Process: 14/2019-T

Date: May 6, 2019

Tax Type: Outros

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 14/2019-T) addresses the supervening inutility of proceedings following administrative annulment of IRC (Corporate Income Tax) assessments and compensatory interest for fiscal years 2013 and 2015. The case originated from a tax inspection that corrected the taxpayer's declared fiscal losses for 2012, converting a loss of €495,086.41 into taxable profit of €2,571,841.06. This correction had cascading effects on subsequent tax years, resulting in IRC assessments totaling €116,619.21. The taxpayer challenged these consequential assessments through tax arbitration after administrative rejection of gracious claims. Crucially, a prior CAAD arbitral decision (Process 717/2016-T), confirmed by the Supreme Administrative Court, had already ruled the underlying 2012 fiscal loss correction illegal. Before the arbitration proceedings concluded, the Tax Authority administratively revoked the contested IRC assessments for 2013 and 2015, recognizing the taxpayer's right to indemnification for undue bank guarantee provision under articles 53 LGT and 169 CPPT. Both parties agreed to terminate the proceedings due to supervening inutility under article 277(e) CPC. The Arbitral Tribunal accepted this position, ordering extinction of the instance and confirming the taxpayer's entitlement to reimbursement of guarantee costs. This decision demonstrates the interconnected nature of multi-year tax assessments and establishes that illegal corrections to fiscal losses in one period invalidate subsequent tax liquidations that depend on those corrections, while affirming taxpayers' rights to compensation for enforcement guarantee expenses when assessments are ultimately annulled.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator president), Dr. Pedro Miguel Bastos Rosado and Prof. Dr. Paulo Jorge Nogueira da Costa (arbitrators members), designated by the Deontological Board of the Administrative Arbitration Centre ("CAAD") to form the present Arbitral Tribunal, constituted on 18 March 2018, agree as follows:

I. REPORT

A..., S.A., a legal entity number..., with registered office at Rua ..., ..., ..., ... Lisbon, hereinafter designated as "Claimant", following the decisions rejecting the Gracious Claims filed against the acts of assessment of Corporate Income Tax ("IRC") and Compensatory Interest, relating to the fiscal years 2013 and 2015, which resulted in the overall amount payable of € 116,619.21 – being € 36,070.92 relating to 2013 and € 80,548.29 relating to 2015 – hereby requested, on 7 January 2019, the constitution of a Collective Arbitral Tribunal, under articles 3, no. 1 and 10, no. 1, subparagraph a) of the Legal Regime for Arbitration in Tax Matters ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, in its current wording.

The Claimant intends: (a) the annulment of the decisions of express rejection of the Gracious Claims filed against the IRC assessments issued under no. 2017..., of 23 October 2017, and under no. 2017..., of 16 March 2017, for the years 2013 and 2015, respectively, including the corresponding compensatory interest, totalling € 116,619.21; (b) the annulment of the aforementioned tax acts; and (c) the condemnation of the TA to indemnify the Claimant for expenses incurred with the constitution and maintenance of bank guarantees provided to suspend the tax enforcement proceedings instituted (nos. ...2017... and ...2017...).

It invokes, for this purpose, a defect of violation of law, which it circumscribes to a single question relating to the impact of the correction made to the tax losses declared by the Claimant in the 2012 taxation period (preliminary issue) in subsequent fiscal years, with the years 2013 and 2015 being under consideration in the present arbitral proceedings. Having been judged illegal the aforementioned correction of the tax losses relating to 2012, by arbitral decision delivered in process no. 717/2016-T of the CAAD, confirmed by the Supreme Administrative Court ("STA"), in the course of an appeal for jurisprudential uniformization, pursuant to Judgment of 30 January 2019, delivered in process no. 1028/17.7BALSB, the Claimant understands that the consequent assessments should likewise be annulled, namely those relating to the fiscal years 2013 and 2015.

The Tax and Customs Authority ("TA") is the Respondent.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 8 January 2019 and followed its normal procedural course, namely with notification to the TA on 14 January.

In accordance with articles 5, no. 3, subparagraph a), 6, no. 2, subparagraph a) and 11, no. 1, subparagraph a), all of the RJAT, the Deontological Board of CAAD designated as arbitrators of the Collective Arbitral Tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 26 February 2019, the parties were notified of this designation, and neither raised any objection, in accordance with the combined provisions of articles 11, no. 1, subparagraphs a) and b) and 8 of the RJAT, 6 and 7 of the CAAD Deontological Code.

The Collective Arbitral Tribunal was constituted on 18 March 2019, as per communication from the President of the Deontological Board of CAAD, under article 11, no. 1, subparagraph c) of the RJAT.

Following notification of the Respondent to present its answer, on 24 April 2019, Claimant and Respondent informed the case file of the "revocation" of the assessment acts that constitute the object of this action.

In this context, the Claimant requested the attachment of subsequent documents, namely annulment of the contested IRC assessments and inherent compensatory interest, which are hereby admitted, and requested extinction of the instance due to subsequent futility of the dispute (dependent on official notification ordering payment of indemnification for undue guarantee provision), and condemnation of the TA to pay arbitral costs.

For its part, the Respondent attached a copy of the order issued on 15 April 2019 by the Deputy General Director of the Income Tax Management Area (by delegation), which proceeded to revoke the assessment acts challenged herein, and likewise a copy of information no. .../2019, on which the order of agreement was issued, which concludes that the Claimant has the right to be indemnified for undue guarantee provision, under article 53 of the General Tax Law ("LGT") and article 169 of the Code of Tax Procedure and Process ("CPPT"), upon proof of the corresponding expenses.

The Respondent concludes in the same sense as the Claimant, advocating extinction of the instance due to subsequent futility of the dispute, under article 277, subparagraph e) of the Code of Civil Procedure ("CPC"), applicable by successive reference from article 1 of the Code of Procedure in Administrative Courts ("CPTA") and article 29 of the RJAT.

Given the unequivocal complete administrative annulment of the controversial tax acts and the consensual position of the parties regarding the effects thereof, in particular, extinction of the instance and payment of indemnification for undue guarantee provision(s) to the Claimant, the Arbitral Tribunal delivers the present decision, dispensing, as unnecessary, with the pleading phase, under the principles of autonomy in conduct of proceedings (article 16, subparagraph c) of the RJAT) and procedural economy.

II. SANCTION

The Tribunal was regularly constituted and is competent ratione materiae, given the constitution of the object of the proceedings (cf. articles 2, no. 1, subparagraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was filed within the period provided for in article 10, no. 1, subparagraph a) of the RJAT.

The parties have judicial personality and capacity, have legitimacy and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

III. REASONING

1. MATTERS OF FACT

With relevance to the decision, it is important to consider the following facts which are held to be proven:

A. A..., S.A., is a company under Portuguese law constituted in 2006, whose main activity consists of non-regular air transport of passengers, under CAE 51100 – cf. Tax Inspection Reports ("TIR"), relating to 2012 and 2013-2015, attached with the request for arbitral pronouncement ("rap").

B. Following an inspection action on the IRC for the 2012 period, the Tax Inspection Services promoted the correction of the tax loss self-assessed by the Claimant, of € 495,086.41, to taxable profit of € 2,571,841.06 – cf. TIR relating to 2012 and 2013-2015, attached with the rap and Information from the IRC Services Directorate no. .../2019, of 12 April 2019, attached by the Respondent.

C. This correction to the taxable matter of IRC for 2012 had repercussions in the years 2013 and 2015, giving rise to the following tax acts:

i. Assessment no. 2017..., of 23 October 2017, relating to the period 2013, with amount payable of € 36,070.92, including compensatory interest;

ii. Assessment no. 2017..., of 16 March 2017, relating to the period 2015, with amount payable of € 80,548.29, including compensatory interest;

iii. Corresponding statements of compensatory interest assessment and account settlement,
– cf. copy of the tax acts in question, attached to the case file with the rap.

D. The Claimant, not conforming to such tax acts, filed Gracious Claims against them, which were rejected by orders of 8 October 2018 – cf. copy of the claim requests and rejection decisions attached with the rap.

E. In disagreement with the rejection of the gracious claims and with the IRC assessments and underlying compensatory interest, relating to the taxation periods 2013 and 2015, the Claimant presented to CAAD on 7 January 2019 the request for constitution of the Collective Arbitral Tribunal that gave rise to the present proceedings.

F. By order of 15 April 2019, the Deputy General Director of the Income Tax Management Area (by delegation) proceeded to revoke the contested assessment acts and ordered payment of indemnification to the Claimant for undue guarantee provision, under information no. .../2019, of 12 April 2019, which is partially transcribed below and is deemed reproduced for due purposes:

"[…]

III – Additional Elements

[…]

Facts,

i) The assessments issued by the Tax Administration by reference to the periods 2013 and 2015 resulted exclusively from the disregard of the tax loss calculated by the Claimant in its self-assessment of 2012.

ii) Following an inspection action on the 2012 period, the inspection services promoted a correction in the amount of 3,066,927.47 €, in view of which the Claimant saw the tax loss self-assessed of 495,086.41 € being changed to a taxable profit of 2,571,841.06 €, which gave rise to an additional IRC assessment of 778,769.52 €.

iii) The correction in question resulted from the inspection services' understanding that the loss realized in the amount of 3,066,927.47 € as a consequence of the sale of a portfolio of credits below the corresponding nominal value is not fiscally deductible as it does not fall within either the regime of fiscal deductibility of losses by impairment on customer credits, or the regime of uncollectible credits provided for in articles 26, 35 and 41, all of the IRC Code.

iv) Not conforming to this position, the Claimant presented a request for arbitral pronouncement to CAAD, to which process no. 717/2016-T was assigned.

Information from the DF Lisbon

v) By reference to arbitral process no. 717/2016-T, the Contentious Justice Division of the Finance Directorate of Lisbon came to inform that an arbitral tribunal decision had already been delivered.

vi) Summarizing, the decision delivered was to uphold the request for declaration of illegality of IRC assessment no. 2016... of 02.07.2016, relating to the taxation period 2012, issued following an inspection action conducted under Service Order no. OI2015....

vii) The information provided states that the said Arbitral Decision became final on 14.02.2019, whereby the deadline for its execution would end on 29.03.2019 (finality + 30 working days).

viii) Considering that the implementation of the decision implies the insertion of an IRC correction document (common DCU) for the period 2012, the same was collected on 06.03.2019 with no. ..., through which the tax situation calculated by the Claimant in its self-assessment was restored.

ix) Thus, from the implementation of this decision resulted a deductible tax loss of 495,086.41 €, which has repercussions on the taxation periods 2013 and 2015.

x) Considering that the assessments contested in the present arbitral request result, therefore, exclusively from the disregard of the tax losses originating in 2012 and deducted by the Claimant in 2013 and 2015, it follows that it is also necessary with respect to these taxation periods to proceed with the collection of the respective correction documents.

xi) Consulted the database that equips the Tax and Customs Authority, more precisely the income application, it is possible to affirm that:

By reference to the period 2013, the DCU no. ... was collected on 14.03.2019, which corrected the field of deducted tax losses (field 309 of table 09) to the value of 126,656.74 €, annulling in its entirety the assessment contested herein, and restoring the situation declared by the Claimant.

Relating to the period 2015, the DCU no. ... was collected on 15.03.2019, which corrected the field of deducted tax losses (field 309 of table 09) to the value of 722,577.43 €, annulling in its entirety the assessment contested herein, and restoring the values of the self-assessment.

xii) In view of the foregoing, it is verified that the decision delivered in Process 717/2016-T CAAD has been implemented, and in consequence the assessments contested in the present Process 14/2019-T are annulled.

Regarding indemnification for guarantee provided

xiii) Indeed, the enforcement proceedings in question resulted from additional assessments promoted by the Tax Administration to the periods 2013 and 2015, in view of correction effected in the period 2012 which was annulled.

xiv) Thus, having the assessments relating to the periods 2013 and 2015 been annulled as a consequence of the arbitral decision delivered regarding the period 2012, it is concluded that the bank guarantee provision is undue, and the Claimant is to be indemnified under article 53 of the LGT and article 169 of the CPPT, provided that it proves the expenses incurred with the guarantee provision.

V – Proposal

In view of all the foregoing, it is proposed to transmit the present information to the DSCJC and to the Finance Directorate of Lisbon for purposes of processing the indemnification for guarantee provided if expenses incurred are proven.[…]"

– cf. Information from the IRC Services Directorate no. .../2019, of 12 April 2019, attached by the Respondent.

G. The Claimant was notified of the annulment of the IRC assessments and compensatory interest identified in point C above, relating to the years 2013 and 2015, and of the issuance of the new substitute assessments enumerated below:

i. Assessment no. 2019..., of 20 March 2019, with amount payable of € 194.10, relating to the fiscal year 2013;

ii. Assessment no. 2019..., of 20 March 2019, with amount calculated of € 0.01, relating to the fiscal year 2015;

iii. Corresponding account settlement statements,
– cf. documents attached by the Claimant in subsequent request.

IV.

2. SUBSEQUENT FUTILITY OF THE DISPUTE

The tax acts that constitute the principal object of the dispute, reported to IRC and compensatory interest of the fiscal years 2013 and 2015, were eliminated by the Respondent already at a moment subsequent to the institution of the present arbitral action, as can be verified from the facts fixed above.

It should be noted that the destruction of acts on the basis of invalidity does not constitute a revocation in the proper sense under the current terminology of the (new) CPA, being designated as "administrative annulment", as provided in article 165 of this Code, applicable by reference from article 29, no. 1, subparagraph d) of the RJAT:

"Article 165

Administrative revocation and annulment

1 - Revocation is the administrative act that determines the cessation of the effects of another act, for reasons of merit, convenience or opportunity.

2 - Administrative annulment is the administrative act that determines the destruction of the effects of another act, on the basis of invalidity."

Administrative annulment produces retroactive effects, according to what is stipulated in article 163 of the CPA.

Both parties request the decree of extinction of the instance on the basis of revocation, that is, "administrative annulment", of the tax acts, as full satisfaction was given to the claims of the Claimant, including indemnification for charges incurred with the provision of guarantees in the tax enforcement process.

In this context, it is important to first note that the impossibility or subsequent futility of the dispute occurs when, by a fact occurring during the pendency of the case, the solution of the dispute ceases to have object, interest or utility, which justifies extinction of the instance (cf. article 277, subparagraph e) of the CPC, applicable by reference from article 2, no. 1, subparagraph e) of the RJAT).

A condition that undisputedly occurs in the present case, with respect to the principal request for invalidation of the IRC and compensatory interest tax acts, since these, by effect of administrative annulment by the Respondent, were, as stated above, eliminated from the legal order by the TA, during the pendency of proceedings instituted precisely for obtaining an annulment pronouncement. Hence the loss of utility of the dispute derives from having achieved the objective sought with the arbitral action: the annulment of the assessments.

With regard to the ancillary request for indemnification for undue guarantee provision, the claim of the Claimant was equally achieved, as the TA determines that this is due, provided that the corresponding expenses are proven, in accordance with the applicable legal regime (articles 53 of the LGT and 169 of the CPPT).

Whereby, in view of the foregoing, it is concluded that extinction of the arbitral instance is warranted.

IV. DECISION

In view of the foregoing, the arbitrators of this Arbitral Tribunal agree in judging the instance extinct due to subsequent futility of the arbitral dispute with the legal consequences thereof.

* * *

The value of € 116,619.21 is fixed to the proceedings, in accordance with articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A, no. 1, subparagraph a) of the CPPT and 306, nos. 1 and 2 of the CPC, the latter pursuant to article 29, no. 1, subparagraph e) of the RJAT.

Costs in the amount of € 3,060.00, to be borne by the Respondent, in accordance with Table I attached to the RCPAT. According to the general regime regarding costs, as the futility of the dispute is attributable to the Respondent, in virtue of the annulment of the tax acts having occurred already after the constitution of the Arbitral Tribunal, the costs of the proceedings are borne by the Respondent, a solution which is drawn from the comparison of articles 4, no. 5 of the RCPAT, 12, no. 2 and 22, no. 4 of the RJAT, and 527 and 536, no. 3 of the CPC, by reference from article 29, no. 1, subparagraph e) of the RJAT.

Lisbon, 6 May 2019

[Text prepared by computer, pursuant to article 131, no. 5 of the CPC, applicable by reference from article 29, no. 1, subparagraph e) of the RJAT]

The arbitrators,

Alexandra Coelho Martins

Pedro Miguel Bastos Rosado

Paulo Jorge Nogueira da Costa

Frequently Asked Questions

Automatically Created

What is supervening inutility of the case (inutilidade superveniente da lide) in Portuguese tax arbitration?
Supervening inutility of the case (inutilidade superveniente da lide) in Portuguese tax arbitration occurs when the object of the proceedings ceases to exist after initiation but before final decision, making judicial resolution unnecessary. Under article 277(e) of the Code of Civil Procedure, applicable to tax arbitration via articles 29 RJAT, 1 CPTA, proceedings are extinguished when the dispute becomes moot. In this CAAD decision, supervening inutility arose because the Tax Authority administratively revoked the contested IRC assessments before the arbitral tribunal rendered judgment. Both parties consensually recognized that the tax acts no longer existed, eliminating the controversy and making continuation of arbitration pointless. The tribunal applied principles of procedural economy and autonomy in case management (article 16(c) RJAT) to declare extinction without proceeding to full merits analysis. This mechanism promotes judicial efficiency by avoiding unnecessary decisions when administrative resolution renders arbitration redundant, while preserving taxpayers' substantive rights including indemnification claims.
Can IRC tax assessments for subsequent years be annulled if the underlying fiscal loss correction is ruled illegal?
Yes, IRC tax assessments for subsequent years can and must be annulled if the underlying fiscal loss correction is ruled illegal, as demonstrated in this CAAD decision. The case involved a 2012 fiscal loss correction from €495,086.41 to taxable profit of €2,571,841.06 that generated consequential IRC assessments for 2013 (€36,070.92) and 2015 (€80,548.29). When CAAD arbitral decision 717/2016-T, confirmed by the Supreme Administrative Court in judgment 1028/17.7BALSB of January 30, 2019, declared the 2012 correction illegal, the derivative assessments for later years became legally unsustainable. The Tax Authority recognized this cascading effect through administrative revocation under article 78 LGT, acknowledging that assessments based on illegal foundational corrections cannot stand. This reflects fundamental tax law principles: tax liquidations must rest on legally valid determinations, and errors in calculating fiscal losses—which carry forward to offset future taxable income under IRC rules—contaminate all subsequent assessments that incorporate those erroneous figures. Taxpayers facing multi-year inspections should therefore challenge foundational corrections, as favorable decisions automatically invalidate dependent assessments for later periods.
How does a CAAD arbitral decision on fiscal losses (prejuízos fiscais) affect consequential tax liquidations for later tax periods?
A CAAD arbitral decision on fiscal losses (prejuízos fiscais) definitively affects consequential tax liquidations for later tax periods by invalidating any assessments that depend on the corrected loss figures. In this case, arbitral decision 717/2016-T ruled illegal the Tax Authority's correction of 2012 fiscal losses, a determination confirmed by the Supreme Administrative Court. This precedent decision had binding effect on fiscal years 2013 and 2015 because Portuguese IRC regime allows fiscal losses to be carried forward and deducted from future taxable profits under articles 52 and following of the IRC Code. When the foundational loss calculation is judicially determined to be incorrect, all subsequent tax liquidations incorporating that erroneous figure become legally defective due to violation of law (vício de violação de lei). The Tax Authority must administratively revoke such consequential assessments under article 78 LGT, as occurred here through order of April 15, 2019. The legal chain is automatic: illegal determination of Year 1 losses → illegal calculation of Year 2+ taxable income → mandatory annulment of Years 2+ assessments. Taxpayers need not re-litigate the substantive loss calculation issue for each subsequent year; the precedent decision's legal effects flow naturally through all affected tax periods, providing comprehensive relief.
What is the procedure for challenging IRC liquidations and compensatory interest through tax arbitration at CAAD?
The procedure for challenging IRC liquidations and compensatory interest through tax arbitration at CAAD follows a structured path established by the Legal Regime for Arbitration in Tax Matters (RJAT, Decree-Law 10/2011). First, taxpayers must exhaust administrative remedies by filing gracious claims (reclamações graciosas) against the IRC assessments under article 68 CPPT within the statutory deadline. After administrative rejection of these claims, taxpayers may request constitution of an arbitral tribunal within 90 days under article 10(1)(a) RJAT. The request must specify the contested acts—here, both IRC liquidations (nos. 2017...) and corresponding compensatory interest assessments totaling €116,619.21—and articulate legal grounds, typically violation of law (vício de violação de lei). CAAD's President accepts the request (article 5(3) RJAT), notifies the Tax Authority, and the Deontological Board designates arbitrators within applicable timeframes (articles 6 and 11 RJAT). A collective tribunal of three arbitrators is constituted for IRC matters. Parties may object to arbitrator appointments within 14 days. The Tax Authority files an answer, and standard arbitral proceedings commence unless, as here, supervening developments warrant procedural modifications. Throughout, taxpayers may suspend tax enforcement by providing bank guarantees under article 169 CPPT, preserving rights to later claim reimbursement of guarantee costs if assessments are annulled.
Can taxpayers claim indemnification for bank guarantee costs when IRC tax assessments are annulled in arbitration proceedings?
Yes, taxpayers can and must claim indemnification for bank guarantee costs when IRC tax assessments are annulled in arbitration proceedings, as explicitly confirmed in this CAAD decision. Article 53 of the General Tax Law (LGT) and article 169 of the Tax Procedure Code (CPPT) establish taxpayers' right to compensation for expenses incurred providing guarantees to suspend enforcement of tax debts ultimately determined to be unfounded. In this case, the taxpayer provided bank guarantees for enforcement proceedings nos. ...2017... and ...2017... to suspend collection while contesting the €116,619.21 in IRC assessments. When the Tax Authority administratively annulled these assessments, recognizing their illegality following the Supreme Administrative Court's confirmation of decision 717/2016-T, the guarantee provision became 'undue' (indevida). Information no. .../2019 of April 2019 specifically concluded the taxpayer had right to indemnification under articles 53 LGT and 169 CPPT upon proof of corresponding expenses. Recoverable costs typically include bank commission fees, guarantee issuance charges, and maintenance fees for the guarantee period. Taxpayers must document actual expenses incurred. This indemnification right is automatic and non-discretionary when assessments are annulled, whether through arbitration, administrative revocation, or judicial decision, reflecting the principle that taxpayers should not bear financial burdens for defending against illegal tax acts. The right encompasses both arbitration proceedings and administrative challenges that result in assessment annulment.