Process: 113/2018-T

Date: July 17, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 113/2018-T) addresses the application of the Derrama Estadual (State Surcharge) to the 2010 fiscal year under Portuguese IRC (Corporate Income Tax) law. The dispute centered on whether the State Surcharge, introduced by Law nº 12-A/2010 of 30 June 2010, should apply to the entire fiscal year (1 January to 31 December 2010) or only from its legal entry into force date (1 July 2010). The Claimant, a Portuguese company, challenged an additional IRC assessment (nº 2013…) that applied the 2.5% State Surcharge to taxable profits exceeding €2,000,000 for the full year, arguing this violated the law by applying the surcharge retroactively to the period before it came into force. The Tax Authority (AT) defended the assessment, invoking the annuality principle inherent in IRC, arguing that taxable profit constitutes a complex taxable event of successive formation throughout the entire fiscal year and cannot be fragmented. The tribunal had to interpret Article 87º-A of the IRC Code, which established the State Surcharge applicable to resident companies engaged in commercial, industrial or agricultural activities, and non-residents with permanent establishments. The key legal issue was determining the effective date of the law's entry into force and whether the principle of tax annuality could override temporal application limitations. This decision has significant implications for taxpayers subject to the State Surcharge regarding how new tax provisions apply to ongoing fiscal years and the limits of retroactive application in Portuguese tax law.

Full Decision

Arbitral Decision [1]

REPORT

A…, SA, a legal entity numbered … (hereinafter referred to as the Claimant), with registered office at Rua …, nº…, in Porto, has, pursuant to article 2º number 1, paragraph a) and articles 10º et seq. of the Legal Framework for Tax Arbitration, provided for in Decree-Law nº 10/2011, of 20 January, as amended by article 228º of Law nº 66-B/2012, of 31 December (hereinafter abbreviated as "RJAT") and articles 1º and 2º of Administrative Order nº 112-A/2011, of 22 March, filed a request for an arbitral determination on the legality of the additional assessment of Corporate Income Tax (IRC) numbered 2013…, relating to the year 2010, seeking a declaration of partial illegality of the said assessment and consequent partial annulment, as well as the refund of the amount unduly paid, plus compensatory interest.

The Tax and Customs Authority (AT) is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 15.03.2018.

The Claimant did not appoint an arbitrator, therefore, pursuant to the provisions of paragraph a) of number 2 of article 6º and paragraph b) of number 1 of article 11º of the RJAT, the President of the CAAD Deontological Council designated the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 07.05.2018, the Parties were duly notified of this designation and did not express any intention to refuse the appointment of the arbitrator, in accordance with the combined provisions of article 11º, number 1, paragraphs a) and b), of the RJAT and articles 6º and 7º of the Deontological Code.

Thus, in conformity with the provision in paragraph c) of number 1 of article 11º of the RJAT, the Arbitral Tribunal was constituted on 28.05.2018.

Duly notified, the Tax and Customs Authority submitted a response in which it defended the inadmissibility of the request, defending itself solely by way of objection.

As it was understood that there is no controversy regarding the essential and relevant facts for the decision and that they have sufficient documentary support, the meeting referred to in article 18º of the RJAT was dispensed with.

The Parties waived the submission of arguments.

30.07.2018 was set as the date for delivery of the final decision.

PROCEDURAL SANCTION

The Parties possess legal personality and capacity, are legitimate with respect to the request for arbitral determination, and are duly represented, in accordance with the provisions of articles 4º and 10º of the RJAT and article 1º of Administrative Order nº 112-A/2011, of 22 March.

No exceptions or nullities are present, therefore it is necessary to proceed to consider the merits of the request.

  1. MERITS

3.1. FACTUAL MATTERS

3.1.1. Established Facts

The following facts are established:

The Claimant is a company incorporated under Portuguese law. Subject to the general regime of taxation for IRC purposes and its fiscal year coincides with the calendar year.

The Claimant filed the income tax return – IRC model 22 – relating to the fiscal year 2010 on 31 May 2011 (doc. 5 attached with the arbitral request).

Following an inspection procedure, the Claimant, accepting the corrections made by AT to the IRC taxable matter, submitted on 31.07.2017 a replacement income tax return for IRC relating to 2010;

Which gave rise to the additional IRC assessment numbered 2013…, relating to the year 2010, with a tax amount determined to be refunded of € 1,665,088.42 (doc. 2 attached with the arbitral request);

With the amount of € 109,095.13 determined as State Surcharge, and collection note nº 2013… generated in the amount of € 9,414.11, which payment the Claimant made on 11.10.2013 (Point 4.1. of the Response and Annex 9 of the Administrative File);

On 03.08.2017, the Claimant filed a request for official revision (Proc. …2017…), requesting the refund of € 55,547.57 plus compensatory interest (doc. 3 attached with the arbitral request).

A draft decision was issued, ordering dismissal, and notified to the Claimant on 30.10.2017, and the latter did not comment thereon (doc. 4 attached with the arbitral request).

By order of 14.12.2017, notified to the Claimant on 19.12.2017, the request for official revision was dismissed (doc. 1 attached with the arbitral request).

The present request for constitution of an arbitral tribunal was filed on 14.03.2018.

3.1.2. Unestablished Facts

There are no other facts with relevance for consideration of the merits of the case that have not been established.

3.1.3. Reasoning Regarding Factual Matters

With regard to the established factual matters, the conviction of the Arbitral Tribunal was based on the free assessment of the positions assumed by the Parties (on matters of fact) and the content of the documents attached to the case file, uncontested by the Parties, as well as on the analysis of the administrative file attached by the Respondent.

3.2. LEGAL MATTERS

3.2.1. Main Question

The Claimant challenges the additional assessment nº 2013…, relating to the fiscal year 2010, in the part that determined tax in the amount of € 109,095.13 as State Surcharge, on the grounds that it is vitiated by a violation of law in that, for the purpose of determining that amount, the period from 1 January to 31 December 2010 was considered when, as it argues, the State Surcharge only came into force on 1 July of that year.

In turn, the Respondent submits that the taxable fact underlying the taxation of the state surcharge is the taxable profit which cannot be viewed in a fragmentary or isolated manner, but rather as a complex taxable fact of successive formation, beginning on the first day of taxation and concluding at the end of the respective taxation period, in conformity with the characteristic of annuality of the tax, which is present within the scope of IRC. It further adds that given the complex incidence of the tax in question and the requirement it entails in terms of a unitary and global view, such characteristics are not compatible with any autonomization or division by time periods within the same fiscal year.

The substantive question to be examined in this case is how article 2º of Law nº 12-A/2010 of 30 June, which created the State Surcharge, applies to the fiscal year 2010.

The said article 2º added to the IRC Code, approved by Decree-Law nº 442-B/88, of 30 November, among others, article 87º-A with the following wording:

"Article 87º-A

State Surcharge

1 - On the part of taxable profit exceeding €2,000,000 subject to and not exempt from corporate income tax determined by taxpayers resident in Portuguese territory who engage, as their principal activity, in a commercial, industrial or agricultural activity and by non-residents with a permanent establishment in Portuguese territory, an additional rate of 2.5% applies.

2 - Where the special regime for taxation of groups of companies is applicable, the rate referred to in the preceding number applies to the taxable profit determined in the individual periodic return of each company in the group, including that of the parent company.

3 - The taxpayers referred to in the preceding numbers shall proceed to calculate the additional surcharge in the periodic income tax return referred to in article 120º"

The Claimant's contention is based on the understanding that the State Surcharge can only be applied to the part of taxable profit determined in the period from 1 July to 31 December 2010, while the Respondent, AT, invoking the principle of annuality, argues that the State Surcharge must apply to the entire fiscal year, that is, from 1 January to 31 December of the same year.

It must be decided.

To decide the main question, it is necessary first to determine the date of entry into force of Law nº 12-A/2010 of 30 June.

Now, the Law itself provides for this question in article 20º, number 1, establishing as the date of entry into force of the statute the day following its publication. Having Law nº 12-A/2010 been published in the Official Journal nº 125/2010, 1st Supplement, Series I of 30.06.2010, its entry into force occurred on 1 July 2010.

Having determined the entry into force, it is now necessary to determine to which facts it applies: if only to those that occurred from 1 July onwards or if it also applies to those that occurred before that date.

As no answer results from that legal instrument to this question, recourse must be had to the General Tax Law (LGT), as provided for in article 1º, applying article 12º to the specific case, as already decided in the Decision for Uniformization of Jurisprudence of the STA of 02.12.2015, delivered in proc. 734/15, a case in which a question of a similar nature was discussed, and in Decisions delivered by CAAD in procs. 26/2016, 432/2016, 770/2014 or 135/2013, among others.

Article 12º of the LGT thus provides:

"Article 12º

Application of tax law in time

1 - Tax norms apply to facts occurring after their entry into force, and no retroactive taxes may be created.

2 - If the taxable fact is of successive formation, the new law applies only to the period elapsed after its entry into force.

3 - Norms concerning procedure and process are of immediate application, without prejudice to the guarantees, rights and legitimate interests previously constituted of taxpayers.

4 - Norms which, although incorporated in the process of determining the taxable matter, have the function of developing the norms of tax incidence are not covered by the provisions of the preceding number."

Now, in the case of the State Surcharge, as it applies to part of the taxable profit of the company, we are faced with a taxable fact of successive formation, applying the rule of number 2 of article 12º: the new law applies only from its entry into force, that is, in the present case, from 1 July.

As stated in the decision of CAAD delivered on 23.01.2017, in proc. 432/2016, with regard to the application of article 12º, number 2 of the LGT, "this is a criterion set out in law in an absolutely clear, intelligible and practicable manner, and which does not lead in this specific case to any injustice; moreover, and let it be repeated, it is a criterion that the legislator could have expressly set aside – and did not".

As well explained there, "resulting from the norms on application of law in time and on the temporal scope of application of tax norms that the State Surcharge created by Law nº 12-A/2010, of 20 June, applies only to the part of taxable profit corresponding to the period elapsed after its entry into force, we do not have here a situation of retroactivity whose admissibility falls to be examined. We would only be faced with a case of retroactivity if the State Surcharge were applied to a part of taxable profit that had been created before the date of its entry into force – which we have seen does not happen as the legislator has resolved that potential conflict through the pro rata temporis criterion set out in article 1, number 2 of the LGT. We would only be faced with a case of retroactivity – whose legitimacy would fall to be analysed – if there were in the Law nº 12-A/2010, of 20 June itself, a norm that derogated the rule contained in article 12º, number 2 of the LGT which is thus general to Tax Law for conflicts (even if only apparent) of tax norms in time in the case of taxable facts of successive formation, a norm which could, in theory, assign temporal competence of the norm to the entirety of the taxable fact being formed on the day of its entry into force (in which case the norm would be partially retroactive) or only to continued taxable facts whose formation began after its entry into force. Taking into account that the Constitution of the Portuguese Republic (CRP) took an express position on the retroactivity of tax norms in 1997 – introducing in article 103º number 3 the rule that no one can be required to pay taxes that have a retroactive nature – and that in 1998 the legislator stipulated in the LGT rules on the application of tax law in time – which despite not having enhanced value cannot cease to be applied by the appliers of the tax norm – the legislator of ordinary tax law who wishes to dispose of its application in time is bound by this normative framework, or to take an express decision to derogate the supplementary norms, as could have been done here regarding article 12º, number 2 (naturally opening afterwards the discussion on the constitutional legitimacy of that choice in light of the principle of non-retroactivity contained in the CRP)."

Therefore, we must consider contrary to law the application of the State Surcharge to the part of taxable profit corresponding to the period prior to 1 July 2010.

The additional assessment in question must therefore be considered illegal in the part relating to the State Surcharge on the taxable profit corresponding to the first half of 2010 by violation of article 12º, number 2 of the LGT and, consequently, partially annulled.

3.2.2. Compensatory Interest

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

The judicial challenge process, although essentially a process for annulment of tax acts, admits the condemnation of AT for the payment of compensatory interest, as is evident from article 43º, number 1, of the LGT, which provides that "compensatory interest is due when it is determined, in a gracious objection or judicial challenge, that there was error attributable to the services which resulted in payment of the tax debt in an amount greater than legally due" and article 61º, number 4 of the Tax Procedure and Process Code (CPPT) (as amended by Law nº 55-A/2010, of 31 December, corresponding to number 2 in the original wording), which provides that "if the decision that recognized the right to compensatory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".

Thus, number 5 of article 24º of the RJAT, when stating that "payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to compensatory interest in the arbitral process.

In the case at hand, it is manifest that, following the illegality of the assessment act, there is entitlement to payment of compensatory interest, as the assessment is attributable to AT, which, on its own initiative, carried it out without legal support.

Consequently, the Claimant is entitled to compensatory interest, pursuant to articles 24º, number 5 of the RJAT, 43º, number 1 of the LGT and 61º of the CPPT, to be determined by AT in execution of this decision.

3.2.3. Questions of Prejudiced Cognizance

As the request for arbitral determination proceeds on the ground of violation of law, which provides effective protection of the Claimant's interest, the cognizance of the remaining questions raised is prejudiced, as it is futile [article 130º of the Civil Procedure Code (CPC)] to consider them.

  1. DECISION

In these terms, this Arbitral Tribunal decides:

To judge the request for partial annulment of the tax act object of the arbitral request corresponding to the additional IRC assessment nº 2013…, relating to the year 2010, well-founded, on the ground of violation of law;

To condemn the Tax and Customs Administration to refund to the Claimant the amount of tax paid, plus the respective compensatory interest;

To condemn the Respondent to pay the costs of the present proceedings.

  1. VALUE OF THE PROCEEDINGS

In accordance with the provisions of article 306º, number 2 of the CPC, 97º-A, number 1, paragraph a) of the CPPT and 3º, number 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 55,103.95.

  1. COSTS

Pursuant to article 22º, number 4 of the RJAT, the amount of costs is fixed at € 2,142.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Notify.

Lisbon, 17 July 2018

The Arbitrator,

Cristina Aragão Seia

[1] The drafting of this decision is governed by the orthography prior to the 1990 Orthographic Agreement, except with regard to transcriptions made.

Frequently Asked Questions

Automatically Created

What is the Derrama Estadual (State Surcharge) under Portuguese IRC tax law?
The Derrama Estadual (State Surcharge) is an additional tax levied under Article 87º-A of the Portuguese IRC Code, introduced by Law nº 12-A/2010. It applies a 2.5% rate on taxable profits exceeding €2,000,000 for companies resident in Portugal engaged in commercial, industrial or agricultural activities, and for non-residents with permanent establishments in Portuguese territory. The surcharge is calculated and declared in the periodic income tax return (Model 22) and represents an extra layer of corporate taxation beyond the standard IRC rates.
Can taxpayers challenge IRC additional tax assessments through CAAD arbitration proceedings?
Yes, taxpayers can challenge IRC additional assessments through CAAD (Centro de Arbitragem Administrativa) proceedings under the RJAT (Legal Framework for Tax Arbitration) established by Decree-Law nº 10/2011. This case demonstrates the procedure: the Claimant filed an arbitral request pursuant to Article 2º(1)(a) and Articles 10º et seq. of RJAT after the Tax Authority dismissed their official revision request. The arbitral tribunal was constituted on 28.05.2018, and parties can seek declarations of illegality, partial annulment of assessments, refunds of amounts unduly paid, and compensatory interest.
What are the legal grounds for requesting partial annulment of an IRC tax assessment in Portugal?
Legal grounds for requesting partial annulment of an IRC assessment in Portugal include violation of law (violação de lei), as demonstrated in this case where the Claimant argued the State Surcharge was illegally applied to the period before the law entered into force. Taxpayers must first exhaust administrative remedies by filing a request for official revision (pedido de revisão oficiosa) under Article 78º of the LGT (General Tax Law). If dismissed, they may then resort to CAAD arbitration or judicial courts, challenging the assessment based on substantive or procedural illegality, incorrect calculation of taxable income, or improper application of tax rates or surcharges.
How does the CAAD arbitral tribunal process work for corporate income tax disputes?
The CAAD arbitral tribunal process for IRC disputes follows these stages: (1) filing the arbitral request with CAAD within the legal deadline; (2) automatic notification to the Tax Authority; (3) appointment of arbitrator(s) - parties may appoint or the CAAD President designates; (4) constitution of the tribunal (28 days after notification); (5) the Tax Authority submits a response, potentially raising preliminary objections; (6) the tribunal may dispense with hearings if facts are undisputed and documentary evidence is sufficient; (7) parties may waive oral arguments; (8) the tribunal issues a final decision within the statutory deadline. This procedure offers a faster, specialized alternative to traditional courts for resolving corporate tax disputes.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when an IRC assessment is declared partially illegal?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when an IRC assessment is declared partially or totally illegal, pursuant to Article 43º of the LGT (General Tax Law). In this case, the Claimant explicitly requested refund of the unduly paid amount plus compensatory interest. These interests compensate taxpayers for the State's unlawful retention of funds and are calculated from the date of payment until the refund is made. The right to compensatory interest is automatic upon successful challenge of a tax assessment and does not require separate proof of damages, reflecting the principle that taxpayers should not bear financial prejudice from illegal tax collection.