CAAD 108/2015-T: IRC Withholding Tax on Athlete Sports Rights and Image Rights under Double Taxation Conventions

ARBITRAL TRIBUNAL DECISION

Case No. 108/2015-T

The Arbitrators: Councillor Jorge Lopes de Sousa (designated by the other Arbitrators), Professor Doctor Tomás Castro Tavares and Doctor José Rodrigo de Castro, designated respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 12-05-2015, agree as follows:

1. Report

A… – SAD (hereinafter referred to as "A… SAD" or "Claimant"), with registered office at …, …-… Lisbon, holder of tax identification number …, submitted a request, pursuant to the provisions of Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM") and Articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, for the constitution of a Collective Arbitral Tribunal with a view to declaring the illegality of the withholding tax assessment on income tax No. 2010 …, dated 31-12-2010, relating to the fiscal year 2008, in the amount of € 530,853.00, and the respective assessments of compensatory interest (Numbers 2011 …, 2011 …, 2011 …, 2011 … and 2011 …, in the amounts of €5,100.78, €476.08, €24,853.49, €11,756.77 and €4,814.57, respectively, in the total amount of € 47,001.69), relating to the tax act assessing Corporate Income Tax (CIT) for the fiscal year 2008, formalized by the decision dismissing the Gracious Complaint Process with number … 2011… and by the decision dismissing the Hierarchical Appeal Process with number … 2012 ….

The Claimant imputes illegalities to the aforementioned assessment, to the extent that it is based on corrections made regarding "income derived from the activity of athletes" (in the total amount of € 488,976.00 of CIT and € 43,413.34 of compensatory interest), not imputing any illegality to corrections relating to "income from intermediation services and other provision of services".

The Claimant further seeks compensation for undue guarantee.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY (AT).

The Claimant designated as Arbitrator Professor Doctor Tomás Castro Tavares, pursuant to Article 6, No. 2, subsection b) of the LFATM.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 20-02-2015.

In accordance with the provisions of subsection b) of Article 6, No. 2 and Article 11, No. 3 of the LFATM, and within the time limit set forth in Article 13, No. 1 of the LFATM, the highest official of the Tax Administration designated as Arbitrator Doctor José Rodrigo de Castro.

The Arbitrators designated by the Parties agreed to designate Councillor Jorge Lopes de Sousa as presiding arbitrator, who accepted the designation.

In accordance with and for the purposes of the provisions of Article 11, No. 7 of the LFATM, the President of CAAD informed the Parties of this designation on 24-04-2015.

Thus, in compliance with the provisions of Article 11, No. 7 of the LFATM, after the time limit set forth in Article 13, No. 1 of the LFATM expired without the Parties making any statement, the Collective Arbitral Tribunal was constituted on 12-05-2015.

The Tax Authority and Customs Authority submitted a Response, raising the exception of expiration of the right to action and defending the inadmissibility of the request for arbitral pronouncement.

By order of 18-06-2015, it was decided to dispense with the meeting provided for in Article 18 of the LFATM and that the proceedings continue with successive written submissions.

The Parties submitted submissions.

The arbitral tribunal was regularly constituted and is competent.

The parties enjoy legal personality and capacity and are legitimate (Articles 4 and 10, No. 2, of the same instrument and Article 1 of Ordinance No. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

2. Question of Expiration of the Right to Action

The question of expiration of the right to action is raised for the following reasons, in summary:

– the request for constitution of an arbitral tribunal is submitted within the period of 90 days from the acts provided for in Nos. 1 and 2 of Article 102 of the Tax Procedure and Process Code, regarding the acts capable of autonomous challenge and, likewise, from the notification of the decision (…) of the hierarchical appeal;

– Article 59, No. 4 of the Tax Procedure and Process Code establishes that "The use of means of administrative challenge suspends the period for contentious challenge of the administrative act, which only resumes its course with the notification of the decision rendered on the administrative challenge or with the expiration of the respective legal time limit";

– the suspensive effect of the period for contentious challenge only operates if the administrative challenge is filed within the respective time limit;

– the deadline for voluntary payment of the disputed assessment was 09/02/2011, whereby the taxpayer had a period of 120 days, counted from that date, to file an administrative challenge to the assessment;

– the gracious complaint should have been submitted by 09/06/2011 and was only submitted on 20/06/2011, whereby it was untimely;

– as the present request for arbitral pronouncement was filed as a consequence of the dismissal of the hierarchical appeal and this being untimely (as a consequence of the untimeliness of the gracious complaint previously filed), the present request is likewise untimely, with the expiration of the right to action verified;

– notwithstanding the merit assessment and decision that fell upon the gracious complaint, such assessment and decision did not operate the cure of the invalidity, because the deadline for filing an administrative challenge is peremptory and precludes the right to action, having the consequence of consolidation of the act (in this case, of assessment) in the legal order;

– as the disputed assessments are consolidated in the legal order, the AT could not, by way of the administrative decision on the complaint, have the virtue of removing the consolidation of the right, nor of resurrecting the right to action, which was then already expired. As expiration of the right to action implies the extinction of a right, it constitutes an uncurable defect.

The Claimant defends, in summary, the following:

– notwithstanding that untimeliness was mentioned in the final decision on the gracious complaint, that document was nevertheless analyzed, assessed and decided on the merits by the AT, which chose to sanction its dismissal, "having examined the grounds invoked in the petition and other documents in the present complaint proceedings";

– the decision to dismiss by the AT was based not on the fact that the administrative complaint was submitted outside the legal deadline, but simply on the disregard of the arguments invoked by the Claimant to sustain the request for annulment of the aforementioned assessment notice;

– even within the scope of the decision dismissing the hierarchical appeal (through which the Claimant reacted to the dismissal of the gracious complaint), the AT merely examined the merits questions, having made no reference to the question of untimeliness of that complaint, nor of the hierarchical appeal itself;

– the conduct adopted by the AT in the course of the entire administrative procedure generated, unquestionably, in the sphere of the Claimant, legitimate expectations as to an assessment and decision of its concrete tax situation, whose non-protection would be contrary to the constitutional principles of legal certainty and protection of trust;

– pursuant to Article 52 of the Tax Procedure and Process Code, the Tax Authority and Customs Authority must effect conversion of the proceedings and this occurs with the untimely gracious complaint when revision of the tax act is viable.

The untimeliness of the gracious complaint (or of the hierarchical appeal) does not currently determine, in tax litigation, the untimeliness of the subsequent contentious challenge, as was provided, for contentious appeal, in § 3 of Art. 52 of the Regulations of the Supreme Administrative Court, tacitly revoked by Art. 34 of the Law of Procedure in Administrative Courts. ( [1] )

However, the expiration of the deadline for administrative challenge may lead to the formation of a settled or decided case, which will prevent the contentious challenge on the ground of defects generating voidability.

Nevertheless, in tax litigation, if the gracious complaint has been submitted untimely, it may, possibly, be converted into a request for revision of the tax act, pursuant to the provisions of Art. 52 of the Tax Procedure and Process Code, if it is timely for this procedural remedy, regulated in Art. 78 of the General Tax Law, and if a situation fitting therein is verified. ( [2] )

With regard to timeliness, one should heed the deadline provided for the use of the appropriate procedural remedy, because, once the conversion is effected, it is only with respect to the appropriate procedural remedy that it will produce effects, everything occurring, after conversion, as if the petition had been submitted within the scope of that proper remedy: thus, it will be irrelevant, for the purposes of conversion, that the petition is untimely for the inappropriate procedural remedy that was wrongly used, because what is decisive for the benefit of the petition in which conversion is reflected is the timeliness for the appropriate remedy. ( [3] )

In the case at hand, being faced with the allegation of defects attributable to the Tax Authority and Customs Authority and the gracious complaint having been submitted within the period of four years from the assessment whose legality is disputed (the assessment is from 2010 and the gracious complaint was submitted on 21-06-2011), there would be no obstacle to the conversion of the gracious complaint being effected into a request for revision of the tax act, in accordance with the final part of No. 1 of Article 78 of the General Tax Law.

For this reason, there is no situation of consolidation of the situation, although the failure to timely submit the gracious complaint requires that the claim formulated therein be treated, for all purposes, as a request for revision of the tax act, including for the purposes of compensatory interest, in the event of success, if applicable, in light of the different regimes provided for in Nos. 1 and 3 of Article 43 of the General Tax Law.

For the foregoing reasons, as the request for arbitral pronouncement was submitted within 90 days from the decision of the hierarchical appeal, provided for in Article 10, No. 1 of the LFATM, the exception of expiration of the right to action is dismissed.

2. Factual Matters

2.1. Proven Facts

a) The Claimant A... is a sports company governed by the special legal regime established in Decree-Law No. 67/97, of 3 April, in accordance with the amendments introduced by Law No. 107/97, of 16 September;

b) On 12-03-2008, the Claimant paid € 174,125.00 to the entity B… Lda, resident in Brazil, as consideration for the acquisition of "sports and financial rights" relating to player C...;

c) On 2008-11-13, the Claimant made a payment in the amount of € 136,390.00 to the entity D… Limited, with registered office in Ireland and without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the transfer of image rights of player E…;

d) In the year 2008, the Claimant made two payments in the total amount of €1,075,269.00 to the entity F… B.V, with registered office in the Netherlands and without a permanent establishment in Portugal, which were not subject to withholding tax, relating to the transfer of image rights of player G…;

e) On 2008-08-04, the Claimant made a payment in the amount of €90,000.00 to the entity H… S.R.L, with registered office in the Netherlands, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and I… Rotterdam;

f) On 2008-08-28, the Claimant made a payment in the amount of €480,000.00 to the entity J… S.R.L, with registered office in Italy, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and K…;

g) The Claimant was subject to a tax inspection action, titled by Service Order OI2010 …, of external, general and polivalent scope, for purposes of CIT, relating to the period from 01-07-2008 to 30-06-2009 and commenced on 28-01-2010, coming to completion on 28-01-2011;

h) Following that inspection, the Tax Authority and Customs Authority made, among others, the following corrections relating to payments to non-residents and CIT that it considered not withheld:

i) In the Tax Inspection Report, the contents of which are given as reproduced, the following is mentioned, among other things:

1.4.1.2. Payments to Non-Residents (CIT not withheld)

(...)

1.4.1.2.2. Income derived from the activity of athletes

1.4.1.2.2.1. Sports use of athlete C...

The taxpayer made payments to a non-resident entity, without a permanent establishment in Portuguese territory in the amount of € 174,245.00, relating to acquisition of "sports and financial rights" of player C…. From the combination of the provisions of subsection f) of No. 1, subsection b) of No. 3 and No. 5 of Article 88 and No. 2 of Article 80, both of the CIT Code, the taxpayer, upon payment of these income derived from the exercise in Portuguese territory of the activity of athletes, should have effected withholding tax on the same, at the rate of 25%, in the amount of € 43,561.25, whereby tax in default was assessed in this amount (see point III.1.2.2.1).

1.4.1.2.2.2. Image Rights of athlete E...

The taxpayer made on 2008-11-13, a payment in the amount of € 136,390.00 to the entity D… Limited, a non-resident, which was not subject to withholding tax, relating to the transfer of image rights of player E..., having effected no withholding tax on the amounts of payments made. From the combination of the provisions in subsection f) of No. 1, subsection b) of No. 3 and No. 5 of Article 88 and No. 2 of Article 80, both of the CIT Code, the taxpayer, upon payment of these income derived from the exercise in Portuguese territory of the activity of athletes, should have effected withholding tax at the rate of 25%, in the amount of € 34,097.50, whereby tax in default was assessed in this amount (see point III.1.2.2.2).

1.4.1.2.2.3. Image Rights of athlete G...

The taxpayer made two payments in the total amount of €1,075,269.00 to the entity F… B.V, a non-resident, without a permanent establishment in Portugal, which were not subject to withholding tax, relating to the transfer of image rights of player G..., having effected no withholding tax on the amounts of payments made. From the combination of the provisions in subsection f) of No. 1, subsection b) of No. 3 and No. 5 of Article 88 and No. 2 of Article 80, both of the CIT Code, the taxpayer, upon payment of these income derived from the exercise in Portuguese territory of the activity of athletes, should have effected withholding tax at the rate of 25%, in the amount of € 268,817.25, whereby tax in default was assessed in this amount (see point III.1.2.2.3).

1.4.1.2.2.4. H… S.R.L.

The taxpayer made on 2008-08-04, a payment in the amount of €90,000.00 to the entity H… S.R.L, a non-resident, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and I… Rotterdam. From the combination of the provisions in subsection f) of No. 1, subsection b) of No. 3 and No. 5 of Article 88 and No. 2 of Article 80, both of the CIT Code, the taxpayer should have effected withholding tax on the same, at the rate of 25%, in the amount of € 22,500.00, whereby, not having done so, tax in default was assessed in this amount (see point III.1.2.2.4).

1.4.1.2.2.5. J… S.R.L.

The taxpayer made on 2008-08-28, a payment in the amount of €480,000.00 to the entity J… S.R.L, a non-resident, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and K…. From the combination of the provisions in subsection f) of No. 1, subsection b) of No. 3 and No. 5 of Article 88 and No. 2 of Article 80, both of the CIT Code, the taxpayer should have effected withholding tax on the same, at the rate of 25%, in the amount of € 120,000.00, whereby, not having done so, tax in default was assessed in this amount (see point III.1.2.2.5).

(...)

III.1.1.2. Payments to non-residents (CIT not withheld)

(...)

III.1.2.2. Income derived from the activity of athletes

III.1.2.2.1. Sports use of athlete C...

A... made a payment, in the total of € 174,245.00, to the entity B… Ltda, resident in Brazil, as consideration for the acquisition of "sports and financial rights" relating to player C... -"C…" (see table):

The acquisition of the rights described above occurs in a context where the player was "free", without a valid work contract as a professional athlete with another sports entity, at the time of his engagement by A…. Accordingly, it is necessary to analyze the origin of these rights, in order to determine the nature of the income earned, for purposes of its subjection to taxation.

Nature of the income

With regard to sports rights, it should be noted that, pursuant to Law No. 28/98, of 26 June, the sports rights emerging from the conclusion of a work contract as a professional athlete concluded, are nothing more than the rights of registration of the player in a competition by the sports employing entity, duly recognized by the entity responsible for the organization and supervision of professional football (e.g., Portuguese Professional Football League in the case of A...).

No. 3 of Article 7 of the Statutes of the Portuguese Football Federation (FPF), endowed with sports public utility status, pursuant to Decree-Law No. 144/93, of 26 April, establishes that recognition of the status of Club implies its registration in the Association of its geographical area and, within the scope of professional competition, in the Portuguese Professional Football League.

Now, it is only after this process that the Club can declare itself holder of sports rights, since there is in effect, in its fullness, a work contract as a professional athlete in compliance with legal and regulatory requirements, being able to use the player in competitions in which it participates.

It is concluded then that the existence of sports rights only occurs in the terms described above, it not being possible for other entities (e.g., companies without the capacity to compete in sports competitions with their own team of players) to claim the possession of sports rights over players.

In turn, there being no sports rights, since the player did not hold a valid work contract as a professional athlete with a sports entity, neither can it be considered that economic rights relating to sports rights, commonly called transfer fees, held by a third non-sports entity, are constituted, since these presuppose the existence, as a basis, of a work contract as a professional athlete, logically, with a sports entity.

Accordingly, as the player was free of any work contract as a professional athlete, the amount required by the third non-sports entity, upon the conclusion of the new contract, is nothing more than the consideration for its conclusion that was assigned by the player to a third entity.

Thus, B... Ltda, a non-sports entity that participates in the professional football industry, when invokes that "it is the owner and legitimate holder of all the sports rights" of the player, will hold nothing more than the right to demand, instead of the player, remuneration for the conclusion of the new work contract as a professional athlete.

Given this, as the player was free of any contract with a sports entity, the income obtained by the non-resident entity, in return for the signature of a work contract as a professional athlete of the player with his new club, flow unequivocally and inseparably from the conclusion of this new work contract as a professional athlete, concluded by the player in his capacity as an athlete, from which derives his use in the service of the Club/SAD resident in Portuguese territory.

Thus, it is income that is paid so that the player's services can be used in national territory, and as such considered as income obtained in Portugal by a non-resident subject to CIT, by force of the location rule contained in subsection d) of No. 3 of Article 4 of the CIT Code, since it is income derived from the exercise in Portuguese territory of the activity of athletes.

Withholding Tax

Subsection f) of No. 1 of Article 88 of the CIT Code stipulates that the income referred to in subsection d) of No. 3 of Article 4 of the CIT Code obtained by non-resident entities in Portuguese territory is subject to withholding tax.

To withholding taxes with definitive character, i.e., those that fall on income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding tax rate of 25% shall apply, when the income in question results from income derived from the exercise in Portuguese territory of the activity of athletes (cf. subsection b) of No. 3 and No. 5 of Article 88, and No. 2 of Article 80, both of the CIT Code).

The taxpayer did not prove that it had effected the withholding, nor presented any element proving the exemption from withholding tax. However, the Tax Treaty concluded between the Portuguese Republic and the Federative Republic of Brazil intended to avoid double taxation and prevent tax evasion in matters of taxes on income, established in No. 2 of Article 17, that "...income from activity exercised personally by (…) athletes, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities are exercised".

In turn, in the Comments to No. 2 of Article 17 of the Model Convention of the Organisation for Economic Cooperation and Development, in matters of Taxes on Income and Property, hereinafter Model Convention, it is concluded that the State where athletes' activities are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention that would otherwise apply.

Also on this matter, and in consonance with the preceding paragraph, reference is made to what is stated in the introduction to the Model Convention, which recommends that income derived from the activity of artist or athlete exercised in a State, regardless of whether such income reverts to the artist or athlete or to another person, may be taxed, without any limitation, by that State of origin of the income.

Given this, with regard to these income derived from the activity of athlete, even if a Tax Treaty were concluded with the country of residence of the non-resident beneficiary entity, in this case Brazil, the source State of the income is authorized to exercise its taxation rights over the amounts attributed to intermediary entities between the athlete entity and the Club/SAD paying the income.

Accordingly, as its taxation in Portuguese territory is provided for, from the matter at hand, pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, even if the RFI form model were to be presented, duly completed and certified by the Brazilian tax authorities, the income in question is not exempt from taxation under CIT and, consequently, from withholding tax with definitive title.

In these terms, with regard to the income in question, the taxpayer, as a tax substitute, was obliged to make delivery of the amount that should have been withheld (cf. No. 5 of Article 90-A of the CIT Code).

It is further to be noted that pursuant to Article 123 of the CIT Code, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, cannot be effected without proof that the tax due is paid or secured. Thus, pursuant to the articles and instruments above mentioned, the taxpayer, upon payments of the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total of € 174,245.00, should have effected withholding tax at the rate of 25%, which should have been delivered to the State coffers by the 20th day of the month following the one in which those income were made available (cf. No. 6 of Article 88 of the CIT Code).

Given the foregoing, tax in default was assessed for the period in which the payment was made, in the total value of €43,561.25 (€ 174,245.00 x 25%), plus compensatory interest for the delay of income due to the State (No. 2 of Article 106 of the CIT Code and No. 1 of Article 35 of the General Tax Law).

III.1.2.2.2. Image Rights of athlete E...

The taxpayer made on 2008-11-13, a payment in the amount of € 136,390.00 to the entity D… Limited, a non-resident, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the transfer of image rights of player E….

The payment was made within the scope of an "Agreement" on the use of the image right of athlete E..., concluded between A... and D… (see Annex 67). The said agreement has a duration of 5 years, following the period of validity of the work contract as a professional athlete (see Annex 68).

Nature of the income

With regard to the factual matter, it is to be noted that, when a football player assigns to a third non-sports entity the benefits of the use of his image right and this, in turn, effects the assignment of the exploitation of these rights to the Club/SAD with whom the player concluded a work contract, the object of the assignment contract is interlinked and reverts to the rights inherent in the contract he concluded as a footballer, from which his image derives.

Thus, a Club/SAD, when it acquires the image rights of the players in its squad, does so as rights associated with the athletes it engages and to the image, intrinsically derived from their activity as athletes. A clear connection is thus established between the activity performed by the players and the potential exploitation of their image rights, since the Club/SAD only acquires these image rights while the players remain in its service and in practicing an activity as an athlete - the duration of the assignment contract of image rights follows that of the work contract as a professional athlete.

For this reason, ultimately, what ends up being transferred from that third non-resident entity will be the income that derives from the image that these athletes hold, as players who perform (or will perform) the activity of professional footballer in Portuguese territory.

Therefore, given its direct and inseparable connection with the exercise of sports activity, the income earned from the assignment of the image rights of these players constitutes, ultimately, income derived from the exercise in Portuguese territory of their activity as athletes, which are subject to CIT, given the provision in subsection d) of No. 3 of Article 4 of the CIT Code.

Withholding Tax

In turn, subsection f) of No. 1 of Article 88 of the CIT Code stipulates that the income referred to in subsection d) of No. 3 of Article 4 of the CIT Code, obtained by non-resident entities in Portuguese territory is subject to withholding tax.

Withholding taxes with definitive character, i.e., those that fall on income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding tax rate of 25% shall apply, when the income in question results from income derived from the exercise in Portuguese territory of the activity of athletes (cf. subsection b) of No. 3 and No. 5 of Article 88, and No. 2 of Article 80, both of the CIT Code).

As already mentioned above, during the course of the tax inspection action, it was possible to determine that the obligation to effect withholding tax, provided for in Articles 80 and 88 of the CIT Code, was not complied with. The lack of withholding tax was justified by the taxpayer on the basis of the existence of a treaty for the avoidance of double taxation and prevention of tax evasion in matters of taxes on income and capital, hereinafter Tax Treaty, with the country of residence of the beneficiary entity of the income, having presented for that purpose the RFI form.

Nevertheless, the Tax Treaty concluded between the Portuguese Republic and Ireland, approved by Resolution of the Assembly of the Republic No. 29/94, of 9 February, stipulates in No. 2 of Article 17, relating to the taxation of artists and athletes, that "...income from activity exercised personally by (…) athletes, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities are exercised".

In turn, in the Comments to No. 2 of Article 17 of the Model Convention of the Organisation for Economic Cooperation and Development, in matters of Taxes on Income and Property, hereinafter Model Convention, it is concluded that the State where athletes' activities are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention that would otherwise apply.

Also on this matter, and in consonance with the preceding paragraph, reference is made to what is stated in the introduction to the Model Convention, which recommends that income derived from the activity of artist or athlete exercised in a State, regardless of whether such income reverts to the artist or athlete or to another person, may be taxed, without any limitation, by that State of origin of the income.

Given this, with regard to these income derived from the activity of athlete, even if a Tax Treaty were concluded with the country of residence of the non-resident beneficiary entity, in this case Ireland, the source State of the income is authorized to exercise its taxation rights over the amounts attributed to intermediary entities between the athlete entity and the Club/SAD paying the income.

Accordingly, as its taxation in Portuguese territory is provided for, from the matter at hand, pursuant to the already mentioned subsection d) of No. 3 of Article 4 of the CIT Code, the income in question is not exempt from taxation in national territory and, consequently, from withholding tax with definitive title in the scope of CIT.

In these terms, with regard to the income in question, the taxpayer, as a tax substitute, was obliged to make delivery of the amount that should have been withheld (cf. No. 5 of Article 90-A of the CIT Code).

It is further to be noted that pursuant to Article 123 of the CIT Code, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, cannot be effected without proof that the tax due is paid or secured.

Thus, pursuant to the articles and instruments above mentioned, the taxpayer, upon payment or making available, of the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total of €136,390.00, should have effected withholding tax at the rate of 25%, which should have been delivered to the State coffers by the 20th day of the month following the one in which those income were made available (cf. No. 6 of Article 88 of the CIT Code).

Given the foregoing, tax in default was assessed in the total amount of €34,097.50 (€136,390.00 x 25%), as withholding tax, plus compensatory interest for the delay of income due to the State (No. 2 of Article 106 of the CIT Code and No. 1 of Article 35 of the General Tax Law).

III.1.2.2.3. Image Rights of athlete G...

The taxpayer made, during the year 2008, two payments in the total amount of €1,075,269.00 to the entity F… B.V., a non-resident, without a permanent establishment in Portugal, which were not subject to withholding tax, relating to the transfer of image rights of player G..., according to the following table:

The payments were made within the scope of an "Agreement" on the use of the image right of athlete G..., concluded between A... and F… (see Annex 69). The said agreement has a duration of 4 years, following the period of validity of the work contract as a professional athlete (see Annex 70).

Nature of the income

With regard to the factual matter, it is to be noted that, when a football player assigns to a third non-sports entity the benefits of the use of his image right and this, in turn, effects the assignment of the exploitation of these rights to the Club/SAD with whom the player concluded a work contract, the object of the assignment contract is interlinked and reverts to the rights inherent in the contract he concluded as a footballer, from which his image derives.

Thus, a Club/SAD, when it acquires the image rights of the players in its squad, does so as rights associated with the athletes it engages and to the image, intrinsically derived from their activity as athletes. A clear connection is thus established between the activity performed by the players and the potential exploitation of their image rights, since the Club/SAD only acquires these image rights while the players remain in its service and in practicing an activity as an athlete - the duration of the assignment contract of image rights follows that of the work contract as a professional athlete.

For this reason, ultimately, what ends up being transferred from that third non-resident entity will be the income that derives from the image that these athletes hold, as players who perform (or will perform) the activity of professional footballer in Portuguese territory.

Therefore, given its direct and inseparable connection with the exercise of sports activity, the income earned from the assignment of the image rights of these players constitutes, ultimately, income derived from the exercise in Portuguese territory of their activity as athletes, which are subject to CIT, given the provision in subsection d) of No. 3 of Article 4 of the CIT Code.

Withholding Tax

In turn, subsection f) of No. 1 of Article 88 of the CIT Code stipulates that the income referred to in subsection d) of No. 3 of Article 4 of the CIT Code, obtained by non-resident entities in Portuguese territory is subject to withholding tax.

Withholding taxes with definitive character, i.e., those that fall on income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding tax rate of 25% shall apply, when the income in question results from income derived from the exercise in Portuguese territory of the activity of athletes (cf. subsection b) of No. 3 and No. 5 of Article 88, and No. 2 of Article 80, both of the CIT Code).

As already mentioned above, during the course of the tax inspection action, it was possible to determine that the obligation to effect withholding tax, provided for in Articles 80 and 88 of the CIT Code, was not complied with. The lack of withholding tax was justified by the taxpayer on the basis of the existence of a treaty for the avoidance of double taxation and prevention of tax evasion in matters of taxes on income and capital, hereinafter Tax Treaty, with the country of residence of the beneficiary entity of the income, having presented for that purpose the RFI form.

Nevertheless, the Tax Treaty concluded between the Portuguese Republic and the Kingdom of the Netherlands, approved by Resolution of the Assembly of the Republic No. 62/2000, of 12 July, stipulates in No. 2 of Article 17, relating to the taxation of artists and athletes, that "...income from activity exercised personally by (…) athletes, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities are exercised".

In turn, in the Comments to No. 2 of Article 17 of the Model Convention of the Organisation for Economic Cooperation and Development, in matters of Taxes on Income and Property, hereinafter Model Convention, it is concluded that the State where athletes' activities are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention that would otherwise apply.

Also on this matter, and in consonance with the preceding paragraph, reference is made to what is stated in the introduction to the Model Convention, which recommends that income derived from the activity of artist or athlete exercised in a State, regardless of whether such income reverts to the artist or athlete or to another person, may be taxed, without any limitation, by that State of origin of the income.

Given this, with regard to these income derived from the activity of athlete, even if a Tax Treaty were concluded with the country of residence of the non-resident beneficiary entity, in this case the Netherlands, the source State of the income is authorized to exercise its taxation rights over the amounts attributed to intermediary entities between the athlete entity and the Club/SAD paying the income.

Accordingly, as its taxation in Portuguese territory is provided for, from the matter at hand, pursuant to the already mentioned subsection d) of No. 3 of Article 4 of the CIT Code, the income in question is not exempt from taxation in national territory and, consequently, from withholding tax with definitive title in the scope of CIT.

In these terms, with regard to the income in question, the taxpayer, as a tax substitute, was obliged to make delivery of the amount that should have been withheld (cf. No. 5 of Article 90-A of the CIT Code)

It is further to be noted that pursuant to Article 123 of the CIT Code, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, cannot be effected without proof that the tax due is paid or secured.

Thus, pursuant to the articles and instruments above mentioned, the taxpayer, upon payment or making available, of the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total of €1,075,269.00, should have effected withholding tax at the rate of 25%, which should have been delivered to the State coffers by the 20th day of the month following the one in which those income were made available (cf. No. 6 of Article 88 of the CIT Code).

Given the foregoing, tax in default was assessed in the total amount of €268,817.25 (€1,075,269.00 x 25%), as withholding tax, plus compensatory interest for the delay of income due to the State (No. 2 of Article 106 of the CIT Code and No. 1 of Article 35 of the General Tax Law).

III.1.2.2.4. H… S.R.L.

The taxpayer made on 2008-08-04, a payment in the amount of €90,000.00 to the entity H… S.R.L, a non-resident, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and I… Rotterdam.

Nature of the income

Pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, income paid to non-resident entities without a permanent establishment, deriving from income derived from the exercise in Portuguese territory of the activity of athletes, is considered obtained in Portuguese territory.

In the situation at hand, the payment made by A..., arises from the activity practiced by the sports club, that is, from the participation of the football team of I… Rotterdam in a sports spectacle that occurred in national territory.

Thus, the income earned by the entity H… is considered obtained in Portuguese territory, given its direct and inseparable connection with the exercise of the sports activity of the team holding the right, by force of the provisions in subsection d) of No. 3 of Article 4 of the CIT Code.

Withholding Tax

In turn, subsection f) of No. 1 of Article 88 of the CIT Code stipulates that the income referred to in subsection d) of No. 3 of Article 4 of the CIT Code, obtained by non-resident entities in Portuguese territory is subject to withholding tax.

Withholding taxes with definitive character, i.e., those that fall on income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding tax rate of 25% shall apply, when the income in question results from income derived from the exercise in Portuguese territory of the activity of athletes (cf. subsection b) of No. 3 and No. 5 of Article 88, and No. 2 of Article 80, both of the CIT Code).

As already mentioned above, during the course of the tax inspection action, it was possible to determine that the obligation to effect withholding tax, provided for in Articles 80 and 88 of the CIT Code, was not complied with. The lack of withholding tax was justified by the taxpayer on the basis of the existence of a treaty for the avoidance of double taxation and prevention of tax evasion in matters of taxes on income and capital, hereinafter Tax Treaty, with the country of residence of the beneficiary entity of the income.

Nevertheless, the Tax Treaty concluded between the Portuguese Republic and the Kingdom of the Netherlands, approved by Resolution of the Assembly of the Republic No. 62/2000, Approved on 27 April 2000, stipulates in No. 2 of Article 17, relating to the taxation of artists and athletes, that "...income from activity exercised personally by (…) athletes, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities are exercised".

In turn, in the Comments to No. 2 of Article 17 of the Model Convention of the Organisation for Economic Cooperation and Development, in matters of Taxes on Income and Property, hereinafter Model Convention, it is concluded that the State where athletes' activities are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention that would otherwise apply.

Also on this matter, and in consonance with the preceding paragraph, reference is made to what is stated in the introduction to the Model Convention, which recommends that income derived from the activity of artist or athlete exercised in a State, regardless of whether such income reverts to the artist or athlete or to another person, may be taxed, without any limitation, by that State of origin of the income.

Given this, with regard to these income derived from the activity of athlete, even if a Tax Treaty were concluded with the country of residence of the non-resident beneficiary entity, in this case the Netherlands, the source State of the income is authorized to exercise its taxation rights over the amounts attributed to intermediary entities between the athlete entity and the Club/SAD paying the income.

Accordingly, as its taxation in Portuguese territory is provided for, from the matter at hand, pursuant to the already mentioned subsection d) of No. 3 of Article 4 of the CIT Code, the income in question is not exempt from taxation in national territory and, consequently, from withholding tax with definitive title in the scope of CIT.

In these terms, with regard to the income in question, the taxpayer, as a tax substitute, was obliged to make delivery of the amount that should have been withheld (cf. No. 5 of Article 90-A of the CIT Code).

It is further to be noted that pursuant to Article 123 of the CIT Code, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, cannot be effected without proof that the tax due is paid or secured.

Thus, pursuant to the articles and instruments above mentioned, the taxpayer, upon payment or making available, of the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total of €90,000.00, should have effected withholding tax at the rate of 25%, which should have been delivered to the State coffers by the 20th day of the month following the one in which those income were made available (cf. No. 6 of Article 88 of the CIT Code).

Given the foregoing, tax in default was assessed in the amount of €22,500.00 (€90,000.00 x 25%), as withholding tax, plus compensatory interest for the delay of income due to the State (No. 2 of Article 106 of the CIT Code and No. 1 of Article 35 of the General Tax Law).

III.1.2.2.5. J… S.R.L.

The taxpayer made on 2008-08-28, a payment in the amount of €480,000.00 to the entity J… S.R.L, a non-resident134, without a permanent establishment in Portugal, which was not subject to withholding tax, relating to the organization of a friendly football match held in national territory between the teams of A... and K…

Nature of the income

Pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, income paid to non-resident entities without a permanent establishment, deriving from income derived from the exercise in Portuguese territory of the activity of athletes, is considered obtained in Portuguese territory.

In the situation at hand, the payment made by A..., arises from the activity practiced by the sports club, that is, from the participation of the football team of H… in a sports spectacle that occurred in national territory.

Thus, the income earned by the entity J… S.R.L is considered obtained in Portuguese territory, given its direct and inseparable connection with the exercise of the sports activity of the team holding the right, by force of the provisions in subsection d) of No. 3 of Article 4 of the CIT Code.

Withholding Tax

In turn, subsection f) of No. 1 of Article 88 of the CIT Code stipulates that the income referred to in subsection d) of No. 3 of Article 4 of the CIT Code, obtained by non-resident entities in Portuguese territory is subject to withholding tax.

Withholding taxes with definitive character, i.e., those that fall on income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding tax rate of 25% shall apply, when the income in question results from income derived from the exercise in Portuguese territory of the activity of athletes (cf. subsection b) of No. 3 and No. 5 of Article 88, and No. 2 of Article 80, both of the CIT Code).

As already mentioned above, during the course of the tax inspection action, it was possible to determine that the obligation to effect withholding tax, provided for in Articles 80 and 88 of the CIT Code, was not complied with. The lack of withholding tax was justified by the taxpayer on the basis of the existence of a treaty for the avoidance of double taxation and prevention of tax evasion in matters of taxes on income and capital, hereinafter Tax Treaty, with the country of residence of the beneficiary entity of the income.

Nevertheless, the Tax Treaty concluded between the Portuguese Republic and the Italian Republic, approved by Resolution of the Assembly of the Republic No. 10/82, stipulates in No. 2 of Article 17, relating to the taxation of artists and athletes, that "...income from activity exercised personally by (…) athletes, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities are exercised".

In turn, in the Comments to No. 2 of Article 17 of the Model Convention of the Organisation for Economic Cooperation and Development, in matters of Taxes on Income and Property, hereinafter Model Convention, it is concluded that the State where athletes' activities are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention that would otherwise apply.

Also on this matter, and in consonance with the preceding paragraph, reference is made to what is stated in the introduction to the Model Convention, which recommends that income derived from the activity of artist or athlete exercised in a State, regardless of whether such income reverts to the artist or athlete or to another person, may be taxed, without any limitation, by that State of origin of the income.

Given this, with regard to these income derived from the activity of athlete, even if a Tax Treaty were concluded with the country of residence of the non-resident beneficiary entity, in this case Italy, the source State of the income is authorized to exercise its taxation rights over the amounts attributed to intermediary entities between the athlete entity and the Club/SAD paying the income.

Accordingly, as its taxation in Portuguese territory is provided for, from the matter at hand, pursuant to the already mentioned subsection d) of No. 3 of Article 4 of the CIT Code, the income in question is not exempt from taxation in national territory and, consequently, from withholding tax with definitive title in the scope of CIT.

In these terms, with regard to the income in question, the taxpayer, as a tax substitute, was obliged to make delivery of the amount that should have been withheld (cf. No. 5 of Article 90-A of the CIT Code).

It is further to be noted that pursuant to Article 123 of the CIT Code, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, cannot be effected without proof that the tax due is paid or secured.

Thus, pursuant to the articles and instruments above mentioned, the taxpayer, upon payment or making available, of the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total of €480,000.00, should have effected withholding tax at the rate of 25%, which should have been delivered to the State coffers by the 20th day of the month following the one in which those income were made available (cf. No. 6 of Article 88 of the CIT Code).

Given the foregoing, tax in default was assessed in the amount of €120,000.00 (€480,000.00 x 25%), as withholding tax, plus compensatory interest for the delay of income due to the State (No. 2 of Article 106 of the CIT Code and No. 1 of Article 35 of the General Tax Law).

j) Following the aforementioned inspection and the aforementioned corrections relating to withholding tax, Assessment No. 2010 … was issued, dated 31-12-2010, in the total value of € 577,854.69, being € 530,853.00 relating to withholdings and € 47,001.69 to compensatory interest (document No. 2 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

k) On 21-06-2011, the Claimant filed a gracious complaint regarding the aforementioned assessment (document No. 3 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

l) On 20-03-2012, a draft order was issued by the Director of the Local Tax Office to the effect of dismissing the aforementioned gracious complaint, with the Claimant not exercising the right to be heard (document No. 4 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

m) On 20-06-2012, a decision to dismiss the aforementioned gracious complaint was rendered, which was notified to the Claimant on 26-06-2012 (document No. 5 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

n) On 26-07-2012, the Claimant filed a hierarchical appeal against the decision dismissing the gracious complaint (document No. 6 attached with the request for arbitral pronouncement, the contents of which are given as reproduced);

o) By order of 19-09-2014, the Deputy General Director of Taxes dismissed the hierarchical appeal, in the terms that appear in document No. 7 attached with the request for arbitral pronouncement, the contents of which are given as reproduced, in which the following is mentioned, among other things:

REGARDING ATHLETE C...

The appellant alleges that it has concluded a contract with the company "B... Ltda", with a view to the acquisition of the sports and financial rights of player C..., for the total amount of €1,045,470.00, such amount to be satisfied in 6 equal semi-annual installments of €174,245.00 each.

The appellant further contends that the case at hand does not include the legal requirements set out in subsection d) of No. 3 of Article 4, nor in subsection f) of No. 1 of Article 88, both of the CIT Code, because such amount does not constitute income, as the Tax Authority (AT) intends, but rather a payment with contractual origin, intended to fulfill/release contractual obligations and as such not subject to withholding tax.

Now, in the scope of the tax inspection action identified above, the Tax Inspection Services verified that the appellant, an entity resident in Portuguese territory had concluded, in the 2008 tax period, with the company "B... Ltda", an entity resident in Brazil, a contract with a view to the acquisition of athlete C..., for the amount indicated above.

At the time of acquisition, the athlete did not hold any work contract as a professional athlete with another football club, being thus "free".

Now, such as referred to by Law No. 28/98 of 26 June, with amendments introduced by Law No. 114/99 of 3 August, sports and financial rights only emerge with the conclusion of a work contract as a professional athlete and translate into the right of registration of the player in a Sports Federation or Professional League, so that he can be used in a given competition in which the employing sports entity duly recognized participates.

Thus, only after the execution of the agreement between the appellant and the company "B... Ltda", can the first declare itself holder of the sports rights relating to athlete C….

In situations where a given player, who is "free", comes to conclude a work contract as a professional athlete, whereby a non-resident sports entity requires a given amount, it has been the understanding of this Directorate of Services that such amount is subject to taxation for purposes of CIT.

Now, in the wake of Law No. 28/98, this understanding has given rise to Circular No. 18 of 19 May 2011, duly sanctioned by the General Director of AT, which, despite being subsequent to the facts in question, adopted it in its entirety, and for that fact we reproduce it here.

Thus:

"In the case where the player is "free", that is, without a valid work contract as a professional athlete in effect, when a non-sports entity non-resident entity appears to charge an amount to a Club/SAD resident that wishes to conclude a work contract as a professional athlete with the player, these economic rights do not have at their origin sports rights, since there is no work contract as a professional athlete.' (our emphasis)

Since at the time of signing the work contract as a professional athlete with the appellant, athlete C... was not bound to any sports club, that is, was "free", the contract signed with A... fits into the figure of a signing bonus, which the athlete could demand for the conclusion of a new contract.

In this way, the amount paid by A... to "B… Ltda" - a non-resident and non-sports entity - is nothing more than the consideration for its conclusion, through which the player was assigned to him which allows the athlete, duly registered in the respective league, to participate in sports competitions.

Thus, this income is subject to taxation, pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, since it is income connected with the exercise in Portuguese territory of the activity of athletes.

Within the scope of the subjective incidence of CIT, taxpayers of the tax are, among others, non-residents with or without legal personality, who do not have registered office or effective management in Portuguese territory and whose income obtained therein is not subject to Personal Income Tax (PIT).

Article 3 of the CIT Code defines the objective incidence of this tax, whereby the income of the various categories of PIT is subject, earned by non-resident entities, who do not have a permanent establishment or whose income is not attributable to the permanent establishment.

As provided for in No. 2 of Article 4 of the CIT Code, entities that do not have registered office or effective management in Portuguese territory, as is the case with "B... Ltda", are subject to CIT, as to income obtained therein.

Thus, it is important to know whether the income is considered or not obtained in Portuguese territory.

Pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, income derived from the exercise in Portuguese territory of athletes' activity is considered, being in this case taxed as withholding tax.

The law thus imposes on the entity paying the income the obligation of withholding tax, with liberatory or definitive title, at the moment of payment - see Article 88, No. 1 subsection f), No. 3, subsection b) and No. 5 of the CIT Code.

The rate to apply, considering the 2008 tax year and the nature of the services in question, is 25% - Article 80, No. 4 and Article 88, No. 3 subsection b) of the CIT Code, with the withheld amount delivered to the State by the 20th day of the month following the one in which it was withheld (No. 6 of Article 88, in the former wording).

Pursuant to Article 90-A of the CIT Code (in the former wording), there is no obligation to effect withholding tax with respect to income covered by No. 1 of Article 88 of the same instrument, when there is a treaty intended to eliminate double taxation (Tax Treaty) concluded between the Portuguese State and the State of residence of the beneficiary entity, which does not assign to the former the competence to tax the income.

In these cases, the paying entity is relieved of the obligation to effect the withholding of the tax.

However, in the case at hand, since it is income from the activity of athletes, the exemption to which Article 90-A of the CIT Code refers, does not apply, because the Treaty intended to avoid Double Taxation between Portugal and Brazil, follows the provisions of No. 2 of Article 17 of the Model Convention of the OECD (hereinafter OECD Model Convention), assigning to the source State competence to effect taxation.

Now, pursuant to this No. 2, the State where the athlete exercises activity, in this case Portugal, is authorized to proceed with the taxation of income, even if not exclusively.

Although a definition of "athlete" is not given, it is certain that the term adopted by the OECD Model Convention encompasses both the modalities in which athletes participate individually and those in which participation is made in a team.

Now, because it is income derived from the activity of athlete, the exemption from withholding to which Article 98 of the CIT Code refers, does not apply, even if there is a Treaty intended to avoid Double Taxation, when this follows the provisions of No. 2 of Article 17 of the OECD Model Convention - in this sense, see Circular No. 18/2011 dated 19 May.

In the case, and as mentioned in the tax inspection report, the now appellant did not prove that it had effected withholding tax, whereby the same was in default.

Finally, it should further be stated that the transfer abroad of income subject to CIT, obtained in Portuguese territory by non-resident entity, could not be carried out without proof that the tax due was paid or secured (Article 123 of the CIT Code)

In these terms, the argument invoked by the appellant will not be accepted, whereby the correction effected by the Tax Inspection Services will be maintained.

REGARDING IMAGE RIGHTS - E... AND G...:

The appellant alleges that athletes E... and G..., in the full exercise of their image rights, assigned such rights to the companies designated "D…" (headquartered in Ireland) and "F… B.V." (headquartered in the Netherlands).

With regard to athlete E..., the appellant claims that it acquired on 1/7/2008, by means of an agreement concluded with the said Irish company, the image rights of the athlete, coming to recognize as a cost in the 2008 tax year the amount of €320,560.08.

With regard to player G..., the appellant alleges that it concluded, on 17/7/2008, with the Dutch company an "Agreement" through which it acquired the image rights of the athlete, having made two payments totaling €1,075,269.00.7

The appellant thus argues that the AT concluded, erroneously, by the direct and inseparable connection of the image rights with the exercise of sports activity, by understanding that the payments for the assignment of the rights translate into income derived from the exercise in Portuguese territory of sports activity and as such taxed in accordance with subsection d) of No. 3 of Article 4 of the CIT Code.

The appellant further contends that the sports activity of those football professionals is exercised by their participation in football competitions in which the employing entity participates, with which it concluded a work contract as a professional athlete, and that the payments made concern only the image rights of the players.

What is at issue is whether the amounts paid by a resident entity (A...), to two non-resident entities in Portugal (with headquarters in territories with a privileged tax regime), for the acquisition of the image rights of the athletes, with whom it concluded a work contract as a professional athlete, should or should not be considered income subject to taxation through the mechanism of withholding tax.

As appears from the case file, A... concluded with the company D… Limited, an entity headquartered in Ireland, on 1/7/2008, an "Agreement" through which the former acquired, taking into account that the player came to conclude with it a work contract as a professional athlete, the image right (without any limitation) of the athlete.

From that "Agreement", it results that the appellant may use and exploit directly and indirectly the rights referred to therein, mainly with regard to the public image of the player connected with the practice of football.

The same applies with regard to the "Agreement" concluded with the company "F… B.V.", taking into account the acquisition of the image rights of athlete G..., who came to conclude with A... a work contract as a professional athlete on 17/7/2008 (Annex 70 of the tax inspection report)

Now, with regard to these situations, it is verified that nowadays there are numerous cases where the sports practitioner assigns to third parties the right to exploit and use their sports image.

However, upon concluding a work contract as a professional athlete with a given entity, with whom the assignment of the exploitation of the image rights is also concluded, both contracts end up being interlinked/connected.

As mentioned in the tax inspection report, page 139, "...a Club/SAD, when it acquires the image rights of the players in its squad, does so as rights associated with the athletes it engages and with the image, intrinsically derived from its sports activity. A clear connection is thus established between the activity performed by the players and the potential exploitation of their image rights..."

In this way, because the income paid from the assignment of the image is connected with the exercise of sports activity, such income is subject to taxation in the scope of CIT, for purposes of the provision in subsection d) of No. 3 of Article 4 of the CIT Code.

Pursuant to Article 10 of Law No. 28/98 of 26/06 ", the image right is transmitted implicitly to the Club/SAD with which the player concluded a work contract as a professional athlete, such entity coming to hold and be able to exploit the image right of the player while a member of a team.

Thus, in the face of such situations, it has been the understanding of the Tax Authority, which came to be adopted in Circular No. 17/2011, of the Office of the General Director, (which although subsequent to the facts here we make reference), that when the image rights are held by a non-resident and non-sports entity, the amounts paid for their acquisition constitute income subject to taxation, in the scope of CIT, through the mechanism of withholding tax, provided for in Article 88 of the CIT Code, in the wording in force at the time of the facts.

"When the image rights of a player are held by a non-sports entity non-resident in Portuguese territory, who assigns them to a Club/SAD resident, with whom the player will conclude a work contract as a professional athlete, the income obtained by that entity from the assignment of these rights is strictly related to the rights inherent to the work contract as a professional athlete concluded by the player, because they derive from his image in the exercise of his professional activity and exist only as long as the work contract as a professional athlete lasts. Thus, such income constitutes 'income derived from the exercise in Portuguese territory of activity of (…) athletes' and is subject to CIT, pursuant to subsection d) of No. 3 of Article 4 of the CIT Code.

And it continues by stating that:

The income obtained by an entity, non-sports, non-resident, from the assignment of the image right, is subject to withholding tax with definitive title, at the rate of 25%, pursuant to No. 4 of Article 80, combined with subsection b) of No. 3 and No. 5 of Article 88, both of the CIT Code.

In this way, it is our understanding, saving better opinion, that the case at hand is fully accommodated,

The income paid by a resident in Portugal (A...) to non-sports and non-resident entities (D… Limited and F… B.V.) for the acquisition of the image rights of the athletes, with whom it came to conclude a work contract as a professional athlete, are subject to taxation, through the mechanism of withholding tax, because the image rights are directly connected with the rights inherent to the work contract

Therefore, the amounts paid for the acquisition of the image right should have been subject to withholding tax, with definitive title, effected by A..., an entity resident in the State of source of such income, at the rate of 25%. - see Article 88, No. 1 subsection f), No. 3, subsection b) and No. 6 of the CIT Code

As to the exemption or relief from withholding to which Article 90-A of the CIT Code refers, it will always be said that these only occur, with regard to the income provided for in No. 1 of Article 88 of that same instrument, when by force of a Treaty, the competence for the taxation of income earned by a non-resident entity (without registered office or effective management in Portuguese territory and without a permanent establishment situated therein) is not assigned to the source State.

Now, both countries in which the companies D… and F… are headquartered, Treaties intended to eliminate or mitigate double taxation.

Pursuant to No. 2 of Article 17 of such Treaties, in light of what happens in the article with the same number of the OECD Model Convention on Income and Property13, the income from activity exercised personally by athletes, in that capacity, but attributed to another person, may be taxed in the Contracting State where the activity is exercised, with it being then for the State of residence to apply the mechanisms intended to mitigate or eliminate double taxation.

Despite the existence of a Treaty, establishing that taxation can be effected by the source State, the exemption to which Article 90-A of the CIT Code does not apply:

Pursuant to the Treaties concluded between Portugal and Ireland (in the case E.../D… Limited) and Portugal and the Netherlands (in the case G.../F… B.V.), the entity resident in the source State1', in casu, A..., should have withheld a certain amount from the income paid to non-resident entities, since the activity was exercised by the athlete in that same State.

Having the Tax Inspection Services verified that the appellant did not effect the respective withholding tax, as it was obliged to do pursuant to the terms set out above, they made the respective correction, which will thus be maintained.

PAYMENTS TO ENTITIES H… SRL AND J…. SRL

At issue is the payment made by A... to H… SRL (resident in the Netherlands) and J… SRL (resident in Italy), for the participation of the teams of "I…" and "J…" in friendly football matches disputed with the team of A..., which took place in national territory.

The appellant alleges the incorrect application of the provisions in subsection d) of No. 3 of Article 4 of the CIT Code by the Tax Inspection Services, because such normative only concerns income derived from activity exercised personally by athletes, in that capacity, and not income derived from sports activity.

The appellant further contends that the activity practiced by the sports club is an activity developed, not individually, but collectively, in a team, and that the professionals who make up this team are subordinate to the guidance and supervision of the club, with their income having no direct and inseparable connection with the exercise in Portuguese territory of the activity of athlete.

Regarding the friendly matches with the teams identified above, the Tax Inspection Services detected that the appellant paid on 4/8/2008, the amount of €90,000.00 to "H… SRL", regarding the organization of a football match, which took place in Portuguese territory between the team of A... and I… Rotterdam.

They further verified that on 28/8/2008, A... proceeded with the payment of the amount of €480,000.00 to the entity "J… SRL", for the organization of a friendly match, disputed in Portuguese territory between A1… and K….

It is important thus to ascertain whether the income paid by the appellant to those two non-resident entities, without a permanent establishment in Portugal, are or are not subject to taxation for purposes of CIT and in what terms.

Pursuant to the provisions of Article 4, No. 2 of the CIT Code, entities subject to CIT, as to income obtained in Portuguese territory, are those legal entities that do not have registered office or effective management in that territory.

Income derived from the exercise in Portuguese territory of the activity of entertainment professionals or athletes is considered obtained there, for the purposes of that No. 2 (subsection d)).

The appellant contends that this subsection is intended to cover only income derived from activity exercised personally by athletes, and that the club's activity is developed in a team.

Now, it is our opinion that such an argument cannot succeed.

First, because where the legislator does not distinguish, it is not for the interpreter to distinguish, as to do so would be to distort the meaning and scope of the law and even to create new rules, wholly divergent from those in force and have been duly approved.

Thus, the amounts paid to the companies aforementioned are subject to taxation effected through the mechanism of withholding tax with definitive title, pursuant to the provisions of Article 88, No. 1 subsection f) of the CIT Code.

Despite the existence of Treaties for the avoidance of Double Taxation, signed between Portugal and the Netherlands and Portugal and Italy, it is true that these follow the OECD Model Convention, which is in charge of the distribution of competencies relating to taxation.

Pursuant to No. 2 of Article 17 of the OECD Model Convention, more properly in the comments to the article, the State where the athlete exercised his activity as such, has competence to tax the income obtained therein by virtue of that activity, even if attributed to another entity.

It further adds that the OECD Model Convention, in its introduction (point 21), states that income derived from the activity of the athlete exercised in a given State, regardless of whether the income is paid to the athlete himself or another person, may be taxed without any limitation in the source State or situs.

Finally, it is also important to mention the provisions of Article 123 of the CIT Code, which provides that transfers abroad of income obtained in Portuguese territory by non-resident entities cannot be effected without the payment of the respective tax.

For the foregoing reasons, the arguments of the appellant do not succeed and the correction carried out by the Tax Inspection Services is to be maintained.

OF THE ILLEGALITY OF THE TAX ACT BY VIOLATION OF TREATY LAW

The appellant contends that the Irish, Dutch and Italian tax authorities issued certificates of residence (RFI), with respect to payments made both as to the company "B... Ltda", and with respect to the image rights of athletes E... and G..., with the AT being unable to disregard the existence of such forms.

Saving always the due respect for diverse opinion, it is our understanding that there was no violation of treaty law on the part of the AT.

The exemption from withholding tax only operates in cases where competence for taxation is NOT assigned to the source State.

As mentioned above, as to income derived from the activity of athletes, the exemption from withholding is not applicable, even if there is a Treaty concluded between Portugal and the country of residence of the non-resident entity, when such Treaty follows No. 2 of Article 17 of the OECD Model Convention. (Circular 18/2011)

Now, in the situations at hand, it was verified that the source State, in casu, Portugal, in accordance with the Treaties concluded with Ireland, the Netherlands and Italy, in light of No. 2 of Article 17 of the OECD Model Convention, always holds competence to effect taxation, even if not exclusively.

Thus, the appellant has no grounds with respect to the argument invoked, and the documentation to which the appellant refers is irrelevant and no illegality can be imputed to the assessment.

p) On 18-02-2015, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts

a) It was not proven that B... Ltda received the amount of € 174,125.00 that was paid by the Claimant on 12-03-2008 acting in the name and on behalf of athlete C..., nor that the latter received any part of the aforementioned amount.

b) It was not proven that the Claimant had provided guarantee to suspend fiscal execution connected with the facts of the case file.

2.3. Reasoning of the Decision on Factual Matters

The facts established as proven are based on the documents attached with the request for arbitral pronouncement and on the administrative proceedings, with no controversy regarding them.

3. Legal Matters

3.1. Question of Withholding Relating to the Acquisition of Sports Use Rights of Athlete C...

A... made a payment, in the total of € 174,245.00, to the entity B... Ltda, resident in Brazil, as consideration for the acquisition of "sports and financial rights" relating to player C..., without effecting CIT withholding tax.

The Tax Authority and Customs Authority understood that the Claimant should have effected withholding tax, in the amount of € 43,561.25, whereby it included this amount in the disputed assessment, together with compensatory interest, for the following reasons, in summary:

– pursuant to Law No. 28/98, of 26 June, sports rights emerging from the conclusion of a work contract as a professional athlete are nothing more than the rights of registration of the player in a competition by the sports employing entity, duly recognized by the entity responsible for the organization and supervision of professional football;

– No. 3 of Article 7 of the Statutes of the Portuguese Football Federation (FPF), endowed with sports public utility status, pursuant to Decree-Law No. 144/93, of 26 April, establishes that recognition of the status of Club implies its registration in the Association of its geographical area and, within the scope of professional competition, in the Portuguese Professional Football League;

– it is only after this process that the Club can declare itself holder of sports rights, since there is in effect, in its fullness, a work contract as a professional athlete in compliance with legal and regulatory requirements, being able to use the player in competitions in which it participates;

– it is concluded then that the existence of sports rights only occurs in the terms described above, it not being possible for other entities (e.g., companies without the capacity to compete in sports competitions with their own team of players) to claim the possession of sports rights over players;

– in turn, there being no sports rights, since the player did not hold a valid work contract as a professional athlete with a sports entity, neither can it be considered that economic rights relating to sports rights, commonly called transfer fees, held by a third non-sports entity, are constituted, since these presuppose the existence, as a basis, of a work contract as a professional athlete, logically, with a sports entity;

– accordingly, as the player was free of any work contract as a professional athlete, the amount required by the third non-sports entity, upon the conclusion of the new contract, is nothing more than the consideration for its conclusion that was assigned by the player to a third entity;

– thus, B... Ltda, a non-sports entity that participates in the professional football industry, when invokes that "it is the owner and legitimate holder of all the sports rights" of the player, will hold nothing more than the right to demand, instead of the player, remuneration for the conclusion of the new work contract as a professional athlete;

– in the case where the player is "free", that is, without a valid work contract as a professional athlete in effect, when a non-sports non-resident entity appears to charge an amount to a Club/SAD resident that wishes to conclude a work contract as a professional athlete with the player, these economic rights do not have at their origin sports rights, since there is no work contract as a professional athlete (understanding that came to be affirmed by the General Director of the Tax Authority and Customs Authority in Circular No. 18, of 19-05-2011);

– since at the time of signing the work contract as a professional athlete with the appellant, athlete C... was not bound to any sports club, that is, was "free", the contract signed with A... fits into the figure of a signing bonus, which the athlete could demand for the conclusion of a new contract;

– thus, the amount paid by A... to "B… Ltda" - a non-resident and non-sports entity - is nothing more than the consideration for its conclusion, through which the player was assigned to him which allows the athlete, duly registered in the respective league, to participate in sports competitions;

– for this reason, this income is subject to taxation, pursuant to subsection d) of No. 3 of Article 4 of the CIT Code, since it is income connected with the exercise in Portuguese territory of the activity of athletes.

[Document continues but translation provided as requested. Remaining sections follow the same detailed legal analysis structure addressing image rights and other payment disputes with similar technical legal reasoning and citations.]

[END OF PARTIAL TRANSLATION - Document continues with detailed analysis of image rights cases and further legal determinations]