Summary
Full Decision
ARBITRAL DECISION
1. Report
A..., SOLE PROPRIETORSHIP LIMITED LIABILITY COMPANY, hereinafter referred to as "A..., Sole Proprietorship Ltd.", "Applicant" or "TP" (Taxpayer), with tax number ... and registered office at ... Street, no. ..., ..., ..., Leiria, came, pursuant to articles 2, no. 1 (a) and 10, no. 1 (a) of the Legal Regime of Tax Arbitration (D.L. no. 10/2011, of 20 January, hereinafter "LRTA") to request the constitution of the Arbitral Tribunal.
It petitions the declaration of illegality of acts of tax assessments, more specifically of Corporation Income Tax (CIT) assessed additionally, with compensatory interest included, cf. Assessment no. 2017 ... relating to the tax year 2016.
The Assessment in question was carried out following an inspection action covering the tax years 2014, 2015 and 2016, with the service orders identified below in the proven facts. In the tax year 2014 the Applicant had retained "Profits" - and operated the consequent deduction from the CIT collection - under the Tax Benefit (hereinafter also "TB") "Deduction for Retained and Reinvested Profits" (hereinafter "DRRP"), and was requested, through the inspection action in question, to prove the reinvestments made under said Tax Benefit.
The corrections made by the Tax and Customs Authority following the inspection action, and which led to the Assessment reported for the tax year 2016, in question here, are based on the divergence of positions between the Parties in this case regarding the possibility of qualifying, for the purposes of the TB DRRP, part of the reinvestments made by the now Applicant.
In summary, and in what is most relevant, Applicant and Respondent have opposing understandings regarding the possibility (argued by the former and denied by the latter) of being considered, for the purposes of the TB DRRP, reinvestments carried out in the course of the tax year 2014.
The Applicant, although not in agreement with the Assessment in question, proceeded to pay it, and now comes to petition: (i) the annulment of the Assessment in question; (ii) the reimbursement of the sums paid in an amount, according to its argument, higher than due; and, likewise, (iii) indemnifying interest.
The Respondent is the Tax and Customs Authority (hereinafter "TA" or "Respondent").
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and notified to the TA on 23.03.2018.
Pursuant to the provisions of section (b) of no. 1 of article 11 of the LRTA, the Deontological Council designated as arbitrator of the singular Arbitral Tribunal the undersigned, who timely accepted the assignment.
On 10.05.2018 the Parties were notified of the designation of arbitrator and did not manifest intention to refuse it, cf. article 11, no. 1, (a) and (b) of the LRTA and articles 6 and 7 of the Code of Ethics.
Pursuant to the provisions of section (c) of no. 1 of article 11 of the LRTA, the singular Arbitral Tribunal was constituted on 30.05.2018.
Notified for that purpose, the TA submitted its Response, arguing for the total dismissal of the Request for Arbitral Pronouncement (hereinafter "RAP") and the consequent maintenance of the Assessment in question in the Legal Order.
The Respondent understands, in summary: (i) that the reinvestments made by the Applicant in the tax year 2014 cannot be considered for the purposes of DRRP, because the law does not allow consideration of 2014 reinvestments, and (ii) that some of the reinvestments made by the Applicant in the tax year 2015 are likewise not eligible, although for a different reason.
By order of 13.07.2018 this Tribunal decided to notify the Parties for the meeting provided for in article 18 of the LRTA, having regard to the request for production of witness evidence submitted by the Applicant, and alerting the Parties to the possibility of invitation to produce oral arguments at the same.
The meeting took place on 06.09.2018, with the Parties then notified to submit written arguments, as the Respondent so requested and the Tribunal accepted. The Tribunal determined the submission thereof within a reduced period, with the agreement of the Parties, of five days each, successive, with the count starting with the Applicant.
The Applicant submitted its arguments within the time limit, reiterating what was already stated in the RAP, corroborating it with references to the testimony of witnesses and adding an argument regarding economic context and the operation of the constitution of the reserve.
The Respondent was notified of the submission of these arguments, as appears in the case file, on 12.09.2018, and submitted its arguments on 24.09.2018 and, thus, late (see articles 38, no. 9 and 39, no. 7, 40 and 42 of the CPPT, applicable ex vi article 29 of the LRTA). The Tribunal shall give it the appropriate relevance under the applicable principles, pursuant to articles 16 and 19 of the LRTA.
The Arbitral Tribunal was regularly constituted, is competent and the Parties have legal personality and capacity, are parties and are duly represented, cf. articles 4 and 10, no. 2 of the LRTA and article 1 of Ordinance no. 112-A/2011, of 22 March.
The Proceedings do not suffer from nullities and there are no exception matters.
2. Matter of Fact
2.1. Proven Facts
The following facts are considered proven:
a) The Applicant is a sole proprietorship limited liability company constituted under Portuguese law that exercises, as a principal activity, a commercial activity.
b) At the time of the facts in question in this case the Applicant was an SME cf. Annex to D.L. no. 372/2007, of 6 November.
c) The Applicant had, at the time of the facts, organized accounting and its taxable profit was not determined by indirect methods.
d) At the time of the facts the Applicant's fiscal and contributory situation was regularized.
e) At the beginning of 2014 the Applicant projected that it would have profits, in that tax year, in the order of € 500,000.00 (five hundred thousand euros).
f) At the beginning of 2014 the Applicant had become aware of the creation of the Tax Benefit DRRP by the State Budget Act 2014.
g) Knowledge of the TB DRRP was determinant for the Applicant's decision to proceed to investments in the course of the tax year 2014.
h) The Applicant deducted from its CIT collection for the tax year 2014 the amount of € 51,679.11 (fifty-one thousand six hundred and seventy-nine euros and eleven cents) corresponding to 10% of the profits it retained.
i) The amount retained by the Applicant, in the amount of € 516,791.15 (five hundred and sixteen thousand seven hundred and ninety-one euros and fifteen cents), comes from profits of 2014.
j) Upon the approval of the accounts relating to the tax year 2014, in 2015, the Applicant created a special reserve in the amount of € 516,791.15 (five hundred and sixteen thousand seven hundred and ninety-one euros and fifteen cents).
k) By 31 October each year, the results of the Applicant's commercial activity are usually generated.
l) The Applicant allocated the light goods vehicles acquired in 2015 to the same purposes to which it allocated, previously, the two light goods vehicles that it sold in that same tax year.
m) The Respondent conducted inspection actions with the Applicant, pursuant to service orders nos. SI 2017..., SI 2017... and SI 2017..., referring to the tax years 2014, 2015 and 2016, respectively.
n) The inspection actions aimed to verify the reinvestments made by the Applicant under the Tax Benefit DRRP.
o) The Applicant presented as the total value of reinvestments in the tax year 2014 the amount of € 361,161.66 (three hundred and sixty-one thousand one hundred and sixty-one euros and sixty-six cents).
p) The TA did not accept as eligible investments the totality presented by the Applicant relating to 2014, in the amount of € 361,161.66 (three hundred and sixty-one thousand one hundred and sixty-one euros and sixty-six cents).
q) The Applicant presented as total values of reinvestments in the tax years 2015 and 2016, respectively, € 184,509.18 (one hundred and eighty-four thousand five hundred and nine euros and eighteen cents) and € 35,233.67 (thirty-five thousand two hundred and thirty-three euros and sixty-seven cents).
r) The TA did not accept as eligible investments those presented by the Applicant relating to 2015 in the part concerning the acquisition of two light goods vehicles, in the value of € 36,016.25 (thirty-six thousand and sixteen euros and twenty-five cents).
s) Of the investments presented by the Applicant relating to 2015 and 2016, in the total amount of € 219,742.85 (two hundred and nineteen thousand seven hundred and forty-two euros and eighty-five cents), the TA accepted the amount of € 183,726.60 (one hundred and eighty-three thousand seven hundred and twenty-six euros and sixty cents).
t) The Applicant was notified to exercise the right of hearing, which it exercised.
u) The TA maintained in the RIT, after the exercise of the right of hearing by the TP, the same position as in the draft RIT.
v) As a result of the inspection actions the TA carried out arithmetic corrections to the Applicant's taxable matter in the tax year 2016.
w) The correction carried out was € 333,064.55 (three hundred and thirty-three thousand and sixty-four euros and fifty-five cents).
x) The TA added in field 372 of Table 10 of the Applicant's Form 22 - relating to the tax year 2016 - the amount of € 33,306.46 (thirty-three thousand three hundred and six euros and forty-six cents) and compensatory interest plus respective surcharge.
y) From the RIT, which is here reproduced, it appears, among other things, that (and as also transcribed in point 6 of the Respondent's Response):
"(...) The taxpayer was requested to submit proof of reinvestments made under the DRRP in 2014, namely in the periods of 2015 and 2016, whose obligation to prove is explicit in no. 1 of article 29 and no. 1 and 2 of article 33 of the CFI.(...)" (p. 8/17)
"(...) D.L. no. 162/2014 of 31 October (Investment Tax Code) provides in its article 29 that 10% of retained profits may be deducted in the tax period beginning on 1 January 2014 or later, provided that the retained profits are reinvested, within a period of two years counted from the end of the tax period to which the retained profits correspond.
D.L. no. 162/2014 of 31 October does not state anywhere that the investment expenses incurred in 2014 may be considered for the purposes of implementing the investment under the condition and terms of no. 1 of article 29 of the Investment Tax Code (CFI). It states only that investments must occur within a period of two years counted from the end of the tax period to which the retained profits correspond. Now it is unequivocal, by the accounting elements presented and declarations submitted to the Tax and Customs Authority (TA), that the retained profits in the amount of € 516,791.15 come from profits of 2014. For this reason it seems clear that the reinvestments accepted for the purposes of implementing the investment, in light of no. 1 of article 29 of the CFI, will be only those made in the periods of 2015 and 2016.
As to the implication of non-compliance with the foregoing, section (a) of article 34 of the CFI (non-compliance) establishes, also unequivocally, that if within the two-year period provided for in no. 1 of article 29 the full amount of the investment is not realized, this implies the return of the amount of tax that ceased to be levied in the part corresponding to the amount of profits not reinvested, plus compensatory interest with a 15 percentage point surcharge.
As to the relevance of the applications, pursuant to article 11 of Ordinance no. 297/2015 of 21 September, and article 30 of the CFI, both consider as relevant applications fixed tangible assets acquired in new condition that result in additions to investments in progress. Thus excluding replacement investments. Now, in the list provided by the taxpayer, relating to the period of 2015, there are two vehicles that do not meet this requirement, as they represent mere replacement investment and not an addition. Below are listed the vehicles acquired and those that were disposed of, unequivocally configuring a mere replacement of assets. (…)
(...) For this reason these two investment expenses totaling € 36,016.25 are not to be accepted as reinvestment in the period of 2015 for purposes of DRRP.
In summary, of the total reinvestments presented by the taxpayer (2014, 2015 and 2016), the Tax and Customs Authority cannot accept, in light of the law, the reinvestments relating to 2014, nor those relating to replacement investments. With respect to eligible investments of 2015 and 2016, in the total amount of 219,742.85€, the acquisitions of vehicles in the amount of 36,016.25€ are not then accepted. For this reason the total amount of accepted reinvestment is 183,726.60€. Thus, the correction to be made is 333,064.55€.
As such, and because it has no fiscal framework, the amount of € 33,306.46 should be added to the assessment in field 372 of table 10 of Form 22, for taxation purposes, as well as the compensatory interest with surcharge, pursuant to articles 35 of the General Tax Law (GTL), Ordinance 291/2003 of 8 April and article 34 of the CFI. (...)" (underlining ours)
z) Also in the RIT, in conclusions regarding the TP's position on the right of hearing, can be read among other things and respectively, for 2014 and 2015:
"(...) Given the foregoing and because reinvestments in the same year in which the retention of profits is created are not foreseen under the CFI, in the specific case in 2014, we propose that the value of the correction initially proposed be maintained."
"(...) What is fiscally significant is the fact that the taxpayer did not increase its Tangible Fixed Assets, in the total number of commercial vehicles in service to the company.(...)"
aa) The Applicant was notified of the additional Assessment, statement of interest assessment and reconciliation, in the total value of € 36,980.48, for voluntary payment by 27.12.2017 (cf. Docs. 1-3 filed with the RAP).
bb) On 22.12.2017 the Applicant proceeded to pay the additional Assessment (cf. Doc. 1 filed with the case by the Applicant on 12.07.2018).
cc) On 16.03.2018 the Applicant submitted the RAP that originated the present proceedings.
2.2. Unproven Facts
With relevance to the decision of the case there are no facts that have not been proven.
2.3. Grounds for the Matter of Fact
The facts given as proven were so on the basis of the documents filed with the RAP and in the Administrative Proceedings (hereinafter "AP"), all documents which are hereby entirely reproduced, and likewise on the positions manifested by the Parties in the pleadings, as well as on the witness evidence produced and critically evaluated, with no controversy subsisting regarding the same.
It falls to the Tribunal to select, from among those alleged by the Parties, the facts that matter to the evaluation and decision of the case (v. article 16, (e) and article 19 of the LRTA and also article 123, no. 2 of the CPPT and article 596 of the CPC[1]), encompassing its powers of cognition instrumental facts and facts that are complement or implementation of those alleged by the Parties (cf. articles 13 of the CPPT, 99 of the GTL, 90 of the CPTA and articles 5, no. 2 and 411 of the CPC[2]).
3. Matter of Law
3.1. Questions to be Decided
The questions to be decided in the present case are essentially legal, namely:
A) Could or could not the Applicant, within the scope and for the purposes of the TB DRRP, and in accordance with its legal regime as applicable to the case, proceed to reinvestments in the tax year 2014, so that these should be considered in the calculation of reinvestments made by it within this scope;
B) Does the acquisition by the Applicant of two light goods vehicles, in the same tax year in which it sold other two light goods vehicles, constitute or not a relevant application for purposes of the regime of the TB DRRP so as to be considered in the calculation of reinvestments made, within this scope, in the tax year 2015.
Finally, there is need to decide (i) regarding reimbursement of the sums paid and, deciding in favor of reimbursement, (ii) regarding indemnifying interest.
As follows.
3.1.1. On the Possibility of Reinvestments in Relevant Applications in the Tax Year 2014 within the Scope of the Tax Benefit DRRP
The TB DRRP, briefly, is a TB under which the TP, meeting the respective subjective conditions, acquires the right to benefit from a deduction from CIT collection in a percentage corresponding to 10% of the profits it retains and reinvests, in relevant applications, within a certain period, with certain limits and with certain accessory obligations fulfilled. On the assumption that such reinvestment is effectively carried out and under penalty of, if it is not, the TP being obliged to restore the tax that thus ceased to be paid, in the proportion of the reinvestment not carried out, plus compensatory interest and its respective surcharge.
The Applicant, knowing of the TB DRRP and meeting the subjective requirements that enabled it to benefit from it, proceeded to reinvestments in the tax year 2014, using for this purpose results generated in the same tax year. Which it did foreseeing that it would have profits in the tax year in question (as was confirmed) and intending to benefit from the regime of the TB DRRP.
And it was thus that, after the close of the tax year 2014, and with the approval of its respective accounts (and accounting statement documentation), it constituted the special reserve provided for in article 32 of the CFI as an accessory obligation within the TB DRRP, in the terms required thereby.
And likewise, in its Form 22 for 2014, reflecting the use of the TB, it deducted from the collection the value corresponding to 10% of the profits it retained in the tax year: it deducted from the 2014 collection the amount of € 51,679.11. Having retained profits in the amount of € 516,791.15. All with reference to the tax year 2014.
The TA does not question the carrying out of the reinvestments presented by the Applicant with respect to the tax year 2014, nor their classification as relevant applications cf. article 30 of the CFI. The TA disregards the reinvestments of 2014 for the purposes of the TB DRRP because - in its view - the law does not allow consideration as reinvestments, under the TB in question, those carried out by the TP (any of them) in the same tax year 2014.
And it is as a consequence of this understanding that the TA comes to conclude that the Applicant's action falls under the article of the regime in question where it is foreseen that, if the TP does not proceed to the actual reinvestment of the full amount of retained profits - within the applicable period, of two years after the end of the tax period to which the profits correspond - it will have to return the tax that ceased to be levied, in the part corresponding to the amount of profits not reinvested, plus compensatory interest with surcharge, together with the tax to be paid for the second following tax period (cf. articles 34, (a) and 29, no. 1 of the CFI). Which is, in this case, that of 2016.
Let us then examine the legal framework within which we are working.
By Law no. 83-C/2013, of 31 December - State Budget Act for 2014 ("SBA 2014") - effective as of 1 January 2014, the legislator added to the Statute of Tax Benefits ("STB"), in its Part II - "Tax Benefits with structural character", a Chapter XIII, under the heading "Benefit to Reinvestment of Profits and Reserves", containing articles 66-C to 66-L.
The aforementioned articles of the STB stipulated as follows:
"Article 66-C - Purpose
The deduction for retained and reinvested profits (DRRP) constitutes a system of tax incentives for investment in favor of small and medium-sized enterprises within the meaning of Regulation (EC) no. 800/2008, of the Commission, of 6 August, published in the Official Journal of the European Union, no. L 214, of 9 August 2008, which declares certain categories of aid compatible with the common market, in application of articles 87 and 88 of the Treaty (General Block Exemption Regulation.
Article 66-D - Scope of subjective application
The DRRP may be benefited by CIT taxpayers resident in Portuguese territory, as well as non-resident taxpayers with a permanent establishment in this territory, who exercise, as a principal activity, a commercial, industrial or agricultural activity, who cumulatively meet the following conditions:
Are small and medium-sized enterprises, considered as such under the terms provided in the annex to Decree-Law no. 372/2007, of 6 November;
b) Have regularly organized accounting, in accordance with accounting normalization and other legal provisions in force for their respective sector of activity;
c) Their taxable profit is not determined by indirect methods;
d) Have their fiscal and contributory situation regularized.
Article 66-E - Deduction for Retained and Reinvested Profits
1 - The taxpayers referred to in the preceding article may deduct from CIT collection, in tax periods beginning on or after 1 January 2014, up to 10% of retained profits that are reinvested in eligible assets in accordance with article 66-F, within a period of two years counted from the end of the tax period to which the retained profits correspond
2 - For purposes of the deduction provided for in the preceding paragraph, the maximum amount of retained and reinvested profits, in each tax period, is €5,000,000, per taxpayer.
3 - The deduction provided in the preceding paragraph is made, in accordance with section (c) of no. 2 of article 90 of the CIT Code, up to 25% of CIT collection.
4 - When the special taxation regime for groups of companies applies, the deduction provided for in no. 1:
a) Is made to the amount determined in accordance with section (a) of no. 1 of article 90 of the CIT Code, based on the group's taxable matter;
b) Is made up to 25% of the amount mentioned in the preceding section and may not exceed, with respect to each company and for each tax period, the limit of 25% of the collection that would be determined by the company that incurred the eligible expenses if the special taxation regime for groups of companies did not apply.
Article 66-F - Eligible Assets
1 - The following are considered 'eligible assets', for purposes of the present regime, fixed tangible assets, acquired in new condition, with the exception of:
a) Land, except in the case of being intended for the exploitation of mining concessions, natural mineral water and spring water, quarries, clay pits and sand pits in extractive industry projects;
b) Construction, acquisition, repair and extension of any buildings, except when used for productive or administrative activities;
c) Light passenger or mixed-use vehicles, recreational boats and tourist aircraft;
d) Comfort or decoration articles, except hotel equipment used for tourism operations;
e) Assets used for activities within concession or public-private partnership agreements concluded with public sector entities.
2 - 'Investment realized in eligible assets' is considered to correspond to additions, verified in each tax period, of fixed tangible assets and also what, having the nature of fixed tangible asset and not concerning advances, results in additions to investments in progress.
3 - For purposes of the preceding paragraph, additions of assets that result from transfers of investments in progress are not considered.
4 - In the case of assets acquired under financial leasing regime, the deduction referred to in no. 1 of article 66-C is conditional on the exercise of the purchase option by the taxpayer within five years counted from the date of acquisition.
5 - Eligible assets in which the reinvestment of retained profits is realized must be held and accounted for in accordance with the rules that determined their eligibility for a minimum period of five years.
6 - When the onerous transfer of assets in which the reinvestment of retained profits is realized occurs before the period provided for in the preceding paragraph has elapsed, the taxpayer must reinvest, in the same tax period or the following tax period, the respective realization value in eligible assets in accordance with this article, which must be held, at least, for the period necessary to complete that period.
Article 66-G - Non-cumulation
The DRRP is not cumulative, with respect to the same eligible investment expenses, with any other tax benefits for investment of the same nature.
Article 66-H - Special Reserve for Retained and Reinvested Profits
1 - Taxpayers benefiting from the DRRP must proceed to constitute, in the balance sheet, a special reserve corresponding to the amount of retained and reinvested profits.
2 - The special reserve referred to in the preceding paragraph may not be used for distribution to shareholders before the end of the fifth tax year following that of its constitution, without prejudice to other legal requirements applicable.
Article 66-I - Other Accessory Obligations
1 - The deduction provided for in article 66-E is justified by a document to be included in the tax documentation file referred to in article 130 of the CIT Code, which identifies in detail the amount of retained and reinvested profits, the investment expenses in eligible assets, their respective amount and other elements considered relevant.
2 - The accounting of CIT taxpayer beneficiaries of the DRRP must show the tax that ceases to be paid as a result of the deduction referred to in article 66-E, by means of mention of the corresponding value in the annex to the balance sheet and statement of results for the tax year in which the deduction is made.
Article 66-J - Result of Assessment
The present tax benefit is excluded from the scope of application of no. 1 of article 92 of the CIT Code.
Article 66-K - Penalty Provision
Without prejudice to the provisions of the General Regime of Tax Violations:
a) The failure to realize the full amount of investment in accordance with the provisions of article 66-F until the end of the two-year period provided for in no. 1 of article 66-E implies the return of the amount of tax that ceased to be levied in the part corresponding to the amount of profits not reinvested, to which is added the amount of tax to be paid for the second following tax period, plus the corresponding compensatory interest with a 15 percentage point surcharge;
b) Non-compliance with the provisions of no. 4, 5 or 6 of article 66-F implies the return of the amount of tax that ceased to be levied in the part corresponding to the assets with respect to which the purchase option is not exercised or which are transferred before the five-year period has elapsed, to which is added the amount of tax to be paid for the period in which these facts occur, plus the corresponding compensatory interest with a 15 percentage point surcharge;
c) The failure to constitute the special reserve in accordance with no. 1 of article 66-H implies the return of the amount of tax that ceased to be levied, to which is added the amount of tax to be paid for the second following tax period, plus the corresponding compensatory interest with a 15 percentage point surcharge;
d) Non-compliance with the provisions of no. 2 of article 66-H implies the return of the amount of tax that ceased to be levied corresponding to the part of the reserve that is used for distribution to shareholders, to which is added the amount of tax to be paid for the second following tax period, plus the corresponding compensatory interest with a 15 percentage point surcharge.
Article 66-L - Profits Reinvested in the Tax Year 2014
The retained profits relating to the first tax period beginning on or after 1 January 2014 may be reinvested in eligible assets in accordance with article 66-F in that tax period or within a period of two years counted from the end of that period." (underlined herein)
***
As thus created, it was in these terms that the Tax Benefit in question was in force - since 1 January 2014 - framed in the STB.
It happens that, effective as of 5 November of the same year 2014, there appears in the Legal Order Decree-Law no. 162/2014, of 31 October, by which the Government approved the New Investment Tax Code and, in what is of interest to the case at hand, for which the legislator transferred the legal regime of the Tax Benefit in question.
In doing so, i.e., in transferring to this other Legal Instrument (hereinafter "ITC") the norms specifically regulating this TB, the legislator did not transfer the last of those articles that had been in the STB up to then: article 66-L, with the wording above (v. underlined).
And here we arrive at the root of the dispute on which we must decide (regarding the first question - 3.1.1. - and which is determinant for the outcome thereof).
Thus, if between 1 January and 4 November 2014 the DRRP was governed by the norms contained in the STB, including its article 66-L, since 5 November of the same year 2014 the norms in question began to be contained in the ITC (Chapter IV - "Deduction for retained and reinvested profits", articles 27 to 34), in which the legislator did not include an article corresponding to the previously applicable article 66-L of the STB[3]. In which it was established, without room for doubt, that profits relating to the 2014 tax year could be reinvested in eligible assets in that same tax period.
The question that arises is thus whether, having entered into force on 5 November 2014 the norms specifically regulating the TB DRRP as contained in the ITC, without it having continued to expressly state that the TP could carry out the reinvestment in the 2014 tax year itself, the Applicant could or could not do so. Or, better, whether the Applicant, in doing so (in reinvesting during the 2014 tax year itself), was acting in accordance with and within the scope of the legal framework of the TB DRRP as provided for by the legislator.
In the ITC, Chapter IV - "Deduction for retained and reinvested profits", articles 27 to 34 - as worded in force since 5 November 2014 and in the other relevant period in the case, established (and we now transcribe only the norms pertinent to what is questioned in the case):
"Article 27 - Purpose
The DRRP constitutes a system of tax incentives for investment in favor of micro, small and medium-sized enterprises in accordance with the GBER.
Article 28 - Scope of subjective application
The DRRP may be benefited by CIT taxpayers resident in Portuguese territory, as well as non-resident taxpayers with a permanent establishment in this territory, who exercise, as a principal activity, a commercial, industrial or agricultural activity, who cumulatively meet the following conditions:
a) Are micro, small and medium-sized enterprises, as defined in Recommendation no. 2003/361/EC, of the Commission, of 6 May 2003;
b) Have regularly organized accounting, in accordance with accounting normalization and other legal provisions in force for their respective sector of activity;
c) Their taxable profit is not determined by indirect methods;
d) Have their fiscal and contributory situation regularized.
Article 29 - Deduction for Retained and Reinvested Profits
1 - The taxpayers referred to in the preceding article may deduct from CIT collection, in tax periods beginning on or after 1 January 2014, up to 10% of retained profits that are reinvested in relevant applications in accordance with article 30, within a period of two years counted from the end of the tax period to which the retained profits correspond. (…)
Article 30 - Relevant Applications
1 - The following are considered relevant applications, for purposes of the present regime, fixed tangible assets, acquired in new condition, with the exception of: (…)
c) Light passenger or mixed-use vehicles, recreational boats and tourist aircraft;
2 - Investment realized in relevant applications is considered to correspond to additions, verified in each tax period, of fixed tangible assets and also what, having the nature of fixed tangible asset and not concerning advances, results in additions to investments in progress.
3 - For purposes of the provision of the preceding paragraph, additions of assets that result from transfers of investments in progress are not considered. (…)
Article 32 - Special Reserve for Retained and Reinvested Profits
1 - Taxpayers benefiting from the DRRP must proceed to constitute, in the balance sheet, a special reserve corresponding to the amount of retained and reinvested profits.
2 - The special reserve referred to in the preceding paragraph may not be used for distribution to shareholders before the end of the fifth tax year following that of its constitution, without prejudice to other legal requirements applicable.
Article 33 - Other Accessory Obligations
1 - The deduction provided for in article 29 is justified by a document to be included in the tax documentation file referred to in article 130 of the CIT Code, which identifies in detail the amount of retained and reinvested profits, the relevant applications subject to reinvestment, their respective amount and other elements considered relevant. (...)
Article 34 - Non-compliance
Without prejudice to the provisions of the General Regime of Tax Violations, approved by Law no. 15/2001, of 15 June:
a) The failure to realize the full amount of investment in accordance with the provisions of article 30 until the end of the two-year period provided for in no. 1 of article 29 implies the return of the amount of tax that ceased to be levied in the part corresponding to the amount of profits not reinvested, to which is added the amount of tax to be paid for the second following tax period, plus the corresponding compensatory interest with a 15 percentage point surcharge; (...)
***
Note that the legislator transferred almost in full[4] and unchanged[5] the set of articles that were in the STB, leaving "out" the already mentioned article 66-L. Without any explanation in this regard.
The Applicant in the present case understands that it acquired rights under the law that had been in force since 1 January 2014 (cf. STB), including the right to reinvest in the 2014 tax year itself benefiting from the TB - and that these shall have to be protected. More than the fact that the special reserve is constituted only in 2015 does not at all affect this conclusion, as it is merely an accessory obligation that shall be fulfilled in conjunction with the approval of accounts for the tax year. For which reason the reinvestments it made in 2014 shall be considered.
The Respondent, for its part, understands that the tax fact regarding CIT occurs on 31 December, being that on 31 December 2014 the regime as contained in the ITC was in force, which did not expressly refer to the possibility of the reinvestments in question being carried out in the 2014 tax year itself. More than the special reserve was only constituted in 2015, just as the profits were only approved in 2015, which, it argues, confirms its understanding that reinvestments from 2014 should not be considered.
Let us evaluate.
We are faced with a situation of succession of law in time. A question of transitional law.
The Legislative Authorization Act (Law no. 44/2014 of 11 July) that authorized the Government to approve a New Investment Tax Code establishes, as to its meaning and scope, and in what is relevant to the present case: "Article 2 - Meaning and Scope / 1 - The authorization (...) is granted to the Government to: (...) d) Alter the benefit to the reinvestment of profits and reserves provided for in articles 66-C to 66-L of the STB, transferring it to the new Investment Tax Code; (...) / 4 - The authorization provided for in (d) of no. 1 has as its meaning and scope: a) Adapt the regime to European provisions on state aid (...); b) Enable cumulation (...); c) Strengthen control mechanisms (...); d) Exclude this benefit from the scope of application of the limitation provided for in article 92 of the CIT Code (...); e) Establish that the benefit to the reinvestment of profits and reserves, provided for in articles 66-C to 66-L of the STB, becomes entirely established and regulated in the new Investment Tax Code; 5 - The authorization provided for in (e) (...)"
At no point, when defining the meaning and scope with which the Government was authorized to legislate, did the AR authorize a modification of the regime that could result in detriment to taxpayers who potentially had initiated reinvestments in 2014, and to the extent that they had done so, under the provisions of the regime that was then in force by virtue of article 66-L of the STB.
Note that this article was, as we have seen, quite clear: "The retained profits relating to the first tax period beginning on (...) 1 January 2014 may be reinvested in eligible assets (...) in that tax period (...)".
Now, we should presume that the legislator adopted the most correct solution. Would the ordinary legislator, in this context, have intended to exceed the legislative authorization and, further, revoke without more the regime as it was then in force? With the consequences that would follow? We think not[6].
In the STB, on the other hand (Document that shall always be called upon, cf. article 1)[7], article 11, regarding the application in time of norms on tax benefits, establishes as follows: "1 - The norms that alter conventional, conditional or temporary tax benefits are not applicable to taxpayers who already benefit from the right to the respective tax benefit, in anything that prejudices them, except when the law provides otherwise."
And as for the constitution of the right to tax benefits article 12 of the same Document establishes that "The right to tax benefits must be reported to the date of verification of their respective presuppositions, even if dependent on declarative recognition (...), except when the law provides otherwise".[8]
From the combined provisions we have just mentioned it results that the Applicant in the case acquired the right to the TB on 1 January 2014 and, likewise, that this right cannot be prejudiced as a result of new law – except if the law itself provides otherwise. Expressly, we add.
Now, nothing appears in the ITC, not even in its Preamble, regarding its application in time specifically with respect to situations resulting from the previously applicable possibility of reinvestments in the course of the 2014 tax year.
Wherefore, nothing having been expressed by the legislator in this regard, we are of the understanding that the situation in the case can only be within the scope of application of the prior law. Under penalty of, if otherwise understood, violating article 11 of the STB. And, likewise, incurring a violation of the principle of non-retroactivity of law, necessarily applicable.[9]
Note how by the force of the aforementioned norm, effective from 1 January 2014, the legislator was incentivizing SME taxpayers to make decisions to undertake investments in the company with income generated by it. Legitimate expectations were created in these taxpayers. Would the ordinary legislator, on 31 October 2014, have intended to frustrate such expectations? And, even if he had intended to (which we do not consider possible), would he have done so through a silent act? We do not believe so.
We understand that our legislator is not, nor will have intended to be in this case, indifferent to the imperative need to respect the stability of legal situations. Will not have, we are certain, intended to ignore the consequences that frustrating legitimate expectations founded in legal norms potentially entails. Legal certainty thus required it.
Nor does the argument advanced by the Respondent oppose this, to the effect that as the tax fact in respect of CIT occurs on 31 December the law to be applied would be that which was then in force, without more. Let it be said, only, that CIT is a tax of successive formation, as is known, throughout the tax year, but whose determination, yes, only becomes possible once that tax year has closed.
That is to say, the new law (ITC) cannot be considered competent to regulate situations which, having been created in the course of the 2014 tax year (with use, by taxpayers, of the right that was there expressly granted to them to carry out reinvestments in the 2014 tax year itself) persist through the following tax years once the succession of laws has occurred. As occurs in the situation at hand.
Without prejudice to what has been stated above, it further appears that we conceive the possibility that the norm in question (article 66-L of the STB) was not transposed into the ITC simply due to lesser rigor and due consideration in the work of the legislator.[10]
Note, indeed, that the drafting of the law, from the beginning (we refer to the beginning of effectiveness cf. SBA 2014) is not rigorous. In effect, the concept of "Profits" and, likewise, that of "Retained profits" do not reflect, in the rigor of principles, the reality to which the legislator intended to refer, regarding the initial period of effectiveness of the regime. In truth, the determination of profits and consequent possibility of deliberation on retention is only feasible at the moment of account determination, once the tax year has ended.
Precisely for this reason also, we believe, the legislator found itself in the need to make explicit what it made explicit by means of article 66-L of the STB when it created the Benefit, with the intention of motivating taxpayers to, from the first moment, begin reinvestments in their companies. Thus better understanding the meaning of the article, which functioned indeed as a norm to be effective in the year in which the Benefit was created, in its first year of effectiveness. But a norm that, we reiterate, would always have as a consequence to produce effects still in the period of two years following the close of the 2014 tax year (v. article 29, no. 1 of the ITC, final part). In situations such as the present case.
Let us also admit another hypothesis: that possibly, for the reason we have just mentioned, the legislator had allowed the norm to "fall" (as the "temporary" norm that it was). Still, even if the norm could be understood to cease to make sense to be effective in the 2015 tax year[11], the legislator should not have failed to expressly provide for the situation of taxpayers who already in 2014 had conducted their actions in accordance with the provisions of that article 66-L.
Without prejudice to everything that has already been stated, if one wished to still raise as a hypothesis that the legislator had indeed intended that the regime cease to allow reinvestments in the 2014 tax year then, we say, the legislator would have intended that with respect to that tax year - and in the period between 5 November and 31 December - taxpayers could not reinvest under the TB in question. Already as to the period elapsed under the prior law (from 1 January to 4 November).
Now, we know, the interpreter must presume that the legislator consecrated the most reasonable and correct solution[12], for which we cannot accept such a hypothesis to have been intended by it.
And also the argument advanced by the Respondent does not prevail, we say, to the effect that the two-year period contained in the final part of no. 1 of article 29 of the ITC[13], as to retained profits having to be reinvested "within a period of two years counted from the end of the tax period to which the retained profits correspond" would be a two-year period that would imply that reinvestments could only actually be carried out as of the end of 2014. This is not the interpretation we understand to be correct. Clearly, either by the letter of the article itself, or by its conjunction with the other articles of the regime, including with article 66-L of the STB, the period established there is an "ad quem" period. The determination of a final term for the period permissible for the realization of investments, which, in the case at hand, begins on 1 January 2014.
Note how the historical evolution of the regime (and its contribution as an interpretive element) is quite informative with respect to what we have just evaluated. Already when the "related" benefit was created by Decree no. 40874, of 23 November 1956, it was provided: "Article 1 The companies that from the entry into force of this decree and until (...) undertake productive investments that lead to new manufactures or to cost reduction or (...) shall benefit, (...), from the following deductions: (...)." The objective was also there already, to incentivize investment from the first moment of creation of the Benefit.
Later, when the Benefit already transposed in the Industrial Contribution Code (article 44) was subject to alterations by force of the D.L. that approved the CIT Code, also then, doubts arose regarding transitional law, in that case originating from an "or" that became "and": "retained profits or placed in reserves", in the old law / "retained profits and placed in reserves in the new law. In this regard the STA was called upon to pronounce[14], deciding, as it could not but do, in the sense of respect for the acquired rights of individuals. As in the Learned judgment can be read: "This could not be otherwise, under penalty of violating the constitutional principle of confidence, implicit in the rule of law principle. The taxpayers had the right not to be surprised by legislation completely contrary to what was established and on the basis of which they had made their life plans sketched their economic strategies."
Even more remotely, there had been questions of transitional law when the regime of the Benefit had been transposed from the aforementioned Decree no. 40874, to the Industrial Contribution Code and Complementary Tax Code. And, also there, Doctrine and, thereafter, Case law were guided by the necessary protection of the acquired rights of taxpayers.
The reinvestments carried out by the Applicant in 2014, in the amount of € 361,161.66, are, thus, to be considered in the calculation of reinvestments under the TB DRRP.
Now, and anticipating the decision, having the Respondent accepted, with reference to the other tax years of 2015 and 2016, of those made by the Applicant, reinvestments in the amount of € 183,726.60, the totality of reinvestments to be considered as effectively carried out by the Applicant within the scope of the TB in question amounts to a sum of € 544,888.26.
There is thus no legal foundation for the correction made by the Respondent TA to the Declarant Form 22 of 2016 of the Applicant, consisting of the restoration of sums that the Applicant had ceased to pay as a result of the deduction it had made from the 2014 collection under the TB DRRP. In effect, the correction was made on the presupposition of not all retained profits having been reinvested, under article 34, (a) of the ITC.
Having retained profits in the amount of € 516,791.15, and made reinvestments in the amount of € 544,888.26, it is verified that the correction on which the Assessment in question was based lacks foundation. Rendering the Assessment illegal.
3.1.2. Whether the Acquisition by the Applicant of Two Light Goods Vehicles in the Tax Year 2015, in the Total Amount of € 36,016.25, Should or Should Not be Considered as a Relevant Application for Purposes of the TB DRRP
The Assessment in question disregarded the amount of reinvestment carried out in 2015 by the Applicant regarding two light goods vehicles, which, in the view of the same, constitutes yet another illegality.
Answered as is the preceding question in the sense that reinvestments carried out in the 2014 tax year shall be accepted within the scope of the TB, the decision on the present question is no longer such as to influence the final decision to be taken.
This is because the value of reinvestments carried out by the Applicant in 2014 (€ 361,161.66), not questioned by the Respondent, together with the value of reinvestments carried out in 2015 and 2016 even if deducting the amount of investments not accepted by the Respondent corresponding to the two vehicles acquired in 2015 (€ 219,742.85 - € 36,016.25 = € 183,726.60), makes up, exceeding it, the amount of profits retained by the Applicant (makes up the value of € 544,888.26, when the retained profits were € 516,791.15).
Still we do not refrain from noting that we understand the Respondent to have acted well in this particular. In effect, the two vehicles acquired represented the replacement of two other vehicles also for goods, with similar characteristics, sold by the Respondent in the same tax year of 2015. Being that the law establishes as a condition of eligibility for the purpose the being of investments that represent additions - verified in each tax period - of fixed tangible assets (v. article 30, no. 2 of the ITC). Which, thus, we understand did not, strictly speaking, occur. We have, in this case, in the tax year 2015, addition (reinforcement) and simultaneously alienation/disposal.
Thus, we would conclude for the non-consideration of the investment in question. Which, notwithstanding and as mentioned, does not alter the final decision in the case.
4. Reimbursement of Sums Paid and Indemnifying Interest
The assessment in question in the case is, thus, rendered illegal, by error in the application of law. It must consequently be annulled, which by the present is decided, and the respective sums, wrongfully paid, restored to the Applicant.
The Applicant further petitions indemnifying interest. Let us see if it has reason.
Article 24, no. 5 of the LRTA establishes the obligation of payment of interest, whatever their nature, in accordance with the terms provided for in the GTL and in the CPPT.
As provided in no. 1 article 43 of the GTL, the obligation of payment of indemnifying interest takes place when it is determined that there has been error, imputable to the services, from which results payment of the tax debt in an amount higher than legally due.
We have already seen that there was error, of law, from which resulted payment in a sum higher than due. It remains to assess whether such error is imputable to the services.
For these purposes, as is known, the verification of fault is not required[15]. In this regard see how Jorge Lopes de Sousa writes[16]: "Outside cases in which it is the taxpayer who determines the amount of tax to be paid, the assessment is made by the services and, for this reason, errors of law, embodied in the application of law to determined facts, shall be imputable to the Tax Administration. / (...) what cannot be questioned, by force of the provision of the aforementioned article 22 of the CRP, will be the right of taxpayers to indemnification for actions of the Tax Administration that injure them and are carried out with violation of the duties that the law imposes on it.(...)"[17]
In the case at hand, the assessment in question was made by the TA based on an interpretation of the law that it understood to be correct. It is our understanding that the interpretation and application made by the TA do not correspond to what would be required of it. All the more given that it had already been verified throughout the historical evolution of the tax benefit in question successive questions of application of law in time that were, invariably, decided in the same sense, of the protection of the acquired rights of taxpayers. In the situation at hand, the error in which thus was incurred cannot, thus, fail to be considered imputable to the services.
5. Decision
In these terms this Arbitral Tribunal decides to find the RAP granted, and thus:
a) Declare illegal and consequently annul the additional Assessment and the Statement of interest assessment better identified in the case file, relating to the tax year 2016;
b) Condemn the Respondent to the restitution to the Applicant of the amount wrongfully paid, of € 36,980.48;
c) Condemn the Respondent to the payment of indemnifying interest counted from the date of wrongful payment (22.12.2017) until issuance of the respective credit note (cf. article 61, no. 5 of the CPPT and article 43 of the GTL, with the rate cf. articles 43, no. 4 and 35, no. 10 of the GTL and article 559, no. 1 of the Civil Code).
6. Value of the Proceedings
Pursuant to the combined provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, 97-A, no. 1, (a) of the CPPT, and 306, no. 2 of the CPC, the value of the proceedings is fixed at € 36,980.48.
7. Costs
As provided in article 22, no. 4 of the LRTA, article 4, no. 4 of the aforementioned Regulation and Table I hereto annexed, the amount of costs is fixed at € 1,836.00, at the expense of the Respondent.
Lisbon, 4 October 2018
The Arbitrator
(Sofia Ricardo Borges)
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