Process: 135/2016-T

Date: October 6, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitral Tribunal Decision 135/2016-T addressed the critical issue of determining the applicable tax regime for transferring reportable losses in corporate mergers under Portuguese IRC law. The case involved a merger deliberated on December 27, 2013, but registered on January 23, 2014, creating uncertainty about which version of Article 75 of the IRC Code applied—before or after the reforms introduced by Law 2/2014 of January 16.

The claimant argued that the merger deliberation date (2013) was determinative, believing that Article 75(4) as amended in 2014 did not apply, and that no prior authorization from the Tax Authority was required. The claimant allegedly relied on information from the AT's Telephone Customer Service Center suggesting authorization was unnecessary when share capital alterations did not exceed 50%.

The Tax Authority countered that the registration date (January 23, 2014) was controlling, making the 2014 version of Article 75(4) applicable. Additionally, the AT argued that even under the 2013 regime, prior authorization was mandatory but never requested by the claimant.

The arbitrator clarified a fundamental distinction between loss deduction and loss transfer—two separate legal concepts. Critically, the tribunal found that Article 75 in both the 2013 and 2014 versions always required a prior authorization request to the Tax Authority for transferring losses in mergers. The regime never dispensed with this procedural requirement, as transfers depended on meeting specific conditions including valid economic reasons, business restructuring strategy, and positive effects on productive structure.

The tribunal distinguished Article 75 (loss transfer) from Article 52 (loss deduction limitations), noting the claimant had confused these provisions. The decision emphasized that authorization was mandatory under both regimes, and that Article 75(4) in 2013 already provided for authorization dispatches setting specific deduction plans. The ruling ultimately upheld the IRC assessment, confirming that the claimant's failure to file the required prior authorization request was fatal to its claim regardless of which regime applied.

Full Decision

ARBITRAL DECISION

The sole arbitrator Nuno de Oliveira Garcia, appointed by the Deontological Council of the Administrative Arbitration Center (hereinafter 'CAAD') to constitute this Arbitral Tribunal (AT), which is singular, decides as follows:

1. Report

1.1

The company 'A…, taxpayer number…, with registered office at …, …-…, … (hereinafter 'Claimant'), requested the establishment of an arbitral tribunal, under the Legal Regime for Tax Arbitration.

1.2

The aforementioned request for arbitral ruling has as its object – according to the petition concluding the initial application – the declaration of illegality, and consequent annulment, of the Corporate Income Tax (IRC) assessment for the year 2014, in the amount of €47,522.29, a tax act better identified in the preamble of the application and attached thereto as doc. no. 1.

Furthermore, the Claimant requests the restitution of the amount paid by it by virtue of the aforementioned assessment, as results from the proof of payment attached to the initial application as doc. no. 20, making no reference to indemnity interest on that amount.

1.3

The core of the motivation for the arbitral request, as appears from the initial application, is based on the Claimant's understanding, allegedly corroborated by the Tax Authority's Telephone Customer Service Center, that the transfer of losses resulting from a merger registered on 23 January 2014, given that it was decided on 27 December 2013, did not require compliance with the requirement provided in no. 4 of article 75 of the IRC Code, as amended by Law no. 2/2014, of 16 January, even though it did not comply with the requirement provided in no. 1 of article 75, now in the version prior to the entry into force of the aforementioned Law no. 2/2014, of 16 January.

1.4

For its part, the 'AT – Tax and Customs Authority' (hereinafter 'AT') disagrees with the direction of the arbitral request, arguing that the information allegedly provided by the Telephone Customer Service Center was merely a 'decontextualized clarification', defending itself further by counter-argument that the relevant date for the merger, with respect to the regime applicable to transferable losses, is that of the registration of the merger – 23 January 2014 – with no. 4 of article 75 of the IRC Code as amended by Law no. 2/2014, of 16 January, and coming into force on 1 January of that year being applicable to it (to the merger).

Furthermore, the AT argues in its reply, as had already been alleged by the IRC Service Management (see doc. no. 17 attached to the additional application) that, notwithstanding the date of the merger registration having occurred already in 2014, the transfer of losses would always be dependent, if one understood that relevance should be given to the registration of the merger project of December 2013, upon a request to be filed with the AT (no. 1 of article 75 in force in 2013) which did not occur (as the Claimant itself recognizes, moreover).

1.5

It was decided by the AT, and did not merit opposition from the parties, to dispense with the meeting of the arbitral tribunal provided for in article 18 of the Legal Regime for Tax Arbitration, as well as final submissions.

2. Sanitation

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2 of the LRAT.

The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (see articles 4 and 10, no. 2, of the Legal Regime for Tax Arbitration and article 1 of Order no. 112-A/2011, of 22 March).

No procedural defects were identified.

3. Factual Matters and Their Justification

3.1

With relevance to the decision on the merits, the Arbitral Tribunal considers the following factuality as proven:

a) On 23.1.2014, the merger of the two companies of the company B…, Lda. into the Claimant was published and definitively registered, with the first being wholly incorporated into the second;

b) As of the date of the final resolution of the merger, the company B…, Lda. presented accumulated tax losses in the amount of €245,471.70;

c) On 20.5.2015 the Claimant submitted IRC form 22 for the fiscal year 2014 in which it indicated:

  • €245,471.70 as transferred tax losses (Field 383), and;
  • €202,546.75 (amount corresponding to 70% of taxable profit – Field 309).

d) The Claimant voluntarily paid the IRC assessment in crisis in the present arbitral proceedings.

3.2

Justification of the Factual Matters

The conviction regarding the facts given as proven was based on the documentary evidence submitted by the Claimant, namely, as to the facts identified above as a), b) and d), docs. no. 2, 5, 8 and 20, all attached as annexes to the initial application, and as to the fact identified above as c) by virtue of it not being contested by the Respondent.

3.3

Facts Not Proven

No essential facts, with relevance for the assessment of the merits of the case, were found that have not been proven.

4. Question to be Decided

The question to be decided in the present proceedings is as follows:

— Is the IRC assessment unlawful insofar as it disregards the deduction of losses transferable by way of a merger registered on 23 January 2014, such disregard being motivated by the provision in no. 4 of article 75 of the IRC Code, as worded in force in 2014?

Of the Legality of Assessments in Crisis

It is necessary to decide on the merits of the request for arbitral ruling, namely, regarding the legality of the IRC assessment in crisis.

It is important to begin, however, by clarifying some points regarding the distinction between the deduction of losses and their transfer to another company. They are, evidently, two different matters – and moments – even though they may be, in some cases, linked. This comes with regard to the query referred to in paragraph 9 of the additional application relating to the alleged information that no prior request for authorization of loss transferability was necessary in the context of a merger given that such operation did not entail an alteration of more than 50% of the share capital or the majority of voting rights.[1] It is based on this alleged information – "[i]n light of all the above mentioned (,..)" can be read at the beginning of paragraph 10 of the additional application – that the Claimant deducts the losses which, in its understanding, would have been transferred by the incorporated company.

However, such is not – nor has it ever been – the case, with or without information from the AT. In effect, article 75 of the IRC Code, in the 2013 version, never dispensed with the submission of a prior request for authorization of loss transfer. Nor would this be possible given that such transfer was dependent on the fulfillment of certain requirements (e.g., valid economic reasons, strategy for business restructuring and development of medium or long-term scope, positive effects on the productive structure), whereby it would always be necessary for the incorporated company, together with the Claimant, to provide the competent administrative entity with all the elements necessary for full knowledge of the operation. Similarly, no. 4 of article 75 of the IRC Code, in the 2013 version, already provided for an authorization dispatch which could even set (and in practice did set) a specific plan for loss deduction.

Something different was the regime provided for in article 52 of the IRC Code, in the 2013 version, which the AT interpreted to mean that the limit provided in its no. 8 was not applicable if there was no alteration of more than 50% of the share capital or majority of voting rights of the company that computed the losses – as seen in Circular within process no. 104/2006, of 4 January 2008.

But, it must be repeated, they are two different things: one, the regime of nos. 8 and 9 of article 52 of the IRC Code, in the 2013 wording, relating to the lapsing of losses due to alteration of more than 50% of share capital or majority of voting rights; another, the regime of nos. 1 and 2 of article 75 of the IRC Code, also in the 2013 version, which always presupposed a prior authorization request in the case of loss transferability.[2]

It is important furthermore, secondly, to make reference to the limitation of the deduction of transferred losses given that, contrary to what appears in the additional application, such limitation already existed in the 2013 regime.

This was what no. 4 of article 75 of the IRC Code referred to – vis-à-vis the setting of a "specific plan for deduction of tax losses to establish the phasing of the deduction during the period in which [the deduction] may be effected and the limits that cannot be exceeded in each tax period" (cit.). And this is also what the Circular within process 1373/2008 (of 31 July 2008) provided for expressly, stating that "where there is an increase in taxable profit, the tax losses computed by the merged company(ies) may be deductible up to the extent of that taxable profit, having as limit, in each fiscal year, the amount of taxable profit of the incorporating company, corresponding to the proportion between the net asset value of the merged company and the net asset value of all companies involved in the operation, determined on the basis of the last balance sheet prior to the merger" (cit.). That is, and contrary to what is alleged, repeatedly, in the additional application, limits to the deduction of transferred losses already existed (well) before 2014 – in the law and in administrative doctrine.

Whereby, and regardless of whether the applicable regime is that in force in 2013 or in 2014, the Claimant acted wrongly in deducting, in the fiscal year 2014, the entirety of the losses only limiting the deduction by no. 2 of article 52 of the IRC Code. Well, at that moment it was not merely article 52 that was at issue but rather, upstream, article 75 of the IRC Code. In effect, one can only deduce in the incorporating company the losses whose transferability was authorized. A company, even if a sister of another, is a legal person distinct from that other. It is not, therefore, by mere virtue of a merger that – automatically(!) – losses transfer from one company to another. Rather, upon being incorporated into another, a company loses the losses recorded by it, naturally. Whereby it would always be necessary to, first, request the transferability of the losses of the incorporated company and, only then, deduce them in the incorporating company.

With these considerations, it is already clear that the Claimant has no merit whatsoever in its claimed position. In any event, and given that it argues that a certain understanding was transmitted to it by the Tax Authority's Telephone Customer Service Center, it is important still to make two additional points.

The first pertains, precisely, to the relevance in the present arbitral proceeding of that supposed information provided by the Tax Authority's Telephone Customer Service Center. For not only do there exist ways for individuals to seek binding the AT (such as the regime provided in article 68 of the LGT) – which did not occur in this case –, but the AT itself is, prima facie, bound by the provisions of Tax Law, as is indeed the case with this Arbitral Tribunal. In effect, no. 2 of article 2 of the LRAT provides that "[a]rbitral tribunals decide in accordance with established law, with recourse to equity being forbidden" (cit.). Now, given that the AT's own binding mechanisms with respect to information to individuals were not activated, and given that the AT – and this Arbitral Tribunal itself – are charged with applying Tax Law, it is therefore evident that it is not possible to ascribe relevance to the supposed information provided by the Tax Authority's Telephone Customer Service Center invoked by the Claimant.

The second point pertains to the merger operation and the determination of the date from which the rights and obligations of the incorporated company are transferred to the incorporating company. And in that sense, there has been coincidence between case law and doctrine regarding the best interpretation of the provision in article 112 of the Commercial Companies Code, applicable ex vis no. 2 of article 11 of the LGT.

Thus, by all means, see the ruling of the STA (2nd Section) within process no. 0925/09 (Rel. Alfredo Madureira), of 10 February 2010. In the same sense, and more recently, see the ruling of the TCA (Tax Contentious), within process no. 9323/16 (Rel. Lurdes Toscano), of 17 March 2016, according to which:

  • "As the appellant rightly states, it results from the law itself on commercial companies – article 112, subsection a) of the Commercial Companies Code (CSC) – that, in cases of merger by incorporation, to which subsection a) of no. 4 of article 97 of the CSC refers [see, by all, RAÚL VENTURA, Merger, Division, Transformation of Companies: Commentary to the Commercial Companies Code, 3rd reprint of 1st ed. 1990, Coimbra, 2006, p. 16 (note 5 to art. 97 of the CSC) and ANTÓNIO MENEZES CORDEIRO (coordinator), Annotated Commercial Companies Code, Coimbra, 2009, p. 323 (note 10 to art. 97 of the CSC)], with the registration of the merger in the commercial registry the incorporated companies are extinguished (…) transmitting their rights and obligations to the incorporating company (…).

That is, also as to this aspect, the Claimant's argument fails.

6. DECISION

In light of the foregoing, it is decided to judge the request for arbitral ruling wholly without merit.

The value of the case is set at €47,522.29 (forty-seven thousand, five hundred and twenty-two euros and twenty-nine cents), in accordance with the provisions of articles 3, no. 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, subsection a) of the CPPT and 306 of the CPC.

The amount of costs is set at €2,142 (two thousand, one hundred and forty-two euros) pursuant to article 22, no. 4 of the LRAT and Table I annexed to the RCPAT, to be borne by the Claimant, in accordance with the provisions of articles 12, no. 2 of the LRAT and 4, no. 4 of the RCPAT.

Let notice be given.

Lisbon, 6 October 2016

The Arbitrator

Nuno de Oliveira Garcia

[1] Without ever specifying which company it refers to, though it is admitted that reference is intended to be made to the incorporating company.

[2] A matter to which we draw attention in our text "Losses, Less and Gains – Cases of Application of Specific Anti-Avoidance Norms of the IRC Code" in Tax, no. 29 (2007).

Frequently Asked Questions

Automatically Created

What is the relevant date for determining the tax regime applicable to loss carryforwards in a corporate merger under Portuguese IRC?
The arbitral tribunal indicated that the registration date is the relevant date for determining the applicable tax regime in mergers. The Tax Authority argued that the merger registration date of January 23, 2014 controlled, making the 2014 version of Article 75 applicable. However, the tribunal's analysis revealed this distinction was ultimately immaterial to the case outcome, as both the 2013 and 2014 versions of Article 75 required prior authorization requests that were not submitted by the taxpayer.
Can tax losses be transferred in a merger registered in 2014 if the merger was deliberated in 2013 under Article 75 CIRC?
No, tax losses cannot be transferred in a merger registered in 2014 (even if deliberated in 2013) without complying with Article 75 requirements. The tribunal definitively established that regardless of whether the 2013 or 2014 regime applied, Article 75 always mandated filing a prior authorization request with the Tax Authority. The claimant failed to submit this required request, making the loss transfer impermissible under either version of the law. The deliberation date alone cannot exempt taxpayers from statutory authorization requirements.
What requirements does Article 75(4) of the Portuguese IRC Code impose on the transmission of tax losses in mergers after the 2014 reform?
Article 75(4) of the IRC Code, both before and after the 2014 reform, imposes mandatory requirements for transmitting tax losses in mergers. The provision requires: (1) submission of a prior authorization request to the Tax Authority; (2) demonstration of valid economic reasons for the merger; (3) evidence of a business restructuring and development strategy of medium or long-term scope; (4) proof of positive effects on the productive structure. The authorization dispatch may establish a specific plan for loss deduction. These requirements existed in both the 2013 and 2014 versions of the statute.
Does a prior request to the Portuguese Tax Authority (AT) remain necessary for transferring reportable losses in corporate mergers?
Yes, a prior request to the Portuguese Tax Authority remains absolutely necessary for transferring reportable losses in corporate mergers. The CAAD tribunal emphatically clarified that Article 75 'never dispensed with the submission of a prior request for authorization of loss transfer' in either its 2013 or 2014 versions. This procedural requirement is mandatory because loss transfers depend on satisfying substantive conditions that require AT evaluation. The incorporated company and acquiring company must jointly provide all necessary documentation for full administrative assessment of the merger operation.
How did CAAD Arbitral Tribunal 135/2016-T rule on the conflict between merger deliberation date and merger registration date for IRC loss reporting?
CAAD Arbitral Tribunal 135/2016-T ruled that the conflict between merger deliberation date (December 27, 2013) and merger registration date (January 23, 2014) was ultimately immaterial to the case outcome. While the Tax Authority argued that the registration date controlled the applicable regime, the tribunal found that under both the 2013 and 2014 versions of Article 75, a prior authorization request was mandatory. Since the claimant failed to file any such request, the IRC assessment disallowing the loss deduction was upheld. The tribunal also clarified the claimant had confused Article 52 (loss deduction limits) with Article 75 (loss transfer authorization).