Process: 105/2018-T

Date: September 21, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 105/2018-T) addresses the annulment of an IRC (Corporate Income Tax) additional assessment for tax year 2012 against A... SGPS. The central issue concerns the expiration of the tax authority's right to assess (caducidade do direito de liquidação) and whether corrections proposed in a tax inspection report can be applied without a formal assessment act. The tax inspection examined 2009-2011 tax periods and proposed correlative adjustments under Article 63 of the IRC Code related to transfer pricing corrections made to a related entity (C... SGPS). The inspection report proposed reducing A...'s 2009 taxable income by €27,054.63 (favorable correction), correcting 2010 results upward by €8,781,402.73 (but noting the assessment period had expired), and making 2011 adjustments. Critically, the 2012 assessment challenged by A... was issued in 2016 to apply corrections from prior years whose statute of limitations had expired. The tribunal analyzed whether the tax authority could issue assessments based solely on inspection report proposals without a formal administrative act explicitly applying those corrections. The decision examines the legal distinction between inspection reports (informative documents) and assessment acts (juridical acts with legal effects), the timing requirements for exercising assessment rights under Article 45 of the LGT, and the taxpayer's right to reimbursement with compensatory interest under Article 43 LGT when assessments are annulled. This case illustrates important procedural safeguards in Portuguese tax law regarding statute of limitations and the formal requirements for valid tax assessments.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. José Calejo Guerra and Dr. Adelaide Moura, appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 24-05-2018, agree as follows:

1. Report

A... (SGPS), S.A., holder of collective person identification number no. ..., with registered office at Rua ..., no. ...-..., in Lisbon, (hereinafter designated as "Claimant" or "A..."), submitted a request for constitution of a collective arbitral tribunal, under the terms of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to annulling the dispatch of 28-11-2017 of the Head of Division of the Financial Directorate of Lisbon, which expressly dismissed the administrative appeal submitted on 14-02-2017, as well as the additional Corporate Income Tax (IRC) assessment no. 2016..., the assessments of compensatory interest nos. 2016..., 2016..., the assessments of default interest no. 2016..., relating to the tax period of 2012, whose balance to be paid included in the statement of account reconciliation no. 2016... was € 91,952.45.

The Claimant further requests reimbursement to A... of the amount unduly assessed and paid, as well as the payment of indemnity interest, under the terms of article 43 of the General Tax Law (LGT), until full reimbursement, relating to the period between the date of payment of the said amount and its return to A....

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 14-03-2018.

Under the terms of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, the Deontological Council appointed as arbitrators the signatories, who communicated acceptance of the assignment within the applicable deadline.

On 04-05-2018, the Parties were notified of this appointment and did not manifest intent to challenge the appointment of the arbitrators, under the combined terms of article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of RJAT, the collective arbitral tribunal was constituted on 24-05-2018.

The Tax and Customs Authority responded, defending the lack of merit of the request for arbitral ruling.

By dispatch of 28-06-2018 it was decided to dispense with the holding of the meeting provided for in article 18 of RJAT and that the proceedings continue with optional submissions.

The Parties submitted arguments.

The arbitral tribunal was regularly constituted and is competent.

The parties enjoy personality and judicial capacity, are legitimate (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from nullities.

It remains to decide.

2. Matter of Fact

2.1. Proven Facts

The following facts are considered proven, being relevant for the issues to be assessed:

  1. A... is a holding company (hereinafter "SGPS"), founded in 1992, whose sole statutory purpose is the management of equity interests in other companies, as an indirect form of exercise of economic activities;

  2. Under service orders with nos. OI2014..., of 02-04-2014, OI2015... and OI2015..., both of 19-09-2015, a partial scope tax inspection was carried out on A..., to focus on Corporate Income Tax relating to the tax periods of 2009, 2010 and 2011;

  3. In this inspection action, a Tax Inspection Report was prepared, which is contained in document no. 10 attached to the request for arbitral ruling, the content of which is reproduced as follows, in what refers, among other things, to the following:

III.1 – Corrections to Taxable Matter of Year 2009

(...)

III.1.1.4. – Conclusion

The primary correction previously made in the sphere of C... SGPS under no. 1 of article 63 of the Corporate Income Tax Code being consolidated, translated into the addition of an item with the positive value of 467,151.08 € and the nature of active interest in the calculation of its respective taxable profit of 2009, it is now proposed, in the sphere of A..., under the terms of nos. 11 and 13 of the same article 63 of the Corporate Income Tax Code and no. 1 of article 17 of Ordinance 1446-C/2001, of 21 December, to carry out the appropriate correlative adjustment, which will be translated into the consideration, here, of the same value of 487,151.08 €, now with the nature of passive interest.

However, since A... is an SGPS, with article 32 of the Corporate Income Tax Code applying to it, only the portion of this financial expense that does not result from allocation to the respective capital shares should contribute to the formation of its result for tax purposes. As shown in detail in Annex no. 2, fls. 5, that portion, determined using the method followed by A... itself, is 27,054.63 €.

Thus, it is proposed to correct the result declared for tax purposes by A... relating to year 2009 by the amount of 27,054.63 €, in favor of the company, under the terms of nos. 11 and 13 of article 63 of the Corporate Income Tax Code and no. 1 of article 17 of Ordinance 1446-C/2001, of 21 December, articulated with the provision at the end of no. 2 of article 32 of the Corporate Income Tax Code.

It should be noted that, being favorable to A..., the statute of limitations for the right to assessment, referred to in no. 1 of article 45 of the General Tax Law, does not apply to this correction.

(...)

III.1 – Corrections to Taxable Matter of Year 2010

(...)

III.2.3. – Summary and Effects of the Proposed Corrections to the Results of 2010

It follows from what is stated in the preceding points that the correct result for tax purposes of A... relating to year 2010 is, not a loss with the value of 5,609,114.62 €, as declared by the company, but rather a profit of 3,172,288.11 €, which is calculated as follows:

No additional Corporate Income Tax assessment will be issued on this taxable profit for year 2010, given that the applicable statute of limitations period has already elapsed, as established in no. 1 of article 45 of the General Tax Law (LGT).

However, this same correction should produce effects in the following years to whose profits A... has deducted amounts carried forward from this year 2010, due to the undervaluation pointed out here, in accordance with no. 3 of article 45 of the LGT and with no. 4 of article 52 of the Corporate Income Tax Code (see subpoint III.3.2. – Deduction of Tax Losses).

III.3. – Corrections to Taxable Matter of Year 2011

As is described in detail in the preceding subpoint III.1.1. – Application of Market Interest Rates to Related Party Financial Operations, a related party operation was found in another and prior procedure between A... and company C... SGPS, in which the Arm's Length Principle was not observed.

This resulted in corrections to the results declared for tax purposes by C... SGPS relating to years 2009, 2010 and 2011, to now include additional items with the nature of active interest. In these terms, the result of 2011 of C... SGPS was corrected by 642,294.19 €, in favor of the State, a correction which is, at this time, consolidated.

For the reasons described in detail in the preceding subpoints III.1.1.2. – Correlative Adjustment – to be carried out in the sphere of A... and III.1.1.3. – The allocation to capital shares – no. 2 of article 32 of the Corporate Income Tax Code, the said primary correction made in the sphere of C... SGPS being consolidated, the appropriate correlative adjustment should now be promoted in the sphere of A..., which will be translated into the consideration of the same value of 642,294.19 €, here with the nature of passive interest, limiting, however, the tax effect resulting from this to the respective portion not attributable to capital shares. As shown in detail in Annex no. 2, fls. 5, that portion, determined using the method followed by A... itself, is 87,317.86 €.

Thus, it is proposed to correct the result declared for tax purposes by A... relating to year 2011 by the amount of 87,317.88 €, in favor of the company, under the terms of nos. 11 and 13 of article 63 of the Corporate Income Tax Code and no. 1 of article 17 of Ordinance 1446-C/2001, of 21 December, articulated with the provision at the end of no. 2 of article 32 of the Corporate Income Tax Code.

III.3.2. – Deduction of Tax Losses

In year 2011, A... determines and declares a taxable profit with the amount of 1,364,021.63 €. To this profit it deducts an amount equal (1,364,021.63 €) of tax losses carried forward from previous years, determining nil taxable matter.

To the taxable profit declared for year 2011, the taxpayer could deduct, under the terms of article 52 of the Corporate Income Tax Code, having them, tax losses determined in the six preceding years, that is, tax losses generated in the period between years 2005 and 2010, inclusive.

Having analyzed the values of the results determined and the tax loss carry-forwards declared by A... throughout the period covered by the six years referred to, it is verified that the amount deducted in 2011 respects a loss declared for year 2010, with the total value of 5,609,114.62 € (Annex no. 3, fls. 6).

However, as stated in the preceding subpoint III.2.3. – Summary and Effects of the Proposed Corrections to the Results of 2010 (and detailed foundation in the preceding points), the result declared for tax purposes by A... relating to year 2010 is undervalued by 8,781,402.73 €, which means that, in this year, determined in the proper manner, the company registers not a loss of 5,609,114.62 € but rather a profit with the value of 3,172,288.11 €.

In these terms, the taxpayer enters year 2011 without any balance of tax losses carried forward from previous years, and the deduction declared is improper, in the amount of 1,364,021.63 €, which is corrected under the terms of no. 4 of article 52 of the Corporate Income Tax Code, in favor of the State (Annex no. 3, fls. 7).

(...)

On this Report, a "Team Chief Opinion" was issued, in which the following is stated:

I agree with the content and grounds of the attached Conclusions Report.

From the grounds contained in it, it results that the legal prerequisites are verified to, maintaining direct assessment of taxable matter, proceed with the technical corrections proposed, related, in the first place, with a correlative adjustment subsequent to the application of the transfer pricing regime in another inspection procedure, under the terms of article 63 of the Corporate Income Tax Code, combined with Ordinance no. 1446-C/2001. To this adjustment, favorable to the taxpayer, the legal provisions contained in article 23 of the Corporate Income Tax Code and article 32, no. 2 of the Corporate Income Tax Code also apply, related to the fact that the amount of financial expenses in question is not fully deductible from taxable profit, because it is attributable to capital shares held by the company, so the adjustments are limited to the values of 27,054.63 euros in 2009, 51,305.37 euros in 2010 and 67,317.88 euros in 2011.

Secondly, in year 2010, from the correct application of articles 35, 36 and 41 of the Corporate Income Tax Code to the losses recorded in credits, as well as the transitional regime provided for in article 7 of Law 30-G/2000 to suspended capital gains, which, in this case, should have been included in the taxable profit of the year, it results that the tax loss determined in 2010, in the amount of 5,609,114.62 euros, would, in practice, need to be corrected to a taxable profit of 3,172,288.11 euros, which, although not assessable, prevents the deduction of that loss from the taxable profit of the following years, given the application of article 45 of the LGT and article 52 of the Corporate Income Tax Code. It is thus proposed to also carry out the correction of the carry-forward of that tax loss, deducted from the taxable profit of year 2011, in the amount of 1,364,021.63 euros.

The corrections made in the Tax Inspection Report relating to years 2009 to 2011 are thus summarized:

Following the inspection to years 2009 to 2011, the Tax and Customs Authority notified the Claimant of the Tax Inspection Report and the opinions issued on it, with the following indication, among other things:

"You are hereby notified, under the terms of article 62 of the Regulations on Tax Inspection Procedures, of the Tax Inspection Report, which is attached as an integral part of this notification, relating to the Service Order referred to above.

Of the purely arithmetic corrections made to taxable matter and/or tax, without resort to indirect assessment, whose grounds are contained in the said Report. In the short term, the AT services will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment deadline, if applicable.

No claim or challenge lies against this notification and its grounds."

The Tax and Customs Authority did not issue any tax assessment nor notified the Claimant of an act determining the correction of tax losses relating to years 2009 to 2011;

Under service order no. OI2015..., of 29-12-2015, the Respondent initiated, starting from 28-04-2016, another administrative tax inspection procedure, of partial scope, to focus on Corporate Income Tax relating to the tax period of 2012;

In this new inspection action, the Tax Inspection Report was prepared, which is contained in document no. 11 attached to the request for arbitral ruling, the content of which is reproduced as follows, in what refers, among other things, to the following:

I – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

Regarding the carry-forward of losses (deductions from taxable profit), no. 1, no. 2 and no. 4 of article 52 of the Corporate Income Tax Code establishes the following:

(...)

This inspection action arises as a follow-up to the corrections to taxable profit made in the course of the aforementioned Service Orders. In the respective final report the following corrections are noted:

After consultation with information contained in the AT databases, it is verified that the taxpayer submitted on 27/06/2013 a substitute model 22 income return. Subsequently, due to an administrative appeal by A..., the Administrative Justice Division proceeded with the assessment of a new income return (annex 1).

From the analysis carried out on the values entered in section 09 of this return, the deduction from taxable matter of 328,520.12€ is verified in field 309, relating to tax losses carried forward from previous years (annex 2).

However, as per the corrections detailed in the table above, the taxpayer registers, in year 2010, a taxable profit of 3,172,288.11€ and not a loss of 5,609,114.62€.

In sum, A... does not have tax losses in years 2009, 2010 and 2011 to carry forward to 2012.

The second inspection action commenced on 28-04-2016 and was concluded on 03-05-2016 (point II.1. of the Tax Inspection Report);

Following this second inspection action, the Tax and Customs Authority notified the Claimant of the Corporate Income Tax assessments no. 2016..., of compensatory interest nos. 2016... and 2016..., of default interest no. 2016... and of the statement of account reconciliation no. 2016..., relating to the tax period of 2012, whose total balance to be paid amounted to € 91,952.45 (document no. 12 attached to the request for arbitral ruling, the content of which is reproduced);

On 18-10-2016, A... paid the assessed amount of € 91,952.45, relating to the tax period of 2012 (document no. 13 attached to the request for arbitral ruling, the content of which is reproduced);

On 14-02-2017, the Claimant filed an administrative appeal against the aforementioned assessments (document no. 14 attached to the request for arbitral ruling, the content of which is reproduced);

On 11-12-2017, the Claimant was notified of the dispatch of 28-11-2017 issued by the Head of Division of the Financial Directorate of Lisbon of the Tax and Customs Authority, which dismissed the administrative appeal (document no. 16 attached to the request for arbitral ruling, the content of which is reproduced);

The dispatch dismissing the administrative appeal manifests agreement with an information whose content is reproduced as follows in what refers, among other things, to the following:

Analysis of the taxpayer's arguments:

  1. The Claimant was subject to inspection actions for years 2009, 2010 and 2011 which resulted in Corporate Income Tax corrections, as can be observed through the following table:

  2. Due to the corrections made to years 2009, 2010 and 2011, an inspection action was opened for year 2012; the losses declared by the taxpayer relating to year 2010 were annulled, which implies repercussions for the following years.

  3. Values declared by the taxpayer

  4. The taxpayer in the model 22 return of Corporate Income Tax relating to year 2012 deducted in field 309 the amount of € 328,520.12 relating to deductions of losses (438,026.82 X 75%), assuming that it had losses of 5,609,114.62 relating to year 2010;

  5. However, the losses declared by the Claimant relating to year 2010 were corrected by the Tax Inspection, which were annulled and the Taxable Profit became € 3,172,288.11;

  6. Therefore, it is verified that the Claimant does not have any values capable of being deducted from the Taxable Profit for years 2011, 2012 and following (see fls 85);

  7. On 08/08/2016 a Tax Correction Memorandum was prepared by the Administrative Justice Division, the said amount entered in field 309 being annulled, with taxable matter becoming € 438,026.82.

  8. Under no. 2 of article 52 of the Corporate Income Tax Code, "when corrections are made to tax losses declared by the taxpayer, the deductions made must be altered accordingly, however no annulment or assessment, even if additional, of Corporate Income Tax is made, if more than 5 years have elapsed in relation to that amount to which the taxable profit relates".

  9. The taxpayer requested that he be paid, under the terms of article 43 of the LGT, indemnity interest, relating to the amount unduly assessed and paid, however the same are not due because there is no error attributable to the Services.

  10. With regard to the statute of limitations for the right to assessment: according to article 45 of the LGT, the right to assess taxes is extinguished if the assessment is not validly notified to the taxpayer within four years; in the event that the taxpayer has, in a given year, carried forward losses or any other deduction or tax credit, the statute of limitations period is that of the exercise of this right. To prevent the statute of limitations, the tax administration must notify the taxpayer within the legal deadlines. In this sense, the statute of limitations period is calculated, in periodic taxes, from the beginning of the year following the one in which the tax event occurred. Thus, the year in which the tax event occurred was 2012, which means that the beginning of the statute of limitations period begins on 1 January 2013 and would expire on 31/12/2016. However, the claimant was notified in August 2016, that is, within the legal deadlines, so the assessments do not suffer from the statute of limitations.

In view of the above, I am of the opinion that this Administrative Appeal should be DISMISSED, maintaining the corrections made by the Tax Inspection Services.

On 12-03-2018, the Claimant submitted the request for arbitral ruling that gave rise to the present proceedings.

2.2. Unproven Facts and Reasoning of the Decision on the Matter of Fact

The facts were proven based on the documents attached to the request for arbitral ruling.

There is no dispute regarding the matter of fact.

3. Matter of Law

The Claimant attributes to the contested assessment defects that it summarizes as follows:

(i) Defects of a formal nature:

a. There is no prior administrative-tax act (nor was A... notified of it) that supports the correction made by the AT to the deduction of losses made by A... from the taxable profit determined in the tax period of 2012;

b. The circumstance of there being no prior administrative-tax act placed and places A... in a situation of total lack of defense;

c. Under the statute of limitations for the right to assessment, the AT was prevented from making such correction to the tax period of 2012;

d. This correction was not properly reasoned by the AT.

(ii) Defect of a substantive nature: the tax framework argued by the AT in the 2009/2011 Report, regarding the disposal of capital shares and the assignment of credits that A... held in B... corresponds to a manifestly incorrect interpretation of the Corporate Income Tax Code and the Corporate Income Tax Code.

Article 124 of the Tax Procedures Code establishes rules on the order of knowledge of defects in a judicial challenge process, which are subsidiarily applicable to the arbitral process, by force of the provision in article 29, no. 1, paragraph c), of RJAT.

In the case of defects generating voidability, paragraph a) of no. 2 of that article 124 establishes that priority should be given to defects whose finding would determine, according to the prudent discretion of the judge, more stable or effective protection of the interests injured.

Of the defects indicated as a priority by the Claimant, that of statute of limitations for the right to assessment ensures, in the case of merit, stable and effective protection of its interests, which justifies that its assessment begins with it.

Question of Statute of Limitations for the Right to Assessment

The contested assessment relates to year 2012 and was issued on 18-01-2017, following a tax inspection action that commenced on 28-04-2016 and was concluded on 03-05-2016, relating to year 2012.

The statute of limitations period for the right to assessment is four years and is counted, in periodic taxes, from the end of the year in which the tax event occurred (article 45, nos. 1 and 4, of the LGT), suspending during the period in which tax inspection was carried out (article 46, no. 1, of the LGT).

Thus, it is clear that in relation to tax events occurring in years prior to 2012, the statute of limitations period for the right to assessment had already elapsed.

This was itself recognized by the Tax and Customs Authority in the Tax Inspection Report of the tax inspection relating to years 2009 to 2011, in which, despite understanding that corrections should be made, it refrained from making any assessment, with express grounds in the statute of limitations for the right to assessment.

However, the Tax and Customs Authority understood that the effects of those corrections that should have been made in years prior to 2012, which would be reduced to the fact that there would be no tax losses reportable to year 2012, can be produced, because in relation to this year the statute of limitations period for the right to assessment had not elapsed.

The Claimant argues that, having not been effectively implemented, through any assessment act or tax act, the corrections that the Tax and Customs Authority understood should be made to years 2009/2011, they cannot be relevant nor can they be taken into account for purposes of assessment relating to facts occurring in periods in relation to which the statute of limitations period has already elapsed.

The Claimant is correct, starting with the question of statute of limitations for the right to assessment.

In fact, as is the case law of the Supreme Administrative Court, "the reasons of certainty and legal security underlying the statute of limitations institute prevent the AT from legally proceeding with corrections to the taxable profit of a year in relation to which the statute of limitations of the right to assessment has already been verified, even if it refrains from assessing tax relating to that period, to extract tax-legal consequences from them in subsequent years (...), because by that means it would be allowed to extract new tax-legal consequences from situations that the law, for reasons of social peace, intends to definitively consolidate in the tax field" (judgment of the Supreme Administrative Court of 10-5-2017, case no. 0699/16).

Moreover, given that the alteration of tax losses in a given year, even if not translated into an assessment act, has the potential to affect the rights of the taxpayer, the production of effects in relation to these cannot but be translated into a "tax matter act" that defines the position of the Tax Administration and that only produces effects in relation to the interested party if it is notified to him, as follows from articles 268, no. 3, of the Constitution and 36, no. 1, of the Tax Procedures Code.

Indeed, this was the understanding adopted by the Tax and Customs Authority in the notification of the Tax Inspection Report relating to the inspection of years 2009/2011, when it stated that "the AT services will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment deadline, if applicable".

The need for a subsequent act to notification of the tax inspection report for the corrections announced therein to produce effects in relation to the recipient results with clarity from article 63, no. 1, of the Complementary Regulations on Tax Inspection Procedures which establishes that "the tax acts or tax matters acts resulting from the report may be based on its conclusions, through adherence or agreement with them, but in all cases the entity competent for their practice must justify any divergence from the conclusions of the report".

In light of this norm, it is clear that the position taken in the report and as such notified to the taxpayer is merely preparatory of a final decision on the definition of taxable matter, a decision which may be divergent from the position taken in the report, as is expressly provided for in the final part of this norm.

Therefore, having no tax act or tax matters act been carried out relating to years prior to 2012, subsequent to the notification of the respective Tax Inspection Report, the possibility of the corrections proposed in this Report producing effects in relation to the Claimant is ruled out.

Thus, for these two grounds (statute of limitations for the right to assessment and ineffectiveness of corrections relating to years prior to 2012), it is concluded that the contested assessment suffers from defects of violation of law, which justify its annulment, in accordance with the provision in article 163, no. 1, of the Administrative Procedure Code, subsidiarily applicable under the terms of article 2, paragraph c), of the LGT.

Since the request for arbitral ruling proceeds on the basis of these defects, which result in stable and effective protection of the rights of the Claimant, knowledge of the remaining issues raised is prejudiced, being pointless (article 130 of the Code of Civil Procedure).

Compensatory and Default Interest and Decision on the Administrative Appeal

The assessments of compensatory and default interest have as their prerequisite the Corporate Income Tax assessment, and thus are affected by the same defects.

The decision on the administrative appeal also suffers from the same defects, since it confirmed the assessments.

Therefore, the annulment of the assessments of compensatory and default interest and of the decision dismissing the administrative appeal is justified.

5. Reimbursement of the Amount Paid and Indemnity Interest

On 18-10-2017, the Claimant paid the assessed amount of € 91,952.45 and requests its reimbursement and indemnity interest.

As results from what is stated above, illegalities of the Corporate Income Tax, compensatory interest and default interest assessments are present, which justify their annulment.

Following the annulment, the Claimant has the right to reimbursement of the amount unduly paid, which follows from the annulment of the assessment, and has support in articles 24, no. 1, paragraph b), of RJAT and 100 of the LGT.

In accordance with the provision in paragraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and the Tax Administration must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the sentences of tax judicial courts, "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in harmony with the provision in article 100 of the LGT [applicable by force of the provision in paragraph a) of no. 1 of article 29 of RJAT] which establishes that "the tax administration is obliged, in the event of total or partial merit of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, including the payment of indemnity interest, if applicable, from the end of the execution deadline of the decision".

Although article 2, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in CAAD, making no reference to condemnatory decisions, it should be understood that the powers are comprised in its competences, which in a judicial challenge process are attributed to tax courts, this being the interpretation that is in tune with the meaning of the legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as a first directive, that "the tax arbitration process should constitute a procedural means alternative to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process for annulment of tax acts, admits condemnation of the Tax Administration in the payment of indemnity interest, as can be inferred from article 43, no. 1, of the LGT, in which it is established that "indemnity interest is due when it is determined, in an administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than that legally due" and from article 61, no. 4 of the Tax Procedures Code (as amended by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original version), which states that "if the decision recognizing the right to indemnity interest is judicial, the payment period is counted from the beginning of the period for its spontaneous execution".

Thus, no. 5 of article 24 of RJAT, when stating that "payment of interest, regardless of its nature, is due, under the terms provided for in the general tax law and in the Tax Procedures Code", should be understood as allowing the recognition of the right to indemnity interest in the arbitral process.

The substantive regime of the right to indemnity interest is regulated in article 43 of the LGT, which establishes, in what is relevant here, the following:

Article 43

Improper Payment of the Tax Obligation

1 – Indemnity interest is due when it is determined, in an administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than that legally due.

2 – There is also considered to be error attributable to the services in cases in which, despite the assessment being made based on the taxpayer's declaration, the latter has followed, in its completion, the generic guidance of the tax administration, duly published.

The illegalities of the assessment are attributable to the Tax Administration, which made it on its own initiative.

Thus, the Claimant has the right to indemnity interest calculated on the amount to be reimbursed, under the terms of articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, 61, no. 5, of the Tax Procedures Code, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April, at the legal suppletive rate, and counted from 18-10-2016 until the date of processing of the respective credit note.

6. Decision

In accordance with what is stated above, this Arbitral Tribunal agrees to:

  • Judge the request for arbitral ruling well-founded;

  • Annul the Corporate Income Tax assessment no. 2016..., the assessments of compensatory interest nos. 2016..., 2016..., and the assessments of default interest no. 2016...;

  • Annul the dispatch of 28-11-2017 which dismissed the administrative appeal filed by the Claimant on 14-02-2017;

  • Condemn the Tax and Customs Authority to reimburse the Claimant the amount € 91,952.45, plus indemnity interest, from 18-10-2016 until the date of processing of the respective credit note.

7. Value of the Proceeding

In accordance with the provision in article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Tax Procedures Code and 3, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceeding is set at € 91,952.45.

8. Costs

Under the terms of article 22, no. 4, of RJAT, the amount of costs is set at € 2,754.00, under the terms of Table I annexed to the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 21-09-2018

The Arbitrators

(Jorge Lopes de Sousa)

(José Calejo Guerra)

(Adelaide Moura)

Frequently Asked Questions

Automatically Created

What happens when the tax authority's right to issue an IRC assessment expires (caducidade do direito de liquidação)?
When the tax authority's right to issue an IRC assessment expires (caducidade), the tax authority loses the legal power to liquidate additional tax for that period. Under Article 45(1) of the LGT, this right generally expires four years after the tax became due. Once expired, no additional IRC assessment can be validly issued for that tax period, even if inspection reports identified corrections. However, under Article 45(3) LGT and Article 52(4) IRC Code, corrections from time-barred years can still affect subsequent periods through mechanisms like carried-forward tax losses or correlative adjustments, provided those subsequent years remain within the assessment period.
Can an IRC additional assessment be annulled if no formal act applies the corrections proposed in a tax inspection report?
Yes, an IRC additional assessment can be annulled if no formal administrative act properly applies the corrections proposed in a tax inspection report. The tax inspection report itself is merely an informative document that does not have direct legal effects on taxpayers. For corrections to become legally binding, the tax authority must issue a formal assessment act (acto de liquidação) that explicitly adopts and applies the proposed corrections. If the tax authority issues an assessment without a prior formal act applying the inspection report's corrections, or if that formal act is defective or never issued, the subsequent assessment lacks proper legal foundation and can be annulled by arbitral tribunals or courts. This distinction protects taxpayers' procedural rights and ensures proper administrative process.
What is the legal significance of the tax inspection report in Portuguese IRC assessment procedures?
The tax inspection report in Portuguese IRC procedures is an informative and preparatory document without autonomous legal effects. It documents findings, proposes corrections, and recommends adjustments to taxable income, but does not itself modify the taxpayer's legal position. The report serves as the factual and technical basis for subsequent administrative acts. For proposed corrections to have legal effect, the tax authority must issue a separate formal act (typically a dispatch or decision by the competent director) that expressly adopts the report's conclusions and determines the corrections to be applied. Only after this formal act can the tax authority issue assessment notices (liquidações) incorporating those corrections. This two-step process ensures administrative legality and provides taxpayers with clear notice and opportunity to challenge specific determinations.
How does the CAAD arbitral tribunal handle claims for reimbursement and compensatory interest under Article 43 of the LGT?
The CAAD arbitral tribunal handles reimbursement and compensatory interest claims under Article 43 LGT by first determining whether the challenged assessment should be annulled. If the tribunal annuls the assessment, it orders reimbursement of any amounts unduly paid by the taxpayer. Article 43 LGT establishes the taxpayer's right to compensatory interest (juros indemnizatórios) when tax amounts are paid and later determined to have been collected without legal basis. The interest is calculated from the date of payment until actual reimbursement, using the legal interest rate. The tribunal's decision will specify both the principal amount to be reimbursed and order the tax authority to calculate and pay compensatory interest. This compensates taxpayers for the State's wrongful retention of funds and is automatic upon annulment of unlawful assessments.
What are the grounds for filing a gracious complaint (reclamação graciosa) against an IRC additional assessment in Portugal?
Grounds for filing a reclamação graciosa (gracious complaint) against an IRC additional assessment include: (1) expiration of the assessment right (caducidade) under Article 45 LGT; (2) substantive errors in calculating taxable income or tax due; (3) procedural defects such as lack of proper notification or failure to provide legally required hearing rights (audiência prévia); (4) lack of legal basis for corrections applied; (5) incorrect application of IRC Code provisions or case law; (6) failure to issue required formal acts before assessment; and (7) mathematical or clerical errors. The reclamação graciosa must be filed within 120 days of notification of the assessment (Article 70 LGT). It is an administrative remedy that suspends collection if filed timely and with bank guarantee or similar security. If denied or not decided within legal timeframes, taxpayers can proceed to judicial review or CAAD arbitration.