Fiscally

The Claimant alleges that the expenses incurred with commissions paid to the two entities identified above, headquartered in Hong Kong and the United Arab Emirates (Dubai), are deductible for tax purposes, and that they are not subject to autonomous taxation, as they correspond to operations actually performed and do not have an abnormal character or excessive amount.

The provision at issue is Article 23-A, paragraph 1, subparagraph r) of the IRC Code, which is worded as follows:

"The following charges are not deductible for the purposes of determining taxable income, even when accounted for as expenses of the taxation period:

r) Amounts paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a tax regime identified by ordinance of the member of the Government responsible for the area of finances as a clearly more favorable taxation regime, unless the taxpayer proves that such charges correspond to operations actually performed and do not have an abnormal character or excessive amount."

Both the territory of Hong Kong and the territory of the United Arab Emirates were included, in 2014, in the "list of countries, territories and regions with privileged tax regimes, clearly more favorable," which appears in Portaria No. 292/2011, of 8 November, which amended Portaria No. 150/2004, of 13 February.

Thus, the issue at stake in the situation under analysis is the burden of proof, imposed by the aforementioned rule, regarding the effectiveness of the operations and the normal or non-excessive character of the operations, a burden that, under the applicable rules, rests with the Claimant.

The judgment of the TCA-Sul of 05-11-2015, rendered in Case 07022/13, states that we are dealing with the "application of the rule of non-acceptance of deductible charges when payments made to natural persons or companies located in tax havens are at issue, unless the taxpayer proves the vectors identified above:

a- That we are dealing with operations actually performed;

b- That they do not have an abnormal character or that the amount in question is not excessive."

It also follows from the aforementioned judgment that:

"It should further be noted that the law does not require any formalism in these proofs, thus applying the system of free proof to them, and the taxpayer may avail itself of all means of proof permitted by law (cf. e.g., Articles 352 et seq. of the Civil Code). With regard to proof of the authenticity of the operation, it will not be sufficient to exhibit written documents, namely contracts concluded between the parties, as these are presumed to be simulated, nor to demonstrate payment of the price, as that is not in question. What must be the subject of proof is rather the actual provision of services, (...) or in other words, the commercial fact that was the origin of the payment of the price that appears as a cost to be deducted in IRC proceedings. As for proof of the absence of abnormal or excessive character of the expenses, this must pass through demonstrating that the contract, whose authenticity has been proven, is balanced. For this purpose, the taxpayer must demonstrate the actual importance of the benefits obtained from the contract in question, such as proving that the charges established constitute just remuneration of those benefits, particularly by comparison with the costs of similar services on the market."

It is therefore necessary to determine whether proof has been made that (i) we are dealing with operations actually performed and (ii) they do not have an abnormal character or excessive amount.

The Claimant alleged that, given its activity, it regularly acquires marketing services and market prospecting services, and that the payment of commissions to non-resident entities falls within the scope of its activity.

It further alleged that, considering the existence of the Residence Authorization for Investment (Golden Visa), the benefits of such services are apparent and are perceptible in the economic data relating to the aforementioned regime.

The Claimant filed with the record a set of elements that formally prove the performance of the operations conducted.

However, given the fact that the entities that invoiced the commissions are residents in countries with more favorable tax regimes, and as results (among others) from the aforementioned judgment, it was required of the Claimant to provide proof of the materiality of the operations.

It is true that, as the Claimant indicates, "the fact that the claimant sold the aforementioned properties to citizens who, at the date, had residence in the territories of the recruiting companies, is an indirect but convincing proof that there was an efficient recruitment activity, as without this, it is not clear how they could have known that the claimant had properties for sale." However, in light of the wording of the legal rule in question here, such indirect proof is insufficient, requiring the Claimant to present elements that prove the actual performance of the operation.

Although the presentation of all the elements suggested by the AT was not required (precisely because, in fact, the Claimant could hardly have had access to data such as the identification of human resources involved, hours applied and hourly rates per consultant), it could have provided elements that would allow it to demonstrate the materiality of the operations, such as correspondence exchanged regarding each client or evidence of information on the benefits of investment provided to non-resident partners by them provided to their potential clients.

Furthermore, the procedure adopted by the Claimant does not appear uniform in the two operations analyzed and raises some questions about how they were conducted. Let us examine this.

Real Estate Property Located at Largo ...

This property was sold for €550,000, with the Claimant invoicing the seller for real estate brokerage services of €150,000 (VAT included), corresponding to approximately 27% of the property value. This invoice appears to charge the property seller the commissions invoiced by the various parties involved in the transaction (the Claimant, the company I..., Ltd., H..., RL, and the non-resident partner), possibly plus the Claimant's own commission.

However:

  • The invoice issued by the Claimant does not identify the amount of the commission relating to its services, nor does it identify the operation to which it relates, making it impossible to verify whether that amount relates to this real estate transaction or to other(s). The sum of the amounts invoiced by each participant was €92,400 (€26,400+€11,000+€55,000); does the difference correspond to the Claimant's commission?

  • The invoice issued by I..., Sole Proprietor, Ltd. has a higher value (€41,984.96), but, according to the Claimant, this entity received €26,400 for recruiting this Client; the invoice description does not allow identification of whether it refers to this transaction or to other(s);

  • The invoice issued by H..., RL does not clearly identify to which real estate transaction it relates, and may refer to this transaction or to other(s). Additionally, legal services are frequently invoiced to the property buyer, not to the real estate broker.

While it is true that these operations are not at issue in the present inspection procedure and unfavorable consequences cannot be drawn from these facts for the Claimant, they raise questions about the procedures adopted in calculating and invoicing real estate brokerage commissions, as well as the operations performed by each of the participants, including the non-resident partner.

Real Estate Property Located at ...

This property was sold for €530,000, with the Claimant invoicing each of the sellers in the amount of €13,250, plus VAT at the legal rate in effect, for a total of €15,900 (considering both sellers, the commission was €26,500, with VAT the amount was €31,800).

With regard to this transaction, clarifications were provided at different times (March and May 2017), with the commission amount invoiced by the Claimant remaining the same (€26,500). However, in the clarifications provided in March, only one invoice issued by the non-resident partner (invoice No. 36) was considered, whereas in the clarification provided in May two invoices (Nos. 30 and 36) were indicated, and the amounts of the commissions of the other parties involved in the transaction were also substantially different.

In this case, if the Claimant invoiced the property sellers in the amount of €26,500 and that was precisely the amount of the commission invoiced to it by the non-resident partner, the Claimant obtained no gain, which surely was not the case. Note that, in addition to the commission charged by the non-resident partner, the Claimant indicates it incurred commissions invoiced by the entities O..., Ltd. (€9,646), P..., Ltd. (€5,300), and Q..., Ltd. (€2,650). It is hardly credible that the Claimant invoiced a commission in the amount of €26,500 when, for the performance of the transaction, it incurred commissions in the amount of €41,096 – if so, it would have made no gain on this transaction.

In this case as well, the invoices issued by the various parties involved in the transaction (with the exception of the invoices issued by the Claimant and the non-resident partner) do not allow identification of the transaction to which they relate, and may refer to this transaction or to other(s).

In this context, it cannot be concluded other than that the clarifications provided during the tax inspection procedure do not allow a clear understanding of the operations performed and their respective costs, and that the Claimant failed to demonstrate the actual performance of the operations underlying the payments made to entities resident in jurisdictions with more favorable taxation regimes, as fiscal law required.

Regarding proof of the normal character and non-excessive amount of the commissions, and as the Claimant indicated, the payment of remuneration for customer recruitment services for the sale of real estate is normal, being regulated by Law No. 15/2013, of 8 February (legal regime for real estate brokerage activity).

As to the "excessive character," the Claimant alleged nothing about specific circumstances of each of the transactions that would allow conclusions to be drawn about the adequacy of the commission amount charged, limiting itself to stating that the conditions for its performance were communicated to the owners of the properties interested in their sale and accepted by them.

In fact, even though the commission amount could be freely set, it was incumbent upon the Claimant to prove that such amount complied with the legally established conditions, which could be done by clarifying the manner of calculating commissions or by comparing its amount with that of commissions charged in similar transactions (and among themselves, the commissions at issue here have quite different amounts).

However, the Claimant's allegations are not sufficient for proof of the normal character and non-excessive amount of the operation to be considered accomplished. Indeed, as can be read in the TCA-Sul judgment of 05-11-2015, rendered in Case 07022/13, we are dealing with the "application of the rule of non-acceptance of deductible charges when payments made to natural persons or companies located in tax havens are at issue, unless the taxpayer proves the vectors identified above:

a- That we are dealing with operations actually performed;

b- That they do not have an abnormal character or that the amount in question is not excessive."

It also follows from the cited judgment that:

"It should further be noted that the law does not require any formalism in these proofs, thus applying the system of free proof to them, and the taxpayer may avail itself of all means of proof permitted by law (cf. e.g., Articles 352 et seq. of the Civil Code). With regard to proof of the authenticity of the operation, it will not be sufficient to exhibit written documents, namely contracts concluded between the parties, as these are presumed to be simulated, nor to demonstrate payment of the price, as that is not in question. What must be the subject of proof is rather the actual provision of services, (...) or in other words, the commercial fact that was the origin of the payment of the price that appears as a cost to be deducted in IRC proceedings. As for proof of the absence of abnormal or excessive character of the expenses, this must pass through demonstrating that the contract, whose authenticity has been proven, is balanced. For this purpose, the taxpayer must demonstrate the actual importance of the benefits obtained from the contract in question, such as proving that the charges established constitute just remuneration of those benefits, particularly by comparison with the costs of similar services on the market."

It is concluded, therefore, that the Claimant did not demonstrate that we are dealing with operations actually performed, nor that they do not have an abnormal character nor an excessive amount, as the applicable rules required, whereby the claim cannot succeed.

Regarding the Failure to Apply Autonomous Taxation

On this point, the Claimant states that "The corrections proposed through the Tax Inspection Report must be justified, complying with the limits of the law and taking into account the rights of taxpayers, so as to ensure all means of reaction, since the corrections will inevitably influence the taxpayer's legal-tax sphere."

And that, notwithstanding both jurisdictions being included in the list contained in Portaria No. 150/2004, of 13 February, Portugal has signed conventions to avoid double taxation with both, whereby, as can be read in Articles 87 and following of the Initial Petition:

"87

Indeed, the tax inspection applied tax rules without having first determined whether they apply to the entities in question.

88

Contrary to what is stated in the response to the hearing of rights, as shown on page 21 of the report, the taxpayer is not invoking the unconstitutionality of the tax laws; quite the contrary, it is demanding their compliance.

89

In these terms, it is not legitimate to conclude, without first proving that the payments in question were destined to entities located in territories with privileged taxation.

90

There is no evidence in the entire report of any steps taken by the inspection that would prove that such payments were directed to entities headquartered in territories with privileged taxation, since Portugal has a Double Taxation Convention concluded with the same territories.

91

This means that it is incumbent on the Tax Authority to previously prove, in accordance with Article 74, paragraph 1 of the General Tax Law, the statements it makes in the report and that support the proposed corrections.

92

This is also stated in the conclusions of the judgment rendered on 19 February 2015, in Case No. 08126/14 of the Central Administrative Court South, which is partially cited on page 12 of the report, and which we now transcribe: "…it falls to the Tax Administration to demonstrate, wishing to invoke the rule (cf. Article 74, No. 1 of the G.T.L.): when the territory of residence of the natural or legal person is listed in the list approved by ordinance of the Minister of Finance or when that is not taxed there on income tax identical or analogous to IRS or IRC, or when, regarding the amounts paid or due mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory."

93

Therefore, it must be concluded that the application of autonomous taxation is illegal."

On the matter of justification, the following can be read in the Arbitral Decision rendered in Case No. 380/2018-T:

"As is known, justification is a requirement of tax acts in general, being both a constitutional (Article 268 of the Constitution of the Portuguese Republic) and legal requirement (Article 77 of the General Tax Law).

Briefly, it can be said that it is today settled in national doctrine and jurisprudence that the justification required must have the following characteristics:

  1. Officiousiness: it must always proceed from the initiative of the administration, with justifications on request not being admissible;

  2. Contemporaneity: it must be contemporaneous with the performance of the act, with delayed justifications not being permitted;

  3. Clarity: it must be understandable to an average recipient, avoiding polysemic or deeply technical concepts;

  4. Completeness: it must contain all essential elements that were decisive in the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal rules and facts – domain of legality) and of motivation (domain of discretion or opportunity, when an assessment is needed).

Now, if justification is, as stated, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the justification required of a concrete tax act must be that which is functionally necessary for it not to present itself to the taxpayer as a pure demonstration of arbitrariness. This will be – it is believed – the touchstone of compliance with the duty of justification: when, before an average recipient placed in the position of the actual recipient, the tax act presents itself, from a reasonableness standpoint, as a product of pure arbitrariness by the Administration, because the reasons of fact and/or law on which it is based are not discernible, the act will suffer from a lack of justification.

Article 77, paragraph 1 of the General Tax Law thus states: "The decision of the procedure is always justified by means of a concise statement of the reasons of fact and law that motivated it, and the justification may consist of mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those that form part of the tax inspection report."

Descending to the specific case, it is verified that the tax assessment acts in question are justified, exclusively, by the tax return, well or poorly, presented by the Claimant.

Now, as the TCA-Sul judgment of 03-12-2015, rendered in Case 07854/14, stated:

"The justification of tax acts or 'acts performed in tax matters' that 'affect the rights or legally protected interests of taxpayers' was enshrined in Articles 19, subparagraph b), 21, 81 and 82 of the Tax Procedure Code (cf. currently Article 77 of the General Tax Law).

This necessity of justification already resulted from both Article 1, paragraph 1, subparagraphs a) and c) of Decree-Law 256-A/77, of 17 June, and from Article 268, paragraph 3 itself of the Portuguese Constitution, in the wording introduced by Constitutional Law No. 1/89 (cf. Gomes Canotilho and Vital Moreira, Constitution of the Portuguese Republic Annotated, 1993, p. 936 et seq.; Vieira de Andrade, The Duty of Express Justification of Administrative Acts, 1990, p. 53 et seq.).

Justification is a relative concept that may vary depending on the legal type of administrative act we are examining.

It has been the constant understanding of jurisprudence and doctrine that a certain act (in this case a tax-administrative act) is duly justified whenever it is possible, through it, to discover the cognitive path used by its author to reach the final decision (cf. Supreme Court judgment of 26/4/95, C.J.-S.T.J., 1995, II, p. 57 et seq.; A. Varela and others, Manual of Civil Procedure, Coimbra Editor, 2nd edition, 1985, p. 687 et seq.; Alberto dos Reis, Civil Procedure Code Annotated, Coimbra Editor, 1984, V, p. 139 et seq.). That is to say. Using the language of various Supreme Administrative Court judgments (cf. all, Supreme Administrative Court – 1st Section judgment, 6/2/90, A.D., No. 351, p. 339 et seq.), the administrative act is only justified if a normally diligent or reasonable recipient – a normal person – placed in the concrete situation expressed by the justifying statement and before the concrete act (which will determine, depending on its diverse nature or type, a greater or lesser requirement of the density of justification elements) is in a position to understand the functional (not psychological) cognitive and evaluative itinerary of the act's author. It should further be noted that justification may be express or consist of mere declaration of agreement with prior opinion, information or proposal, which, in that case, constitutes an integral part of the respective act (the so-called "per relationem" justification – cf. Article 125 of the Administrative Procedure Code).

If the justification does not specifically clarify the motivation of the act, due to obscurity, contradiction or insufficiency, the act is considered not justified (cf. Article 125, paragraph 2 of the Administrative Procedure Code). There is obscurity when the statements made by the decision maker do not make clear the reasons why he decided as he did. In other words, the grounds of the act must be clear, so that the sense of the reasons that determined the practice of the act may be grasped with precision, so that the use of dubious, vague and generic expressions is not to be permitted. There will be contradiction of the justification when the reasons invoked to decide would justify not the decision rendered, but a decision of opposite sense (contradiction between grounds and decision), and when grounds are invoked that are in opposition to others. In other words, the grounds of the decision must be congruent, that is, they must be premises that inevitably lead to the decision that functions as the logical and necessary conclusion of the motivation adduced. Finally, justification is insufficient if its content is not sufficient to explain the reasons why the decision was taken. In conclusion, the justification must be sufficient, in the sense that reasons that suitably explain the final decision are not left unstated (cf. Marcello Caetano, Manual of Administrative Law, vol. I, Almedina, 1991, p. 477 et seq.; Diogo Freitas do Amaral, Course of Administrative Law, vol. II, Almedina, 2001, p. 352 et seq.; Diogo Leite de Campos and Others, General Tax Law Annotated and Commented, 4th Edition, 2012, p. 675 et seq.; TCA-Sul – 2nd Section judgment, 2/12/2008, Case 2606/08; TCA-Sul – 2nd Section judgment, 10/11/2009, Case 3510/09; TCA-Sul – 2nd Section judgment, 29/3/2011, Case 4489/11)."

There can be no doubt, therefore, that the application of the autonomous taxation rate is duly justified.

It follows from Article 88, paragraph 8 of the IRC Code that "Expenses corresponding to amounts paid or due, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a tax regime clearly more favorable referred to in paragraph 1 of Article 63-D of the General Tax Law, or whose payment is made in accounts opened in financial institutions resident or domiciled there, are subject to the regime of paragraphs 1 or 2, as applicable, with the applicable rates being, respectively, 35% or 55%, unless the taxpayer is able to prove that they correspond to operations actually performed and do not have an abnormal character or excessive amount."

It follows from the aforementioned legal provision that payments made to entities headquartered in jurisdictions with more favorable taxation are subject to autonomous taxation, at the rate of 35%, unless the taxpayer is able to prove that they correspond to operations actually performed and do not have an abnormal character or excessive amount.

In this case, the same proof is required as is required for the amounts paid to entities headquartered in jurisdictions with more favorable taxation to be accepted as expenses, in accordance with the provision of Article 23-A, paragraph 1, subparagraph r) of the IRC Code, a contrario.

The fact that Portugal has signed conventions to avoid double taxation with Hong Kong and the United Arab Emirates does not mean that tax rules such as those under analysis here cannot be applied in the Portuguese legal order. It means, rather, that, as to certain matters (such as the jurisdiction to tax certain income or the rates at which that income may be taxed in each country), conventional rules prevail over internal law. But nothing prevents Portugal from continuing to apply rules such as those with which we are here concerned and that permit the limitation of fiscal deductibility of payments made to jurisdictions with more favorable taxation, or the application of higher autonomous taxation rates.

In this case as well, the Claimant failed to demonstrate that the amounts here in discussion correspond to operations actually performed and do not have an abnormal character or excessive amount. For this reason, the subjection of those amounts to autonomous taxation, at the rate of 35%, merits no censure and should be maintained.

C. DECISION

In view of the foregoing, the Arbitral Tribunal decides to render judgment dismissing the present arbitral petition, due to lack of legal foundation, and consequently:

a. To maintain in the legal order the Additional IRC Assessment identified above, as well as the decision rendered in the gracious complaint proceedings;

b. To condemn the Claimant in the costs of the proceedings.

D. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at €52,568.52, in accordance with Article 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 3 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. COSTS

The arbitration fee is set at €2,142, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Claimant, since it gave cause to the present arbitral proceedings, in accordance with Articles 12, paragraph 2 and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 5 of the aforementioned Regulation.

Notification to be made.

Lisbon, 25 September 2019

The Arbitrator

(Marta Gaudêncio)

Frequently Asked Questions

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What happens when a Portuguese company makes payments to entities located in tax havens like Hong Kong or the UAE for IRC purposes?
When a Portuguese company makes payments to entities located in tax havens like Hong Kong or UAE, these payments face two IRC consequences under Portuguese tax law. First, under Article 23-A(1)(r) of the IRC Code, such expenses are generally non-deductible for calculating taxable profit unless the taxpayer proves the expenses relate to genuine commercial operations and were not used primarily to reduce taxation. The taxpayer bears the burden of demonstrating that services were actually provided and economically justified. Second, these payments trigger special documentation requirements and heightened scrutiny from the Tax Authority, particularly when the beneficiaries are located in jurisdictions listed in ministerial orders as privileged tax regimes. The presumption is that such expenses are not deductible, requiring robust evidence to overcome this legal barrier.
How does autonomous taxation (tributação autónoma) apply to payments made to non-residents in privileged tax jurisdictions under Portuguese tax law?
Autonomous taxation (tributação autónoma) applies to payments made to non-residents in privileged tax jurisdictions under Article 88(8) of the IRC Code at significantly higher rates than standard autonomous taxation. This is a final tax charged directly on the expense amount, regardless of whether the company has taxable profit, functioning as a penalty mechanism to discourage transactions with tax haven entities. The autonomous taxation rate for payments to tax havens is substantially elevated (typically 35% or higher, compared to standard rates of 5-10% for domestic payments). This taxation applies independently of whether the expense is deductible for calculating taxable income, meaning companies face double taxation consequences: non-deductibility of the expense plus autonomous taxation on the payment itself. The Tax Authority automatically applies these rates when payments are identified as going to entities in listed privileged tax regimes.
Can expenses paid to entities in tax havens be deducted as costs when calculating taxable profit (lucro tributável) for IRC?
Expenses paid to entities in tax havens generally cannot be deducted as costs when calculating taxable profit (lucro tributável) for IRC purposes under Article 23-A(1)(r) and paragraph 7 of the IRC Code. The law establishes a rebuttable presumption of non-deductibility for such payments. However, taxpayers can overcome this presumption by demonstrating: (1) the expenses correspond to actual operations effectively carried out; (2) the services were genuinely provided and economically justified for the company's business; and (3) the arrangement was not primarily designed to obtain tax advantages. This requires comprehensive documentation including detailed contracts, proof of service delivery, business rationale, evidence of the service provider's substance and operational capacity, and proof of payment. In real estate transactions involving Golden Visa programs, companies must particularly demonstrate the economic necessity of using foreign intermediaries rather than domestic service providers. The burden of proof rests entirely on the taxpayer, and mere contractual documentation is generally insufficient without evidence of actual service performance.
What are the legal grounds for the Portuguese Tax Authority (AT) to make additional IRC assessments related to payments to offshore jurisdictions?
The Portuguese Tax Authority (AT) has several legal grounds for making additional IRC assessments related to payments to offshore jurisdictions. Under Article 23-A of the IRC Code, the AT can deny deductibility of expenses paid to entities in privileged tax regimes listed in ministerial orders (Portarias), which include Hong Kong, UAE, and other jurisdictions with low or no taxation. The AT applies Article 88(8) of the IRC Code to impose elevated autonomous taxation rates on such payments as a deterrent measure. The legal framework presumes that payments to tax havens lack economic substance unless proven otherwise, shifting the burden of proof to the taxpayer. The AT's inspection powers under the Tax Procedure Code (Código de Procedimento e de Processo Tributário) allow detailed examination of transactions with non-residents, requiring taxpayers to provide comprehensive documentation. Additional assessments can cover both the correction of taxable income (adding back non-deductible expenses) and the application of autonomous taxation, resulting in cumulative tax impact. The AT typically issues these corrections following inspection procedures where taxpayers cannot adequately demonstrate the genuine commercial nature of offshore payments.
How does the CAAD arbitral tribunal assess the legality of IRC corrections involving non-deductible expenses and payments to tax haven residents?
The CAAD arbitral tribunal assesses the legality of IRC corrections involving non-deductible expenses and payments to tax haven residents by examining whether the Tax Authority correctly applied the legal framework and whether the taxpayer met their burden of proof. The tribunal reviews: (1) whether the payment recipients are genuinely located in privileged tax regimes as defined by applicable ministerial orders; (2) whether the taxpayer provided sufficient evidence that expenses correspond to actual operations effectively performed; (3) whether the Tax Authority properly applied Article 23-A and Article 88 of the IRC Code; (4) whether the quantification of corrections is accurate and supported by documentation; and (5) whether the taxpayer was given adequate opportunity to present evidence during the administrative procedure. The tribunal applies strict scrutiny to transactions with tax haven entities, requiring taxpayers to demonstrate clear business rationale, actual service delivery, arm's length pricing, and absence of tax avoidance as the primary purpose. In real estate cases involving Golden Visa transactions, tribunals examine whether foreign intermediary services were genuinely necessary or whether domestic alternatives existed. The tribunal can annul AT assessments if procedural violations occurred, if quantification errors are proven, or if the taxpayer successfully demonstrates the commercial substance of the arrangements, though such outcomes are rare given the strong legal presumptions against tax haven transactions.