Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsel Jorge Lopes de Sousa (arbitrator-president), Professor Luís Menezes Leitão, and Professor Jorge Bacelar Gouveia, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 28-04-2017, hereby agree as follows:
1. REPORT
A…, a legal entity with registered office in…, …, …, Dublin …, in Ireland, registered with VAT identification number IE…N and with Portuguese tax identification number …, (hereinafter referred to as "Claimant"), submitted a request for constitution of an arbitral tribunal with a view to annulment of source withholding acts.
The Claimant further requests reimbursement of sums wrongfully collected and payment of compensatory interest on the amount wrongfully withheld at source.
Subsidiarily, the Claimant requests partial annulment of the source withholdings.
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 27-02-2017.
In accordance with article 6(2)(a) and article 11(1)(b) of the RJAT, the Deontological Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.
On 11-04-2017 the parties were duly notified of this appointment, and neither manifested any intention to refuse the appointment of the arbitrators, in accordance with article 11(1), subparagraphs (a) and (b) of the RJAT and articles 6 and 7 of the Deontological Code.
In accordance with article 11(1)(c) of the RJAT, the collective arbitral tribunal was constituted on 28-04-2017.
The Tax and Customs Authority filed a response, raising exceptions of lack of jurisdiction of the Arbitral Tribunal and lis pendens, the preliminary issue of mootness of the dispute, and defending the unfoundedness of the request for arbitral pronouncement.
By order of 10-05-2017 the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the case would proceed with successive written pleadings.
The parties filed pleadings.
The parties possess legal personality and capacity, are parties in interest and are duly represented (arts. 4 and 10(2) of the same instrument and art. 1 of Ordinance no. 112-A/2011, of 22 March).
The case contains no nullities.
It is necessary to examine as a priority the exceptions and preliminary issue raised by the Tax and Customs Authority, beginning with the question of jurisdiction (article 13 of the Code of Administrative Court Procedure).
2. EXCEPTIONS
2.1. Question of the Arbitral Tribunal's Jurisdiction to Examine Requests for Declaration of Illegality of Source Withholding Acts Preceded by Official Review
The Tax and Customs Authority contends, in summary, that article 2(a) of Ordinance 112-A/2011, of 22 March, through which the Tax and Customs Authority was bound to arbitral jurisdiction, excludes claims relating to declaration of illegality of source withholding acts that have not been preceded by resort to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process.
The jurisdiction of arbitral tribunals operating in CAAD is, in the first place, limited to the matters indicated in art. 2(1) of Decree-Law no. 10/2011, of 20 January (RJAT).
In a second line, the jurisdiction of arbitral tribunals operating in CAAD is also limited by the terms in which the Tax Administration was bound to such jurisdiction by Ordinance no. 112-A/2011, of 22 March, since art. 4 of the RJAT establishes that "the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an ordinance of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of disputes covered".
In view of this second limitation on the jurisdiction of arbitral tribunals operating in CAAD, the resolution of the jurisdiction question depends essentially on the terms of this binding, since, even if one is dealing with a situation that can be framed under that art. 2 of the RJAT, if it is not covered by the binding, the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be excluded.
In subparagraph (a) of art. 2 of this Ordinance no. 112-A/2011, there are expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of arbitral tribunals operating in CAAD "claims relating to declaration of illegality of self-assessment acts, source withholding acts and payments on account that have not been preceded by resort to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process".
The express reference to the preceding element "resort to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process" must be interpreted as referring to cases where such resort is mandatory, through the gracious claim, which is the administrative remedy indicated in those articles 131 to 133 of the CTPP, to whose terms it refers. In fact, it would not be understood that, when prior administrative challenge is not necessary "when its grounds are exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration" (art. 131(3) of the CTPP, applicable to source withholding cases, by virtue of article 132(6) of the same Code), the arbitral jurisdiction would be excluded by that administrative challenge, which is understood to be unnecessary, not having been carried out.
In the case at hand, declaration of illegality of source withholding acts is sought, following the rejection of a request for review of tax acts made after the expiry of the two-year period provided for in article 132.
Thus, it is important, first and foremost, to clarify whether the declaration of illegality of acts rejecting requests for review of the tax act, provided for in art. 78 of the LGT, is included in the competencies attributed to arbitral tribunals operating in CAAD by art. 2 of the RJAT.
In fact, in this art. 2 there is no express reference to these acts, contrary to what occurs with the legislative authorization on which the Government relied to approve the RJAT, which refers to "requests for review of tax acts" and "administrative acts involving consideration of the legality of assessment acts".
However, the formula "declaration of illegality of assessment acts, self-assessment acts, source withholding acts and payments on account", used in subparagraph (a) of art. 2(1) of the RJAT does not restrict, in a mere declaratory interpretation, the scope of arbitral jurisdiction to cases in which an act of one of those types is directly challenged. In fact, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-instance act that confirms an assessment act, incorporating its illegality.
The inclusion in the competencies of arbitral tribunals operating in CAAD of cases where the declaration of illegality of the acts indicated therein is made through the declaration of illegality of second-instance acts, which are the immediate object of the challenging claim, results with certainty from the reference made in that rule to self-assessment acts, source withholding acts and payments on account, which are expressly referred to as being included among the competencies of arbitral tribunals. Indeed, with respect to these acts, a necessary gracious claim is imposed as a rule, in articles 131 to 133 of the CTPP, so that in these cases, the immediate object of the challenging proceeding is, as a rule, the second-instance act that examines the legality of the assessment act, an act that, if it confirms it, must be annulled to obtain the declaration of illegality of the assessment act. The reference made in subparagraph (a) of art. 10(1) of the RJAT to article 102(2) of the CTPP, which provides for the challenge of acts rejecting gracious claims, dispels any doubts that arbitral tribunals operating in CAAD cover cases in which the declaration of illegality of acts referred to in subparagraph (a) of that art. 2 of the RJAT must be obtained following the declaration of illegality of second-instance acts.
Indeed, it was precisely in this sense that the Government, in Ordinance no. 112-A/2011, of 22 March, interpreted these competencies of arbitral tribunals operating in CAAD, by excluding from the scope of these competencies "claims relating to declaration of illegality of self-assessment acts, source withholding acts and payments on account that have not been preceded by resort to the administrative procedure in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has the effect of restricting its binding to cases where this resort to the administrative procedure was used.
Having reached the conclusion that the formula used in subparagraph (a) of art. 2(1) of the RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-instance act, it will also encompass cases in which the second-instance act is the rejection of a request for review of the tax act, since there is no apparent reason to restrict it, especially since, in cases where the request for review is made within the period of the gracious claim, it should be equated with a gracious claim. [1]
The same applies to the decision on the hierarchical appeal, expressly indicated in subparagraph (a) of art. 10(1) of the RJAT as the starting point of the deadline for presentation of a request for constitution of an arbitral tribunal.
The express reference to articles 131 to 133 of the CTPP made in article 2 of Ordinance no. 112-A/2011 cannot have the decisive effect of excluding the possibility of examining requests for illegality of acts rejecting requests for official review of acts of the types indicated therein.
In fact, the interpretation exclusively based on the literal wording that is defended by the Tax and Customs Authority in the present case cannot be accepted, since in the interpretation of tax law the general rules and principles of interpretation and application of laws are observed (article 11(1) of the LGT) and article 9(1) expressly prohibits interpretations exclusively based on the literal wording of the rules by providing that "interpretation should not be limited to the letter of the law", instead it should "reconstitute from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied".
As to the correspondence between interpretation and the letter of the law, "a minimum of verbal correspondence, even if imperfectly expressed" (article 9(3) of the Civil Code) suffices, which will only prevent the adoption of interpretations that cannot at all be reconciled with the letter of the law, even while acknowledging in it imperfection in the expression of the legislative intent.
Therefore, the letter of the law does not prevent declaratory interpretation, which makes explicit the scope of the literal wording, nor even extensive interpretation, when it can be concluded that the legislator said less than what, in coherence, it intended to say, that is, when it imperfectly stated what it intended to say. In extensive interpretation "it is the very valuation of the norm (its 'spirit') that leads to discovering the need to extend the text of this to the hypothesis that it does not cover", "the expansive force of the valuation itself is capable of leading the provision of the norm to cover hypotheses of the same type not covered by the text". [2]
Extensive interpretation, thus, is imposed by the evaluative and axiological coherence of the legal system, established by article 9(1) of the Civil Code as a primordial interpretive criterion by way of imposing observance of the principle of unity of the legal system.
It is manifest that the scope of the requirement for a prior gracious claim, necessary to open the contentious avenue of challenging acts of the types referred to in articles 131 to 133 of the CTPP, has as its sole justification the fact that with respect to that type of act there is no statement of position by the Tax Administration on the legality of the legal situation created by the act, a position that may even come to be favorable to the taxpayer, avoiding the need to resort to the contentious avenue.
In fact, beyond not envisioning any other justification for this requirement, the fact that a necessary gracious claim is provided for challenging contentiously source withholding acts and payments on account (in articles 132(3) and 133(2) of the CTPP), which have in common with self-assessment acts the circumstance that there is also no statement of position by the Tax Administration on the legality of the acts, confirms that this is the raison d'être of that necessary gracious claim.
Another unequivocal confirmation that this is the raison d'être of the requirement for a necessary gracious claim is found in article 131(3) of the CTPP, by establishing that "notwithstanding the provisions of the preceding paragraphs, when its grounds are exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration, the deadline for challenging does not depend on a prior claim, and the challenge must be presented within the deadline of article 102(1)", a regime which is applicable to source withholding acts by referral of article 132(6) of the CTPP. In fact, in situations of this type, there has been a prior generic pronouncement by the Tax Administration on the legality of the legal situation created with the self-assessment or source withholding act and it is this fact that explains why the necessary gracious claim ceases to be required.
Now, in cases where a request for official review of a self-assessment or source withholding act is made, the Tax Administration is given, with this request, an opportunity to pronounce on the merits of the claim of the taxpayer before the latter resorts to the judicial avenue, so that, in coherence with the solutions adopted in articles 131(1) and 132(3) and articles 132(6) of the CTPP, it cannot be required that, cumulatively with the possibility of administrative review under that official review procedure, a new administrative review be required through a gracious claim. [3]
On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from filing requests for official review in cases of self-assessment acts, since these are expressly referred to in article 78(2) of the LGT. And to self-assessment acts, carried out by the taxpayer, are comparable, by mere declaratory interpretation, source withholding acts which are carried out by the withholding agent, who is considered a taxpayer (article 18(3) of the LGT).
In this context, allowing the law expressly that taxpayers opt for a gracious claim or for official review of self-assessment and source withholding acts and being the request for official review made within the period of the gracious claim perfectly comparable to a gracious claim, as mentioned, there can be no reason that can explain that a taxpayer who opted for review of the tax act instead of the gracious claim cannot access the arbitral avenue.
Therefore, it must be concluded that the members of Government who issued Ordinance no. 112-A/2011, when making reference to articles 131 to 133 of the CTPP, stated imperfectly what they intended, since, intending to impose prior administrative review to the contentious challenge of acts of the types referred to, they ended up including reference to articles 131 to 133 which do not exhaust the possibilities of administrative review of those acts.
Moreover, it is to be noted that this interpretation not limited to the literal wording is justified especially in the case of subparagraph (a) of article 2 of Ordinance no. 112-A/2011, because its imperfections are evident: one is to associate the comprehensive formula "resort to the administrative procedure" (which references, beyond the gracious claim, hierarchical appeal and review of the tax act) to the "expression in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has potentially restrictive scope to the gracious claim; another is to use the formula "preceded" by resort to the administrative procedure, reporting to "claims relating to declaration of illegality of acts", which obviously would align much better with the feminine word "preceded".
Therefore, beyond the general prohibition of interpretations limited to the letter of the law that appears in article 9(1) of the Civil Code, in the specific case of subparagraph (a) of article 2 of Ordinance no. 112-A/2011 there is a special reason not to justify great enthusiasm for a literal interpretation, which is the fact and the drafting of that rule is manifestly defective.
Furthermore, by ensuring official review of the tax act the possibility of examining the taxpayer's claim before access to the contentious avenue that is intended to be achieved with necessary administrative challenge, the most accurate solution, because it is the most coherent with the legislative intent of "strengthening effective and efficient protection of the rights and legally protected interests of taxpayers" manifested in article 124(2) of Law no. 3-B/2010, of 28 April, is the admissibility of the arbitral avenue to examine the legality of assessment acts previously examined in a review procedure.
And, because it is the most accurate solution, it must be presumed to have been normatively adopted (article 9(3) of the Civil Code).
On the other hand, containing that subparagraph (a) of article 2 of Ordinance no. 112-A/2011 an imperfect formula, but which contains a comprehensive expression "resort to the administrative procedure", which potentially also references official review of the tax act, there is found in the text the minimum verbal correspondence, though imperfectly expressed, required by that article 9(3) for the viability of adoption of the interpretation that consecrates the most accurate solution.
It must be concluded, thus, that article 2(a) of Ordinance no. 112-A/2011, duly interpreted on the basis of the criteria of interpretation of law provided for in article 9 of the Civil Code and applicable to substantive and procedural tax rules, by virtue of article 11(1) of the LGT, enables the presentation of requests for arbitral pronouncement with respect to source withholding acts that have been preceded by a request for official review.
As to the allegation of the Tax and Customs Authority that "the understanding (...) that disputes concerning declaration of illegality of self-assessment acts, as occurs in the situation sub judice, are excluded from the material jurisdiction of arbitral tribunals, if not preceded by a gracious claim in accordance with article 131 of the CTPP, is imposed by force of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as the right of access to justice (article 20 of the CRP) and legality [cf. articles 3(2), 202 and 203 of the CRP and also article 266(2) of the CRP, in its corollary of the principle of indisponibility of tax credits inherent in article 30(2) of the LGT, which bind the legislator and all activities of the AT". [4]
In fact, the Constitution does not impose that the interpretation of normative instruments be limited to the literal wording and, in the case at hand, as explained, duly interpreted the rules of article 2(1) of the RJAT and article 2 of Ordinance no. 112-A/2011, of 22 March, it is concluded that the binding of the Tax and Customs Authority to arbitral tribunals operating in CAAD covers cases where self-assessment acts were preceded by requests for official review. Therefore, the interpretation made did not increase the binding of the Tax and Customs Authority beyond what is regulated, but rather defined exactly its terms, which result from the regulatory instrument.
On the other hand, in interpreting and applying legal rules, this Arbitral Tribunal is performing the function that is constitutionally assigned to it (articles 202(1), 203 and 209(2) of the CRP), so it is not perceived how there can be a violation of the principles of separation of powers, rule of law and legality, since what is decided by this tribunal evidences, precisely, the perfect implementation of these principles: the Assembly of the Republic authorized the Government to legislate (article 124 of Law no. 3-B/2010, of 28 April); the Government, in exercise of legislative powers, issued the RJAT; the Administration, through two members of Government, issued Ordinance no. 112-A/2011, of 22 March; the Arbitral Tribunal interpreted and applied the referred normative instruments.
As to the principle of the right of access, it is perplexing the allegation of its violation made before an Arbitral Tribunal, an organ absolutely independent of both parties, which gave them the opportunity to argue what they saw fit for defense of their positions on the jurisdiction question, which weighed their reasons and applied its interpretation of the applicable legal regime in a decision extensively reasoned: it is precisely this that constitutes the essence of the right of access to justice, the possibility of obtaining a decision from an independent organ which, through an equitable process, weighs the arguments of the parties and applies to the issues raised its interpretation of the applicable legal regime.
As to the invocation of the principle of indisponibility of tax credits, defined in article 30(2) of the LGT, in which it is stated that "the tax credit is indisponible, and conditions for its reduction or extinction can only be fixed with respect for the principle of equality and tax legality", this is surely a lapse, since in deciding on its jurisdiction the Arbitral Tribunal is not performing any act of disposition of any credit. On the other hand, it is not seen which credit the Tax and Customs Authority will be referring to, since in the present case, which concerns source withholding acts of tax that was paid, no collection of any tax credit is at issue, those that existed before the source withholdings having already been extinguished by payment, and it is not even alleged that any other credit of the Tax and Customs Authority exists in relation to the Claimant related to the self-assessments in question.
Furthermore, the principle of indisponibility of tax credits applies to the Administration and not to the Courts, as understood by the Constitutional Court, following the majority of doctrine. [5]
This exception of lack of jurisdiction, derived from the failure to file a gracious claim of the source withholding acts, is therefore without merit.
Essentially in this sense, with respect to self-assessment acts, can be seen the decision of the Central Administrative Court of the South of 27-04-2017, handed down in case no. 08599/15.
2.2. Question of the Arbitral Tribunal's Lack of Jurisdiction to Examine Requests for Declaration of Illegality of Source Withholding Acts Preceded by Official Review in Which the Legality of Assessment Acts Was Not Examined
The Tax and Customs Authority makes reference to a hierarchical appeal subsequent to the request for official review, of which there is no knowledge in the records, in particular in the administrative proceeding it attached, so it is surely a lapse.
Therefore, the question will be examined with reference to the decision on the request for official review.
In art. 2 of the RJAT, which defines the "Jurisdiction of arbitral tribunals", there is not expressly included the examination of claims for declaration of illegality of acts rejecting requests for official review of tax acts, since, in the version introduced by Law no. 64-B/2011, of 30 December, only the jurisdiction of arbitral tribunals is indicated for "declaration of illegality of assessment acts, self-assessment acts, source withholding acts and payments on account" and "declaration of illegality of acts fixing the taxable matter when this does not give rise to assessment of any tax, acts of determination of taxable income and acts of fixing patrimonial values".
However, the fact that subparagraph (a) of art. 10(1) of the RJAT makes reference to articles 102(1) and (2) of the CTPP, in which the various types of acts giving rise to the deadline for judicial challenge are indicated, including the gracious claim, gives to understand that all types of acts capable of being challenged through a judicial challenge proceeding will be covered within the scope of the jurisdiction of arbitral tribunals operating in CAAD, covered by those articles (1) and (2), provided that they have as their object an act of one of the types indicated in that art. 2 of the RJAT.
Moreover, this interpretation in the sense of identity of the fields of application of the judicial challenge process and the arbitral process is in harmony with the referred legislative authorization on which the Government relied to approve the RJAT, granted by art. 124 of Law no. 3-B/2010, of 28 April, in which the intention is revealed that the arbitral tax proceeding constitute "an alternative procedural means to the judicial challenge proceeding and the action for recognition of a right or legitimate interest in tax matters" (no. 2).
But this same argument that is extracted from the legislative authorization leads to the conclusion that the possibility of using the arbitral process will be excluded when, in the judicial tax proceeding, judicial challenge or action for recognition of a right or legitimate interest cannot be used.
In fact, this being the sense of the referred legislative authorization law and being inserted in the reserved legislative competency of the Assembly of the Republic to legislate on the "tax system", including the "guarantees of taxpayers" [arts. 103(2) and 165(1)(i) of the CRP] [6], and on the "organization and jurisdiction of courts" [art. 165(1)(p) of the CRP], the referred art. 2 of the RJAT cannot, on pain of unconstitutionality, due to lack of coverage in the legislative authorization law that limits the Government's power (art. 112(2) of the CRP), be interpreted as attributing to arbitral tribunals operating in CAAD jurisdiction for examination of the legality of other types of acts, for whose challenge the judicial challenge process and action for recognition of a right or legitimate interest are not appropriate.
From subparagraphs (d) and (p) of art. 97(1) and art. 97(2) of the CTPP it can be inferred the rule that challenge of administrative acts in tax matters be made, in the judicial tax proceeding, through judicial challenge or special administrative action (which succeeded the contentious appeal, under art. 191 of the Code of Administrative Court Procedure) depending on whether these acts involve or do not involve examination of the legality of administrative tax assessment acts. [7] It is a rule that may have exceptions [8] and will be excluded when special rules exist [9], but, when there is no ground to exclude the rule this criterion for division of the fields of application of the judicial challenge process and special administrative action should be applied.
In light of this criterion for division of the fields of application of the judicial challenge process and special administrative action, acts issued in proceedings for official review of self-assessment acts may only be challenged through a judicial challenge process when they involve examination of the legality of these self-assessment acts. If the act rejecting the request for official review of a self-assessment act does not involve examination of the legality of this, the special administrative action will be applicable. This is a criterion for distinguishing the fields of application of the referred procedural means of questionable justification, but the fact is that it is what results from the wording of subparagraphs (d) and (p) of art. 97(1) of the CTPP and has been uniformly adopted by the Supreme Administrative Court. [10]
Thus, the said delimitation of the fields of application of the judicial challenge process and special administrative action leads to the conclusion that, restricting the jurisdiction of arbitral tribunals operating in CAAD to the field of application of the judicial challenge process, only claims for declaration of illegality of acts rejecting requests for official review of self-assessment acts that involve examination of the legality of these acts are included in this jurisdiction.
The legislative concern in excluding from the jurisdiction of arbitral tribunals operating in CAAD the examination of the legality of administrative acts that do not involve examination of the legality of assessment acts, beyond resulting from the outset from the generic directive of creation of an alternative means to the judicial challenge process and action for recognition of a right or legitimate interest, results clearly from subparagraph (a) of art. 124(4) of Law no. 3-B/2010, of 28 April, in which are indicated among the possible objects of the arbitral tax process "administrative acts involving examination of the legality of assessment acts", because this specification can only be justified by a legislative intent to exclude from the possible objects of the arbitral process the examination of the legality of acts that do not involve examination of the legality of assessment acts.
In light of the criterion for division of the fields of the judicial challenge process and special administrative action delineated by subparagraphs (d) and (p) of art. 97(1) of the CTPP, it is not necessary that examination of the legality of an assessment act be the foundation of the procedural decision or that the request filed asks for examination of the legality of an assessment act, it being sufficient that the act involve it, which, in this context, means that the impugned act includes a judgment about the legality of an assessment act, even if its legality or illegality is not the foundation of the decision. It would be different if the law employed other expressions, such as "examines" or "decides".
However, in the case at hand, beyond the primary object of the proceeding being the source withholding acts and the decision on the request for official review not affecting the jurisdiction to examine their legality, it is found that in the decision on the request for official review, despite stating initially that the prerequisites for review are not met, it ends up explicitly examining the legality of the source withholding acts, saying, among other things, the following:
Indeed, it is requested in its petition that what be considered as income subject to source withholding is not the gross value of royalties paid by its associate B…, but these royalties deducted from the expenses incurred for their obtaining, that is the management commissions and conclusion of lease contracts as well as expenses incurred with depreciation of the leased equipment.
Now, since it is A… that exercises the equipment leasing activity, with B… a company resident in Portugal acting simply on its behalf, the expenses incurred with this activity are costs of A…, entering negatively in the calculation of income subject to taxation in Ireland under "corporation tax".
The applicant itself affirms in its petition (Point 32) that "it is the owner of the equipment thus acquired and also the holder of the rents of the respective lease contracts".
So then, on what basis is it going to deduct from the value of royalties billed to its counterpart B… the costs referred to?
Therefore, either because the decision on the request for official review does not affect the jurisdiction to examine the legality of the source withholding acts, or because this decision involves examination of the legality of assessment acts (source withholding), the exception of lack of jurisdiction raised by the Tax and Customs Authority is without merit.
2.3. Question of Lis Pendens or Suspension of Proceedings
The Tax and Customs Authority raises the question of lis pendens because there is pending in the Tax Court of Lisbon a judicial challenge proceeding in which additional assessments are challenged that were based on the understanding of the Tax and Customs Authority that the source withholding should have been greater than what was carried out.
Subsidiarily, the Tax and Customs Authority contends that proceedings should be suspended pending decision of the referred judicial challenge proceeding.
The challenging party in that proceeding is B…, SA, and not A… which is the Claimant in the present arbitral proceeding.
The requirements for lis pendens are stated in article 581 of the CPC, subsidiarily applicable, by virtue of subparagraph (e) of article 29(1) of the RJAT, which establishes the following:
Article 581
Requirements for Lis Pendens and Res Judicata
1 - The cause is repeated when an action identical to another is proposed as to the subjects, the claim and the cause of action.
2 - There is identity of subjects when the parties are the same from the point of view of their legal quality.
3 - There is identity of claim when in both causes the same legal effect is sought to be obtained.
4 - There is identity of cause of action when the claim made in two actions proceeds from the same legal fact. In real actions the cause of action is the legal fact from which the real right derives; in constitutive and annulment actions it is the concrete fact or specific nullity invoked to obtain the intended effect.
In the case at hand, it is apparent from the outset that the parties in the referred judicial challenge proceeding and in the present arbitral proceeding are not the same, so the possibility of a situation of lis pendens is excluded.
Furthermore, in the referred judicial challenge proceeding, B…, SA seeks to have the additional assessments annulled and the source withholding acts maintained as it carried them out, while in the present proceeding A… seeks annulment of the withholding acts.
There is no identity of subjects and claims, which is sufficient to conclude that there is no situation of lis pendens between the present proceeding and the referred judicial challenge proceeding.
On the other hand, the requirements required by the transcribed article 581 of the CPC not being met (the requirements of res judicata are the same as those for lis pendens, as can be seen from this article), the Claimant A… is not covered by the binding force of the decision that is handed down therein (article 619(1) of the CPC), so that, even if in that proceeding the legality of the additional assessments that are its object is affirmed, the Claimant is not prevented from discussing it in the present proceeding.
Thus, there is no relationship of dependence of the present proceeding on the referred judicial challenge proceeding, so there is no justification for suspension of proceedings.
The request for suspension of proceedings contained in the response of the Tax and Customs Authority is thus rejected.
2.4. Question of Mootness of the Dispute
The Tax and Customs Authority raises the preliminary issue of mootness of the dispute because the amounts sought by the Claimant, relating to the period from October 2012 to December 2013, have already been granted by DSRI, under the reimbursement requests submitted under the Interest and Royalties Directive, and the request for issuance of checks has already been sent to the Reimbursement Services Department. More specifically, the source withholdings of tax relating to the period from July to December 2013 were fully reimbursed under the Interest and Royalties Directive (Documents nos. 1 to 6, attached with the Response).
The Claimant confirms what is alleged by the Tax and Customs Authority, saying that the reimbursement occurred after submission of the request for arbitral pronouncement (article 56 of the Claimant's pleadings).
The Claimant further states that "given the fact that the Claimant has in the meantime been reimbursed from the reimbursement requests relating to source withholdings, submitted under the Interest and Royalties Directive, the source withholding rate should be 0% for the periods from July 2013 to December 2013; and 5% for the periods from January 2012 to June 2013" and that "considering the reimbursement processed, (...) the Claimant accordingly reduces its initial request from €1,450,523.45 and €1,949,477.25 for the years 2012 and 2013, respectively. The amount sought in the present request for pronouncement is €1,247,289.89 and €162,322.27 for the years 2012 and 2013, respectively, thus maintaining the utility of the present dispute".
Having been made the full reimbursement of the sums withheld relating to the period from July to December 2013 and the Claimant having already eliminated the request in that respect, it is pointless to examine the issues raised regarding the return of the reimbursed sums, but the Claimant's interest subsists in examining the legality of the withholdings to determine whether it is entitled to "compensatory interest on the amount wrongfully withheld between January 2012 and October 2013, from the date of respective payment until the date of issuance of the corresponding credit note, calculated at the legal rate of interest in force, in accordance with article 43(1), (2) and (4) of the LGT, and article 61(3) of the CTPP", as referred to in article 268 of the request for arbitral pronouncement.
As to the withholdings relating to the period from October 2012 to June 2013, as the Tax and Customs Authority states, "the reimbursement by DSRI, relating to the period from October 2012 to June 2013 was based on net source withholdings, that is, already deducted from management commission expenses and contracted arrangements, as appears from the requests submitted by the Claimant, since it declared and classified net income in the RFI forms as "Gross Income"".
Since the Claimant contends that, in addition to those deductions of expenses, deductions should also be made for expenses corresponding to financial amortizations, the utility of the dispute subsists as to the remaining withholdings with the reductions indicated by the Claimant in article 58 of its pleadings.
2.5. Question of the Prerequisites for Official Review Provided for in Article 78 of the LGT
Although the acts that are the object of the request for arbitral pronouncement are source withholding acts, as stated, their challenge without prior claim and beyond the deadline for this depends on verification of the prerequisites provided for review of the tax act, since if a situation does not exist in which the Tax and Customs Authority should effect the review, the acts will be consolidated in the legal order.
The Supreme Administrative Court has understood that in situations where taxpayers can judicially challenge or claim against assessment acts within certain periods, they can also, after these periods have expired, request review of the tax act, with the restricted grounds provided for in article 78 of the LGT. The review is based on the duty of the Tax Administration to revoke illegal acts, restoring legality, and in these cases, it does not have the effect of retroactive legal elimination of the effects of the act (in particular with respect to compensatory interest), but only the effects of restitution of what was wrongfully collected. [11]
This duty of revocation of illegal acts that review of the tax act materializes does not depend on prior challenge or claim, as it has also been uniformly understood by the Supreme Administrative Court. [12]
Thus, the fact that the two-year period provided for in article 132(4) of the CTPP and article 137(3) of the CIRC for claim by the payee (holder of income subject to source withholding) has expired does not prevent the filing of a request for review of the tax act.
On the other hand, there is no obstacle to the challengeability of source withholding acts derived from the requirement made in these rules that the withholding have a definitive character and not mere nature of payment on account of the tax due ultimately, since in the case at hand, the source withholding has a definitive nature, as results from article 94(3) of the CIRC (in the version of Decree-Law no. 159/2009, of 13 July), in which the following is established:
3 – Source withholdings have the nature of tax on account, except in the following cases where they have a definitive character:
a) When, in accordance with articles 9 and 10, or in situations provided for in the Statute of Tax Benefits, the exemption from corporate income tax is excluded for all or part of capital income;
b) When, not being real estate income, the holder of the income is a non-resident entity that does not have a permanent establishment in Portuguese territory or that, having one, such income is not attributable to it.
c) When it is capital income that is paid or placed at the disposal of accounts opened in the name of one or more holders but on behalf of unidentified third parties, except when the beneficial owner is identified, terms under which the general rules apply. (Added by Law no. 55-A/10, of 31-12).
In the case at hand, there is a situation falling within that subparagraph (b), so there is source withholding with definitive character and, consequently, there are acts that can be challenged by the Claimant, holder of the income by substitution.
There was thus no obstacle to the examination by the Tax and Customs Authority of the merits of the review request, which it indeed carried out.
3. FINDINGS OF FACT
3.1. Proven Facts
The following facts are considered proven:
A) The Claimant A…, with registered office in Ireland, and B…, SA, with registered office in Portugal, entered into on 28-12-2009 a Commission and Agency Agreement, whose effectiveness commenced on 01-01-2010 (document no. 4 attached with the request for arbitral pronouncement, whose content is given as reproduced);
B) B… promotes operational leasing of technological equipment through a set of commercial partners whose activity consists in the sale of such equipment;
C) When a potential customer company contacts one of these commercial partners supplying equipment for the acquisition thereof and if it needs liquidity for that purpose, that supplier then promotes B…'s services to the potential customer with a view to the latter executing a lease contract for the equipment in question with B…, as an alternative to its acquisition;
D) If the potential customer is interested in the option of leasing the equipment, B… will initiate negotiations with it for the execution of a lease contract for that equipment;
E) If the negotiations are successfully concluded, B… then executes a lease contract for the equipment, acting in its own name, but on behalf of the Claimant;
F) Having executed the lease contract, on behalf of the Claimant, B… transmits instructions to its commercial partner (equipment supplier) to proceed with delivery of the contracted equipment (leased), at the client's (lessee's) facilities;
G) The commercial partner (equipment supplier) proceeds to sell and invoice this leased equipment to B…, which resells and re-invoices it to the Claimant;
H) This acquisition and resale occur from the fact that B… acts in fact on behalf of the Claimant, so it immediately transmits to it the ownership of the leased goods;
I) The resale is always made without the addition of any margin, which is why the respective invoice is always issued to the Claimant (by B…) for an amount equivalent to the acquisition value of the same;
J) The owner and effective lessor of the leased equipment is the Claimant;
K) Additionally, it is also the responsibility of B… to manage and carry out maintenance of the equipment lease contracts executed with client lessees located in Portugal;
L) Under the Commission and Agency Agreement, the intervention of B… is remunerated exclusively through the commissions agreed and owed to it by the Claimant;
M) This remuneration, specifically, corresponds to a commission of €385.00 for each new contract entered into with a customer in Portugal and further for a management commission of €2.33/month for each contract that is in progress;
N) The obtaining of rents from leasing of equipment located in Portugal implies for the Claimant a set of expenses directly connected with the obtaining of these rents in Portugal and which are essential for the realization of the leasing;
O) The Claimant also incurs expenses inherent in the acquisition and holding of the leased goods, including depreciation of equipment acquired for leasing in Portugal;
P) Under the Commission and Agency Agreement referred to above, B… then invoices to the Claimant monthly the cost of acquisition of equipment acquired for leasing;
Q) Under the Commission and Agency Agreement, the Claimant invoices to B… monthly the value of equipment lease rents, corresponding to the amount that B… invoiced and collected from national lessees (customers), in its own name but on behalf of the Claimant, deducted from the Commissions owed to it by the execution and administration and management of the lease contracts;
R) The amounts contained in invoices issued monthly by the Claimant were, between January 2012 and October 2013, subject to source withholding, by B…, at the rate of 10%, under article 12(2) of the Portugal-Ireland Tax Treaty, which were as follows (document no. 3 attached with the request for arbitral pronouncement, whose content is given as reproduced):
S) The tax base of the 10% rate applied by B…, with the objective of applying article 12(2) of the Portugal-Ireland Tax Treaty, corresponded to the value of equipment lease rents deducted from the commissions earned by B…;
T) The gross values of the leasing rents relating to contracts executed by B…, SA, on behalf of the Claimant, were €24,116,437.00 in 2012 and €29,658,205.88 in 2013, with these values including the values relating to financial amortization of the leased equipment, in the amounts of €16,018,928.14, for the year 2012, and €21,591,482.51, for the year 2013;
U) B… was the subject of a tax inspection action for the years 2012 and 2013 identified with Service Order number 0I2014…/…, which was initiated in 2014 and concluded in the first semester of 2015 (document no. 13 of the request for arbitral pronouncement, documents attached with the Claimant's pleadings);
V) On 18-05-2015, B… was notified of the Tax Inspection Report in which the AT understood that the source withholdings on the amounts of royalties relating to the years 2012 and 2013 paid by B… to the Claimant should have been made on the gross amount of lease rents and not on the value deducted from the amount of management commission and operational equipment lease contract conclusion commissions owed to B…;
W) On 04-06-2015, B… was notified of the Demonstrations of Assessment of source withholding of Corporate Income Tax with nos. 2015… and 2015… relating to Additional Assessments nos. 2015… and 2015…, relating to the years 2012 and 2013 (document no. 8 attached with the request for arbitral pronouncement, whose content is given as reproduced);
X) On 17-07-2015, the Claimant requested, under article 96(4) of the Corporate Income Tax Code and Directive no. 2003/49/CE, also designated as the Interest and Royalties Directive, partial reimbursement of the source withholdings made by B… and borne by the Claimant in the months from October 2012 to September 2014 (document no. 9 attached with the request for arbitral pronouncement, whose content is given as reproduced);
Y) The amounts sought by the Claimant, relating to the period from October 2012 to December 2013, were granted and reimbursed by the Tax and Customs Authority in April 2017, with the source withholding rate of 0% being applied for the periods from July 2013 to December 2013 and 5% for the periods from January 2012 to June 2013, payment guides having been issued in the following terms, relating to the taxation periods of 2012 and 2013 (article 57 of the Claimant's pleadings and article 27 of the Response of the Tax and Customs Authority):
Z) The simulation of taxation of the Claimant as non-resident and as resident relating to the periods from January to September and October to December 2012 is as follows (article 58 of the Claimant's pleadings):
AA) The simulation of taxation of the Claimant as non-resident and as resident relating to the periods from January to June 2013 (article 58 of the Claimant's pleadings):
BB) The Claimant is held in 90.9% of its capital by C…, a company with registered office in Germany (document no. 1 attached with the request for arbitral pronouncement, whose content is given as reproduced), which also holds 100% of the capital of B… since 01-01-2012 (documents nos. 10 and 11 attached with the request for arbitral pronouncement, whose contents are given as reproduced);
CC) On 02-11-2015, B… filed a judicial challenge against the referred Additional Assessments (document no. 12 attached with the request for arbitral pronouncement, whose content is given as reproduced);
DD) On 21-12-2015, the Claimant requested official review of the Corporate Income Tax source withholdings, relating to the months of January 2012 to December 2013, because it understood that the taxable base of the source withholdings borne (rents deducted from the commissions already referred to) should also have been deducted from expenses with depreciation of equipment (document no. 13 attached with the request for arbitral pronouncement, whose content is given as reproduced);
EE) By Notices nos. … of 02-06-2010 and … of 18-08-2016 relating to case no. …/2010, the Claimant was notified of the draft rejection of its request for official review and to exercise its right of prior hearing (documents nos. 14 and 15 attached with the request for arbitral pronouncement, whose contents are given as reproduced);
FF) The Claimant did not exercise the right of hearing;
GG) On 22-11-2010, the Claimant was notified of the rejection of the request for official review, referring to the grounds of the draft rejection (document no. 2 attached with the request for arbitral pronouncement, whose content is given as reproduced);
HH) In the grounds of the draft rejection of the request for official review the following is stated, among other things:
However, regardless of this discussion, and admitting that the position of the AT on this matter could/can be altered, fitting thus the source withholding in the provision of article 78 of the LGT it seems to us that the taxpayer's claims could never come to be satisfied.
Indeed, it is requested in its petition that what be considered as income subject to source withholding is not the gross value of royalties paid by its associate B…, but these royalties deducted from the expenses incurred for their obtaining, that is the management commissions and conclusion of lease contracts as well as expenses incurred with depreciation of the leased equipment. Now, since it is A… that exercises the equipment leasing activity, with B… a company resident in Portugal acting simply on its behalf, the expenses incurred with this activity are costs of A…, entering negatively in the calculation of income subject to taxation in Ireland under "corporation tax".
The applicant itself affirms in its petition (Point 32) that "it is the owner of the equipment thus acquired and also the holder of the rents of the respective lease contracts".
So then, on what basis is it going to deduct from the value of royalties billed to its counterpart B… the costs referred to?
(…)
The passive subject thus has no reason when he rebels against the content of the binding information drawn up regarding the current article 84 of the CIRC (ex – 88) for this to state that "Existing Convention entered into with the country of residence of the lessor, in which remuneration paid for the use or granting of use of equipment is assimilated to royalties, lease rents are subject to withholding tax as a definitive right, on the totality of income (capital + interest) at the rate of 15% or at the rate established in the Convention applicable to the case…
II) The Tax Administration issued a doctrine sheet based on the Binding Information handed down in case no. …/2003, in which the following is stated:
Case: …/2003 – with the agreement dispatch of the Director-General of Taxes, on 2004.03.25 Content: In accordance with internal law, lease rents of financial leasing paid to non-resident entities without a permanent establishment in Portuguese territory, whose debtor has residence, registered office or effective management in this territory or whose payment is attributable to a permanent establishment situated therein, are subject to taxation in the same territory, at the rate of 15%, with withholding operating as a definitive right, in accordance with the provision of article 4(3)(c)(2) and article 88(1)(b), both of the Corporate Income Tax Code. Existing convention entered into with the country of residence of the lessor, in which remuneration paid for the use or granting of use of equipment is assimilated to royalties, lease rents are subject to source withholding, with the same operating as a definitive right, on the totality of income (capital + interest), at the rate of 15% or at the rate established in the convention applicable to the case, and for that purpose, the entity owing these rents must be equipped, by the term of the deadline for submission of the tax, with a Form Mod.10-RFI from the Tax Benefits Office, certified by the competent authorities of the country of residence (see article 90(3) and (4) of the Corporate Income Tax Code).
If the beneficial owner of the royalties, resident of the other Contracting State, exercises a commercial or industrial activity in Portuguese territory through a permanent establishment situated therein or exercises a self-employed profession in this territory, through a fixed installation situated therein and the right or property as to which royalties are paid is effectively connected to that permanent establishment or that fixed installation, in these cases the provisions of article 7, relating to taxation of profits, or article 14, relating to taxation of self-employed professions, are applicable, depending on the case. [13]
JJ) On 20-02-2017, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceeding.
3.2. Unproven Facts and Reasoning for the Findings of Fact
There are no facts relevant to the decision of the case that have not been proven.
The evidence is based on the documents attached by the Claimant and those in the administrative proceeding.
As to the values of financial amortizations contained in the rents paid by B…, S.A, to the Claimant, although the Tax and Customs Authority in article 134 of its Response contends that they should not be considered proven, the grounds it invokes for doubting the correspondence to reality of the values invoked by the Claimant do not appear pertinent.
In fact, the Tax and Customs Authority, as can be seen from articles 131 and 132 of the Response, bases its position on the failure to observe the regime provided for in articles 29 and 34 of the CIRC and in Regulatory Decree no. 25/2009 and identification of the goods in question, nor the periods of useful life or even the depreciation method used, which would be necessary if technical amortizations of equipment were at issue, but does not appear necessary when financial amortizations contained in operational lease rents are at issue.
Furthermore, it is found that in the decision on the request for official review the Tax and Customs Authority made no reference to doubts about these values as a ground for rejection.
4. MATTER OF LAW
4.1. Questions That Are the Subject of the Proceeding
The Claimant is a non-resident without a permanent establishment in Portugal and with registered office in Ireland.
B…, SA, with registered office in Portugal, acting on behalf of the Claimant, entered into operational equipment leasing contracts of which this became owner and effected collection of the respective rents, which it transferred to the Claimant, deducted from the values of commissions earned by the former.
B…, SA, effected source withholding of Corporate Income Tax relating to the rents based on the values of the rents deducted from the commissions it collected.
The essential question at issue in the present proceeding is to determine what the tax base for taxation of financial equipment lease rents is, specifically to know whether, as the Claimant contends, that tax base should be constituted by the amount of income net of expenses directly incurred for their obtaining, including deduction of the values of financial amortizations contained in the values of the rents, in addition to the commissions collected by B…, SA.
The Tax and Customs Authority understands, in harmony with the doctrine of the Binding Information handed down in case no. …/2003, that in the situation referred to source withholding should be made, as a definitive right, based on the "totality of income (capital + interest) at the rate established in the convention applicable to the case", applying in this case the rate of 10% provided for in the Convention between the Portuguese Republic and Ireland to Avoid Double Taxation and Prevent Fiscal Evasion in Matters of Income Taxes, approved, for ratification, by Resolution of the Assembly of the Republic no. 29/94, published in the Official Journal, Series I, of 24-06-1994 (hereinafter "Treaty"). That is, the Tax and Customs Authority understands that source withholdings should have been in greater amounts and not less than those that were withheld, since the values of the commissions collected by B…, SA should not have been deducted from the taxable base.
Beyond the interpretation of article 12 of the Treaty, the Claimant raises the questions of the compatibility of the source withholdings it challenges with the rules of articles 56 and 63 of the Treaty on the Functioning of the European Union (TFEU) and with articles 7(5) and (6), 8(4), and 266(2) of the CRP, as well as articles 13 and 104(2) of the CRP.
4.2. Examination of the Questions
Article 12 of this Treaty establishes the following, insofar as pertinent:
Article 12
Royalties
1 - Royalties arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2 - However, such royalties may also be taxed in the Contracting State from which they arise and according to the laws of that State, but if the person receiving the royalties is the beneficial owner thereof, the tax so levied shall not exceed 10% of the gross amount of the royalties.
The competent authorities of the Contracting States shall agree upon the form of application of this limit.
3 - The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trademark, design or model, plan, formula or process, or for information concerning industrial, commercial or scientific experience.
The term "royalties" also includes payments for assistance that is ancillary and subsidiary to the disclosure of the information or know-how to which the royalties relate.
It results from this article 12(3) (and is not a matter of controversy) that the rents earned by the lessor in the context of operational equipment leasing contracts fall within the concept of "royalties", for the purposes of this Treaty. [14]
It is to be noted that, although the Binding Information invoked by the Tax and Customs Authority refers to rents of financial leasing contracts (which is, at the very least, doubtful that they fall within the concept of consideration for the use or granting of use of industrial, commercial or scientific equipment), in the case at hand there are operational equipment leasing contracts that fall within that concept of royalties.
Equipment lease rents for operational leases are "payments of any kind received as a consideration for... the use of, or the right to use, any... industrial, commercial or scientific equipment", and therefore fall within article 12(2) of the Treaty.
The totality of the values of the rents constitutes consideration received by the lessee from the lessor for the use or granting of use of the equipment and, therefore, it is the gross value of this consideration that in that provision of the Treaty is considered royalties, for this purpose, as the Tax and Customs Authority contends.
Moreover, this is the rule in the taxation of non-resident entities, as explained in point 12 of the Preamble of the CIRC: "As for non-resident entities, the taxation of their income not attributable to a permanent establishment, which will almost always be through source withholding as a definitive right, is situated at values that take into account the nature of the income and the fact that, as a rule, the respective rates apply to gross amounts".
It is for this reason that the source withholding rates applicable, as a definitive right, to income from those non-resident entities are, as a rule, considerably lower than those that would correspond to taxation based on taxable profit. Specifically, in the case of income derived from the use of or granting of use of agricultural, industrial, commercial or scientific equipment, the rate is 15%, in accordance with articles 87(4)(b) and 94(1)(b), (3) and (5) of the CIRC, in the versions in force in the years in question (2012 and 2013).
In fact, if only net income derived from the use of or granting of use of equipment of the types referred to were to be considered, there would be no justification for the rate being lower than that applicable to taxation based on taxable profit, which was 25% in the years referred to (apart from the increases in taxation applicable to resident entities, as autonomous taxes, state tax levy and municipal tax levy).
Thus, by force of article 12(2) of the Treaty, being the Claimant the beneficial owner of the rents, the tax so levied shall not exceed 10% of the gross amount thereof.
In the case at hand, the Corporate Income Tax source withholding made by B…, SA, was 10% of the gross value deducted from the value of the commissions, so the limit provided for in this provision of the Treaty was not exceeded.
But this article 12(2) provides only for a limit on taxation of royalties ("the tax so levied shall not exceed 10% of the gross amount of the royalties"), so there is no legal support for the understanding adopted in the referred Binding Information, which amounts to interpreting it as a rule of incidence, imposing taxation of the holder of royalties through source withholding as a definitive right at the rate of 10% on the gross value thereof.
In fact, the first part of this article 12(2) expressly establishes that "such royalties may also be taxed in the Contracting State from which they arise and according to the laws of that State".
Therefore, the correct interpretation of this provision, applied to rents arising in Portugal generated by operational equipment leasing contracts, is that taxation is made in accordance with the law in force in Portugal, but if it exceeds 10% of the gross value of the rents, it will be reduced to this value.
In any case, if such excess does not exist, taxation of the Claimant cannot exceed that which would be applicable to a resident entity in the same circumstances, by force of the principles of prohibition of restrictions on the freedom to provide services and restrictions on movements of capital stated in articles 56 and 63 of the TFEU, invoked by the Claimant on the basis of CJEU case law, which converge in their application, in this case, with the principle of non-discrimination, stated in article 24 of the Treaty, which establishes that "nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or connected requirement that is other or more burdensome than that to which nationals of that other State that find themselves in the same situation are or may be subjected".
In fact, as has been understood by the CJEU, in particular in the judgments invoked by the Claimant, what is prohibited by those provisions of the Treaty and affects those principles is negative discrimination against non-resident entities as compared with residents in the Member State that applies the taxation.
Now, in the case at hand, as can be seen from the simulations that the Claimant itself presents in article 58 of its pleadings, the tax to be paid if it were taxed as a resident, with deduction of depreciation from the taxable base, would always be greater than what it paid as a non-resident entity:
– for the year 2012 it paid €1,925,610.70 and if it were a resident entity would pay €1,954,313.53;
– for the periods from January to June 2013 it paid €697,843.42 and if it were a resident entity would pay €1,184,483.83.
Thus, it is manifest that negative discrimination of the Claimant as a non-resident entity did not occur, for the purpose of article 24 of the Treaty, so that, the 10% limit provided for in article 12(2) of the same Treaty not being exceeded by the source withholdings made, no provision of this instrument was violated.
On the other hand, since the taxation that would be applicable to the Claimant, if it were a resident entity, is greater than that applied to it through the source withholdings, it is clear that from the application of domestic law no restriction to the freedom to provide services, prohibited by article 49 of the TFEU, results, since it aims only to protect the freedom to provide "in relation to nationals of Member States established in a Member State other than that of the recipient of the provision". In the case at hand, being the taxation made through source withholdings less than that which would be made if the Claimant were resident in Portugal, the taxation in question does not affect its freedom to provide services in Portugal, but rather facilitates it.
This same fact of the taxation made through source withholding being less than that which would be applicable if the Claimant were resident in Portugal prevents one from discerning any restriction on movements of capital, prohibited by article 63(1) of the TFEU. Indeed, that provision does not prevent the application of "relevant provisions of its tax law which establish a distinction between taxpayers not in an identical situation with respect to their place of residence or the place where their capital is invested" [article 65(1)(a) of the TFEU], provided that they do not translate into "arbitrary discrimination or disguised restriction on the free movement of capital" (article 65(3) of the same article). In the case at hand, taxation through source withholding is justified by the impracticability or difficulty of effecting taxation of non-residents based on taxable profit and, being the regime fiscally favorable to the Claimant, no disguised restriction on the free movement of capital can be seen in it.
Being situations in which it is clear that there is no violation of these rules of European Union law and there already being CJEU case law that defines their scope, there is no justification for the preliminary reference to which the Claimant alludes, which would be futile [article 130 of the CPC subsidiarily applicable, by virtue of subparagraph (e) of article 29(1) of the RJAT].
As to the invocation of constitutional provisions connected with these rules of European Union law and the duty of their application by the Tax and Customs Authority (articles 7(5) and (6), 8(4), and 266(2) of the CRP), it appears that their invocation is not pertinent when source withholding acts are at issue that were not practiced by the Tax and Customs Authority and which are those whose annulment the Claimant requests at the conclusion of the request for arbitral pronouncement and which are the subject of the proceeding. Therefore, even if these provisions had been violated by the decision on the review request, the violation could only justify annulment of this decision, but not the source withholding acts, which do not suffer from any of the illegalities that the Claimant imputes to them.
In any case, for what was stated, the decision on the request for official review is not incompatible with the rules of European Union law that the Claimant invokes, so the duty of their application that results from articles 7(5) and (6), 8(4), and 266(2) of the CRP was not breached.
As to the principle of equality, stated in article 13 of the CRP, it prohibits arbitrary discrimination. "The prohibition of arbitrariness constitutes an external limit of the freedom of discretion or decision of public powers, serving the principle of equality as a negative principle of control. In this perspective, the principle of equality requires positively equal treatment of situations of equal fact and diverse treatment of situations of different fact. However, the legal-material binding of the legislator to the principle of equality does not eliminate the freedom of legislative configuration, since it pertains to it, within constitutional limits, to define or qualify the situations of fact or relations of life that are to function as reference elements to be treated equally or unequally. Only when the external limits of "legislative discretion" are violated, that is, when the legislative measure does not have adequate material support, is there an "infringement" of the principle of equality as prohibition of arbitrariness". [15]
The distinction in tax treatment of resident and non-resident companies is justified by obvious reasons of practicability and efficiency of taxation, in face of the difficulty or impracticability of correct determination of taxable profit of non-residents. Therefore, it is a legislative measure of distinction in tax treatment that does not imply arbitrary discrimination.
On the other hand, when the principles of taxation of companies focusing fundamentally on their real income, this is a rule that admits exceptions, as results from its formulation, and in this case, the reasons for practicability and efficiency that would be referred to justify an exception.
Consequently, there is no violation of any of these constitutional provisions.
5. COMPENSATORY INTEREST
Reimbursement of taxes paid and compensatory interest have as their prerequisite wrongful payment of a tax obligation (article 43(1) of the LGT).
Not being demonstrated that source withholdings are illegal, the requests for reimbursement and compensatory interest are accordingly without merit.
6. DECISION
In these terms, the members of this Arbitral Tribunal hereby decide as follows:
a) The exceptions and preliminary issue raised by the Tax and Customs Authority are dismissed as without merit;
b) The proceedings are partially extinguished with respect to the source withholdings that were reimbursed by the Tax and Customs Authority, referred to in paragraph Y) of the findings of fact;
c) The request for arbitral pronouncement is dismissed and the Tax and Customs Authority is absolved of the requests for annulment, reimbursement and compensatory interest.
7. VALUE OF THE CASE
In accordance with article 306(2) of the CPC and 97-A(1)(a) of the CTPP and 3(2) of the Regulation of Costs in Arbitral Tax Proceedings, the case is valued at €4,953,518.49.
8. COSTS
In accordance with article 22(4) of the RJAT, the amount of costs is set at €62,424.00, in accordance with Table I attached to the Regulation of Costs in Arbitral Tax Proceedings.
Having occurred partial mootness of the dispute regarding source withholdings in the total value of €2,456,428.17 [sum of the values reimbursed referred to in paragraph Y) of the findings of fact fixed, without considering the one referring to the taxation period 2014, which is not part of the object of the present case], it is understood that the mootness is attributable to the Tax and Customs Authority, for not having decided the reimbursement requests within the one-year period provided for in article 96(5) of the CIRC (the reimbursement request was submitted on 17-07-2015, as can be seen from document no. 9 attached with the request for arbitral pronouncement, and only in April 2017 were the reimbursements made) and already after the request for arbitral pronouncement had been filed on 20-02-2017.
Thus, in light of article 536(3) of the CPC, it is understood that, in the part where partial mootness of the dispute occurred (49.59% of the value of the claim), responsibility for costs lies with the Tax and Customs Authority.
In the remaining part, having the Claimant lost, the responsibility for costs lies with it (article 528(1) and (2) of the CPC).
In these terms, the Claimant is responsible for costs in the proportion of 50.41% and the Tax and Customs Authority in the proportion of 49.59%.
Lisbon, 17-08-2017
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Luís Menezes Leitão)
(Jorge Bacelar Gouveia)
Frequently Asked Questions
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