CAAD Case 152/2018-T: IRC Payments to Entities in Favorable Tax Regimes – Tax Deductibility Ruling

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sérgio de Matos and José Nunes Barata, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 27 March 2018, A... LDA., with Tax Identification Number..., with registered office at Rua..., no...,...,...,...,...-... Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228th of Law no. 66-B/2012, of 31 December (hereinafter, briefly designated RJAT), seeking the declaration of illegality of the act of assessment of Corporate Income Tax and autonomous taxation no. 2017... and corresponding compensatory interest, for the fiscal year 2014, and assessment of Corporate Income Tax and autonomous taxation no. 2017... and corresponding compensatory interest, for the period 2015, in the total amount of € 573,097.15.

To substantiate its request, the Claimant alleges, in summary:

• Omission of the right to a hearing, provided for in article 60(a) of the General Tax Law, with respect to the assessment of compensatory interest;

• assessment 2017... should be annulled, as it is considered that the expenses which the Tax Administration deemed non-deductible in the amount of € 897,883.50 in 2014 are verified;

• defect of lack of grounds for the assessments of compensatory interest.

On 28-03-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration.

The Claimant did not appoint an arbitrator, wherefore, pursuant to the provisions of article 6(2)(a) and article 11(1)(a) of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline.

On 21-05-2018, the parties were notified of these appointments, and neither expressed a wish to reject any of them.

In accordance with the provisions of article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 12-06-2018.

On 03-09-2018, the Respondent, duly notified for this purpose, presented its defence solely by objection.

On 18-10-2018, the meeting referred to in article 18 of the RJAT was held, at which party statements were made and witnesses presented by the Claimant were examined.

Having been granted a deadline for the presentation of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

It was indicated that the final decision would be delivered by the deadline set by article 21(1).

The Arbitral Tribunal is materially competent and is duly constituted, in accordance with articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal standing and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceeding is not affected by any nullities.

Thus, there is no obstacle to the determination of the case.

Having reviewed all matters, it is appropriate to rule as follows:

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

The Claimant has as its corporate purpose "Construction of own enterprises for commercialisation, organisation and construction of civil, mechanical or electrical works, works contracts or own enterprises or for third parties, organisation, supervision, study and preparation of projects of any nature. Purchase, sale and administration of immovable property, namely purchase of land and resale of properties acquired for this purpose, capital investment in immovable property and promotion of urbanisation studies exempt from Transfer Tax. Hotel management and similar activities".

Company B... (hereinafter, "B...") was established on 27-09-2012, and has as sole shareholder Mr. C..., holder of 600,000 shares with a value of 1 Hong Kong dollar, corresponding to the entire capital, and who is its sole administrator.

B... operates on all continents, except the African continent, and provides services by providing the conditions for obtaining residence authorizations in "Golden Visa" programmes or similar, for Cyprus, Greece, Ireland, Malta, Portugal, Spain and the United States of America.

B... is, and was already in 2014, a company with more than 17 offices, 750 associates and 600 employees and was awarded by the Luso-Chinese Chamber of Commerce and Industry, on 29 October 2015, with the "Award for Business Excellence".

The first contacts between the Claimant and B... took place in November 2012.

Mr. D... (Project Director) and Mr. E... from B... conducted prospection, with a view to obtaining promoters and properties eligible for the "Golden Visa" programme, and in that context contacted Engineer F..., manager of the Claimant, at its sales stand in Lisbon.

Engineer F... represented various companies which, individually, did not meet the requirements as to the quantity of available properties, but together the Claimant, ..., ..., ... and ... already met those requirements, namely as to the number of units in the same location, the operation being identified as "...", in Lisbon, and "..." and "..." in the Algarve.

The Claimant entered into a contract with B... pursuant to which the latter undertook to promote and publicise the Claimant's properties to Chinese citizens, in return for payment by the Claimant of a commission for each property sold to a buyer referred by that company.

No commission was payable without actual sale of the property and receipt of the price.

B..., prior to and during the term of the said contract, carried out the following activities:

• conferences and seminars in China on the advantages and benefits of living in Portugal;

• preparation of brochures and other promotional material on Portugal and the national real estate market, for distribution in China;

• assistance to Chinese citizens in obtaining visas for entry and stay in Portugal;

• accompaniment of Chinese citizens during travel to Portugal for visits to properties;

• payment of travel, accommodation and food expenses, as well as other expenses related to the stay of Chinese citizens and property visits;

• interpreter service, hiring translators;

• hiring of drivers to transport Chinese citizens in Portugal, namely between the airport and the hotel, foreign affairs and border services, banks and restaurants and the main tourist sites in Portugal;

• accompaniment of Chinese citizens in opening bank accounts in Portugal;

• assistance to Chinese citizens, after acquisition of the properties, in decorating the properties and in connecting electricity, gas and water;

• provision of legal services, hiring lawyers.

B... held conferences and seminars throughout China, namely in the cities of Beijing, Shanghai, Shenzhen, Dongguan, Guangzhou, Chongqing, Nanjing, Wuhan, Tianjin, Chengdu, Zhengzhou, Qingdao, Shantou and Wuxi, on the advantages and benefits of living in Portugal.

These conferences were attended by members of the Government of the People's Republic of China, ambassadors, consuls and representatives of the Portuguese investment and external trade agency (AICEP), as invited speakers.

B... hired former footballer Luís Figo to promote Portugal as a good destination to live and invest.

Between the developer companies, represented by Engineer F..., and representatives of B... regular status meetings were held regarding pending matters.

Initially, the commission value agreed to pay to B... was 15%, and during this percentage, no properties were sold.

Subsequently, in September 2013, the commission value, by imposition of B..., changed to 20%, and also during this percentage, no properties were sold.

By agreement of 10-10-2013, entering into force in December 2013, the commission changed to 25%.

In January 2014, the Claimant increased the price of the units by 5% in order to accommodate the increase in commission.

The commission value was imposed by B..., with the Claimant having no possibility of discussing its value.

All payments by the Claimant to B... were made by bank transfer.

On the payments made to B..., the Claimant self-assessed and paid VAT at the rate of 23%, in accordance with article 6(6)(a) of the applicable VAT Code.

The commission of 25% paid by the Claimant in relation to the price received from the sale of properties in the Algarve is similar to that paid by other companies in the real estate sector to commission agents who provided real estate brokerage services similar to presentation of client nationals from extra-Community countries for acquisition of properties, with a view to obtaining Golden Visas.

The commission paid by the Claimant, which was around 20%, in relation to properties located in Lisbon is similar to that paid by other companies in the real estate sector to commission agents who provided real estate brokerage services similar to presentation of client nationals from extra-Community countries for acquisition of properties, with a view to obtaining Golden Visas.

G... SA, which contracted with other brokerage companies for the Chinese market, paid on 07 October 2014, the amount of € 113,400.00 to H... LDA, for brokerage services, in a sale of a property for the price of € 630,000.00, the commission corresponding to 18% of the price.

The corresponding invoice was accepted by the Tax Administration in the course of a Tax Inspection carried out following service orders OI2016... and OI2016..., because H... LDA has its head office in Macau.

The company "I... SA" in 2014 paid a commission of 20% to "J... LDA", payment which was accepted by the Tax Administration because the beneficiary of the payment has its registered office in..., in Lisbon.

The description of some of the invoices issued to the Claimant by B... contains the generic description "Marketing Consultancy", and others contain descriptions of service provision such as:

• identification of investors with a focus on receiving residence authorization;

• creation of technical records for each property and ensuring implementation of designs in accordance with law and other technical aspects;

• preparation of promotional material for each property with detailed description;

• promotion activities in China (organisation of seminars, roadshows, national TV advertising campaign, etc);

• Direct mailings to selected customers;

• Supply of air and ground transport for potential customers within China;

• Organisation of inspection visits to Portugal for potential buyers, accommodation, short excursions to sites and places of interest, as well as islands;

• Property viewing, opening of bank accounts, legal service with lawyer and notary;

• Organisation of health examinations, obtaining tax number, etc;

• Technical, legal and financial due diligence;

• Carrying out of all procedures and preparation of necessary documents;

• Creation and maintenance of web platforms;

• After-sales service;

• Issuing of process leading to residence authorization.

B... handled all documentation required by the Portuguese Foreign Service with the Chinese State, as well as authorizations and arrangements so that clients could verify transfers of hundreds of thousands of euros.

B... had partners in China who attracted clients, with whom it divided the commission.

In 2014, account SNC 62215 – FSE – Specialized Services – Marketing and Advertising showed a balance of € 897,883.50, which corresponded to expenses paid for services to B..., with head office in Hong Kong.

The expenses accounted for as advertising and marketing in the context of the Claimant's activity were allocated to the following properties:

[Property details omitted for brevity]

The Claimant made 14 sales, but the visits of Chinese citizens brought by B... to the properties of the Claimant, and by other companies promoting the project identified as – Capital Building –, were often in greater numbers.

On 31-12-2013, the Claimant had a financial obligation with the banking system in the amount of four million seven hundred and fifteen thousand euros, to which was added the remaining indebtedness of the entire group of companies, where the persons of the partners and managers coincide.

By way of interest, the Claimant paid the banking system from 2006 to 2013, under the construction financing contract, the following amounts:

• in 2006, €164,000.00;

• in 2007, €187,000.00;

• in 2008, €160,000.00;

• in 2009, €160,000.00;

• in 2010, €175,000.00;

• in 2011, €320,000.00;

• in 2012, €343,000.00;

• in 2013, €363,000.00.

More than 3,000 emails were exchanged between the companies of manager F... and B...

The sale of properties proceeded as follows:

A potential buyer referred by B... arrived in Portugal and was received by a translator who accompanied him during his stay in Portugal and by a driver, both hired by B..., who accompanied him on all his trips in Portugal, to the properties and to some reference tourist sites in terms of gastronomy, landscape and culture;

Potential customers travelled to the law office "K..." and "L...", where they were presented with the Golden Visa programme in Portugal and where they issued a power of attorney in favour of one of the lawyers from those offices;

The potential customer began a visit to 10 reference real estate developments and, of these, chose 2 or 3 to begin negotiations;

Once the deal was closed, B... provided the "Property Purchase Confirmation Form", written in Mandarin and English, with the terms of the transaction, identification of the property, price, payment terms and expected date for the deed.

This document was signed by the customer and the developer and, subsequently, attached to the promise to purchase and sale agreement;

The promise to purchase and sale agreement was drawn up by the law office "K..." or "L...", contracted by B..., and signed by the customer, the developer and the translator;

The developer issued the receipt corresponding to the deposit (reservation) received, which was followed by a visit to the Foreign Service and Borders to collect biometric data;

After the deadline stipulated in the promise to purchase agreement had elapsed, the purchase and sale agreement was concluded.

The law offices "K..." and "L..." had offices in China and, on behalf of B..., prepared and monitored the entire operation.

Unit "R", type T/1, of the urban property which is part of the development designated by "..." located in..., Albufeira, was sold on 21 May 2008 by the Claimant to Mr. M... for the price of € 164,000.00, while unit "AA", type T/1, identical to unit "R", of the same property, was sold, with the intermediation of B..., on 21 March 2014 to N..., for the price of 279,850.00.

Units "V" and "X" of the urban property which is part of the development designated as "..." located in..., Albufeira, were sold on 4 June 2007 for the total amount of € 224,000.00, and an identical "package", also formed by two units, "O" and "L", of the same property, was sold, with the intermediation of B..., to O..., on 15 January 2015, for the total amount of € 527,600.00.

Unit "U" of the urban property which is part of the development designated as "...", located in..., Albufeira, was sold on 6 January 2011 for € 145,000.00, while an identical unit, identified by the letter "V", of the same property, was sold to P..., with the intermediation of B..., on 16 May 2014, for the price of € 261,300.00.

B... brought an action against the Claimant seeking payment of the amount of € 130,900.00 as commission on a sale, an action which proceeded under no..../15...T8LSB by the Central Court of Lisbon – ... Civil Section –..., and the Claimant was ordered to pay.

The Claimant was subject to an external inspection procedure, relating to the fiscal years 2014 and 2015, for purposes of monitoring compliance with tax obligations, in compliance with service orders no. OI2016... and OI2017....

On 3 July 2017, the Inspection Services notified the Claimant to, on 2 August 2017, present at the company's registered office, documents providing actual proof of compliance with the requirements set out in article 23-A(1)(r), (7) and (8) of the Corporate Income Tax Code, for purposes of acceptance of the tax deductibility of the expenses incurred with invoices issued by B....

On 2 August, the company's partner-manager, F..., informed that, at this stage of the procedure, the company did not intend to provide any further supplementary information, beyond those already collected in the course of the inspection action.

Following the said inspection, the Tax Administration concluded that there were non-deductible expenses in the amount of € 897,883.50 in 2014, relating to payments for mediation services.

The Claimant was notified of the Draft Inspection Report and, if desired, to exercise its right to a hearing, in accordance with article 60 of the General Tax Law and article 60 of the Regulations for Procedures and Process in Tax Matters.

The Tax Inspection Services issued the Final Tax Inspection Report, which contains the following:

[Report details omitted for brevity]

With regard to compensatory interest in the Final Inspection Report, the following is stated:

[Details omitted for brevity]

The Claimant was notified of the corporate income tax assessment statements no. 2017... and 2017... and of the assessment of compensatory interest, which incorporate the corrections made in the course of inspection.

From the said assessments, the applicable rate or rates and the period of calculation of the compensatory interest assessed do not appear, only the amount of interest assessed being indicated and the following note:

[Note details omitted for brevity]

A.2. Facts Established as Not Proven

There are no facts of relevance to the decision that should be considered as not proven.

A.3. Substantiation of Proven and Not Proven Matters of Fact

With regard to matters of fact, the Tribunal does not have to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from not proven matters (see article 123(2) of the Code of Procedure and Process in Tax Matters and article 607(3) of the Civil Procedure Code, applicable by virtue of article 29(1)(a) and (e) of the RJAT).

Thus, the facts relevant to the determination of the case are selected and delimited according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (see previous article 511(1) of the Civil Procedure Code, corresponding to the current article 596, applicable by virtue of article 29(1)(e) of the RJAT).

Therefore, having regard to the positions taken by the parties, in light of article 110(7) of the Code of Procedure and Process in Tax Matters, the documentary evidence and the procedure file attached to the case, as well as the witness evidence and party statements produced, the facts listed above were considered proven, as relevant to the decision, taking into account that, as was stated in the Judgment of the Southern Administrative Court of Justice of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

In particular, the facts contained in points 5, 6, 7, 10 to 13, 19, 22, 23, 28, 29, 36 and 37 were affirmed or confirmed, in accordance with the available documentary evidence, by the witnesses examined, as well as by the Claimant's representative, F....

Thus, witness Q..., who operates in the Algarve real estate market, confirmed the existence of services provided by B... to competing companies in that market, as well as the payment of commissions similar to those paid by the Claimant, which will have even been subject to inspection by the Tax Administration, without corrections being made.

Witness R..., manager of another company, G..., showed in-depth knowledge of the state of the real estate market at that time, as well as of the modus operandi of B... and of its results, in accordance with what was established as proven.

Witness S... also gave evidence in a coherent and credible manner, relating his intervention in the pre-sale, sale and after-sale procedures, in articulation with the representatives and advisers of B....

As a party, the statements of F... were also taken into account, which, corroborating the accounts of the examined witnesses, further clarified the concrete economic and financial situation of the Claimant, contextual to the need to accept the conditions imposed by B....

Allegations made by the parties and presented as facts, consisting of strictly conclusive assertions, not susceptible to proof and whose truthfulness would have to be assessed in relation to the concrete matter of fact consolidated above, were neither established as proven nor not proven.

B. ON THE LAW

The Claimant first petitions for the annulment of the acts carried out by the Tax Administration of Corporate Income Tax assessment relating to 2014, titled by assessments no. 2017... and, relating to 2015 titled by assessment no. 2017..., for lack of a hearing of the taxpayer before the assessment of compensatory interest, in accordance with article 60(1)(a) of the General Tax Law, an omission of formality which, in the Claimant's view, implies the invalidity of the final assessment act.

First and foremost, it is believed that the Claimant manifestly has no reason on this latter point since, as abundant tax doctrine and case law affirm, the tax act is by nature divisible, the alleged invalidity could only justify the partial annulment of the assessments in question, in the part relating to compensatory interest.

On this point, the Claimant alleges, in short, that while it is true that it was heard before the final report was issued, it was not heard on the matter of compensatory interest, this matter being entirely new, only appearing in the assessment notes already after the hearing of the taxpayer.

In fact, examining the matter of fact established, it is verified that there is no element in the file that allows demonstration that the Claimant was heard before the conclusion of the tax inspection report, with regard to the possibility of compensatory interest being assessed, and it is undisputed that these are not an automatic consequence of the tax assessment.

From this it follows that, in principle, one should conclude that the alleged omission of the duty of prior hearing in the matter in question, and the consequent granting of the request, in this part, with the annulment of the compensatory interest assessments in question.

Nevertheless, article 25(2) of the RJAT provides that:

"The arbitral decision on the merits of the claim that terminates the arbitration procedure is still subject to appeal to the Supreme Administrative Court when it is in opposition, on the same fundamental question of law, with a judgment delivered by the Central Administrative Court or the Supreme Administrative Court."

In this way, and also taking into account the duty of uniform application of the Law (see article 8(3) of the Civil Code), arbitral tribunals should decide in accordance with what is the settled case law of the superior courts of the administrative and tax jurisdiction.

On the matter in question, it has been understood that "Compensatory interest functions as a penalty clause for the delay in the assessment of tax, attributable to the taxpayer, being integrated in the assessment thereof, from where it derives part of its substantiation, and also requiring its own segment of substantiation, but their assessment does not require the law that the Tax Administration proceed with the prior hearing of the taxpayer in an autonomous and distinct manner from the hearing with regard to the tax from which it originates." and that "Having the Tax Administration heard the taxpayer with regard to the tax from which the compensatory interest assessment originates, it is no longer legally required to proceed with a new hearing in an autonomous and distinct manner".

In this same judgment, it can further be read that:

"- Returning, once more, to the prerequisites of compensatory interest assessment, as an autonomous assessment, although integrated in the tax assessment, it is evident that this must possess a minimum of its own substantiation with regard to, from the outset, the calculation base, the applicable rate, the period to which it relates, but also and equally, as to the fault necessary for its imputation to the taxpayer; and it will be with reference to that same substantiation that compliance with the power/duty of the Tax Administration to provide the taxpayer with the right of prior hearing will have to be assessed.

• Now, with regard to the rate, calculation base and period to which compensatory interest relates, no margin of discretion is given to the Tax Administration, which only has and can specify what is expressly set out in the law, that is, as to those prerequisites, the action of the Tax Administration consists of a strictly bound procedure, whereby its action in that domain is not susceptible to being influenced by any arguments that the appellant could raise, in the sense of influencing the assessment act, by seeking the application of a different rate, or of a different period of time or of a different calculation base, since these cannot be other than those determined by the applicable legal order.

• It is evident that the assessing entity, by oversight or for another reason, may heed, with regard to such prerequisites, elements that it should not heed; Only that such eventual circumstantiality does not constitute grounds for the exercise of the right to prior hearing, but rather only that express and clear reference to it will have to form part of the substantiation of the assessment so that its addressee can react against it, for breach of law.

• Consequently, and as regards these grounds, what is understood is that the taxpayer does not have any right to prior hearing before the assessment of compensatory interest, which means that not having been given the exercise of the same does not constitute even any procedural irregularity and, much less, with invalidating effects on the final assessment act.

• As regards fault, as a prerequisite of the interest in question, it is understood that, being a subjective judgment, it implicitly entails that the taxpayer, in the exercise of a hearing, may bring to the procedure, elements not previously available to the Tax Administration, which may remove it, in light of the elements relevant to its assessment, in accordance with the above-mentioned terms; For this reason, it cannot be concluded that the mere fact of knowledge of the delay in the tax, on the part of the taxpayer, of the applicable rate and of the period of time, inexorably imply the act of its assessment, whereby in this scope it is understood, on the one hand, as an essential formality to be observed, the notification of the addressee of the final tax act, to exercise, if desired, the right of hearing, and on the other, that the omission of such power/duty is insusceptible of being degraded into a non-essential formality.

• Only that what has just been said does not mean/imply that reason lies on the side of the appellant.

• For, as accounted for above, fault is a legal concept to be extrapolated from the adequate and relevant factuality, whereby its removal passes through the demonstration of the lack of adherence to reality of that on which the assessing entity bases that conclusive judgment, through its inadequacy for such effect from the outset through relevant justification capable of excluding it.

• Now, in the case of compensatory interest and following what has been said above, the factuality on which the judgment of fault must be rooted cannot be other than that which underlies the determination of tax understood as deficient, precisely to the extent that they are integrated therein, in accordance with article 35(8) of the General Tax Law.

• But, being so, if on the one hand it is inexorable that the taxpayer must be given the exercise of the right of hearing, before the assessment of compensatory interest, under penalty of invalidity of this final act, it is equally axiomatic that the exercise of that right is satisfied, as regards fault, with providing the same right to exercise before the assessment of the tax to which the compensatory interest relates, since it will be there that he will have to contest the adherence to reality, or justification, of the circumstances of fact that may constitute the ground of that judgment of censure.

• Now, in the present case, it is demonstrated that the appellant was given the right of hearing, with the notification made to him of the draft report of the inspection action and from which appear, as stated in the appealed decision, all the circumstances of fact that led the Tax Administration to assess him by using indicative methodology, as well as the calculation criteria for the amount, which means, in line with what was just stated, that no other notification had to be made to provide him with the exercise of prior hearing, with reference specifically to the assessment of compensatory interest, whether because such formality must be considered complied with by the notification made to him for that same purpose with reference to the tax, whether because, as to the remaining prerequisites of compensatory interest assessment, they consist of a strictly bound conduct of the Tax Administration."

This understanding was sanctioned by the Supreme Administrative Court which understood that:

"where the taxpayer is heard in any of the phases of the procedure – in the case the respondent was notified to comment on the conclusions arising from the tax inspection action, as per the facts of paragraphs B) to F) of the evidence – it should only be heard before assessment in the event of invocation of new facts on which it had not commented.

The appealed judgment does not mention that new facts were invoked.

However, the respondent, in the conclusions of its counter-arguments, came to say that in the assessment were considered "new elements", since the assessment contains compensatory interest and from the said draft of corrections there was no prior mention of those same compensatory interest.

The truth, however, is that the assessment of compensatory interest cannot be considered a "new fact" for purposes of the right of hearing, even because the same vary depending on the period of time considered.

By "new fact" should be understood that which may determine the alteration of the tax, the corrections, etc. The assessment of interest is merely an arithmetic operation whereby by itself it does not justify the right of hearing.

Thus, even if at the time of invitation to exercise the right of hearing the compensatory interest was not assessed, the Tax Administration was not obliged to hear the respondent again just because the interest was assessed."

Thus, it should be considered that by means of the notification to the Claimant for the exercise of the right of hearing on the Tax Inspection Report relating to the tax on which compensatory interest subsequently came to be assessed, the Tax Administration sufficiently complied with its duty of prior hearing with regard to these, and the arbitral request should be rejected on this point.

Next, the Claimant petitions for the annulment of assessment no. 2017..., as it is considered that the expenses which the Tax Administration deemed non-deductible in the amount of € 897,883.50 in 2014 are verified.

Let us examine this.

With regard to the correction and autonomous taxation relating to the expenses with payments to company B..., the Tax Administration considered, in short, that the Claimant did not demonstrate, as was its responsibility, the actuality of the operations nor the reasonableness of the value corresponding to the expenses it accounted for, considering, summarily, that:

• the Claimant did not produce sufficient material proof that would allow assessment of the intrinsic nature of the expense, or its congruity with the business activity, and therefore it was not possible to assess its normal character in light of the activity developed;

• there is likewise no proof that would allow assessment of whether the amount of services charged by non-resident entities is appropriate, by comparison with what would be applicable by other entities in an equivalent context;

• there is likewise no specific proof that would allow assessment of the real importance of the benefits gained by entering into a contract with that entity based in Hong Kong;

At issue is the application of articles 65 of the Corporate Income Tax Code, in the wording of Law no. 64-B/2011, of 30 December (in force in 2013) and 23-A(1)(r) (in force in 2014), and 88(8) of the same Code, which establish the following, to the extent relevant to the case:

"Article 65

Payments to non-resident entities subject to a privileged tax regime

1 – Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and therein subject to a clearly more favourable tax regime, are not deductible for purposes of determining taxable profit, unless the taxpayer can prove that such expenses correspond to actually executed operations and do not have an abnormal character or an excessive amount.

2 – It is considered that a natural or legal person is subject to a clearly more favourable tax regime when the territory of residence thereof is included in the list approved by an Ordinance of the Minister of Finance or when it is not taxed therein in income tax identical or analogous to personal income tax or corporate income tax, or when, with regard to the amounts paid or owed mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax which would be due if the said entity were considered resident in Portuguese territory.

3 – For purposes of the provision in the previous number, taxpayers must possess and, when requested by the Directorate-General of Taxes, provide the supporting elements of the tax paid by the non-resident entity and of the calculations made for the determination of the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence thereof is not included in the list approved by an Ordinance of the Minister of Finance.

4 – The proof referred to in number 1 must take place after notification of the taxpayer, made with a minimum notice of 30 days."

"Article 23-A

Expenses not deductible for tax purposes

1 - The following expenses are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the tax period: (...)

r) Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory, and therein subject to a tax regime identified by an Ordinance of the member of Government responsible for the finance area as a clearly more favourable taxation regime, unless the taxpayer proves that such expenses correspond to actually executed operations and do not have an abnormal character or an excessive amount."

"Article 88

Autonomous taxation rates

(...)

8 - They are subject to the regime of number 1 or 2, as applicable, the applicable rates being respectively 35% or 55%, the expenses corresponding to amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and therein subject to a clearly more favourable tax regime, as defined in accordance with the Code, unless the taxpayer can prove that they correspond to actually executed operations and do not have an abnormal character or an excessive amount. (...)

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers presenting a tax loss in the period to which any of the tax facts referred to in the previous numbers related to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from corporate income tax."

The territory of Hong Kong was included, in 2014 and 2015, in the "list of countries, territories and regions with privileged taxation regimes, clearly more favourable", which appears in Ordinance no. 292/2011, of 8 November, which amended Ordinance no. 150/2004, of 13 February.

As stated, at issue in the case sub iudice is the proof, imposed by both of the above-cited rules, with regard to the actuality of the operations and the normal character or lack of excessiveness of the operations, proof which, in accordance with the applicable rules concerning burden of proof, falls on the Claimant.

a.

Regarding the first of the points referred to, it is not considered that any doubt is justified regarding the occurrence of the operations in question.

In fact, as results from the proven matters and as the Tax Administration itself recognizes in the Inspection Report, the Claimant had exponential growth in the volume of sales from 2013 to 2014, corresponding to a positive percentage variation of 317.88%, brought about by the increase in property sales to citizens from China.

Furthermore, commercial documentation and correspondence exchanged between the Claimant and B... relating to these activities was attached to the file, and the evidence produced at the hearing was to that effect, by those who had direct contact with these activities in Portugal.

It is further noted that the actual payment of the amounts invoiced and accounted as expenses is not questioned, and it is verified that the Claimant self-assessed and paid VAT to the State on those amounts.

Finally, as was stated in arbitral case 198/2017T, which dealt with a situation analogous to that in the present case:

"Moreover, the fact, which is not disputed, that the Claimant sold a large quantity of properties to Chinese citizens is indirect but convincing evidence that there was efficient canvassing activity, for without this it is not clear how they could have known that the Claimant had properties for sale. On the other hand, the fact that the remuneration of B... was paid only if it resulted in the completion of the sales, ensures that there were no payments which did not have underlying canvassing activity.

Therefore, it is not justified that it not be considered proven that the expenses incurred by the Claimant with payments to B... correspond to actually executed operations.

In this context, it is manifestly unjustified to require, for proof of the actuality of the activity developed by B..., the "identification of human resources involved, hours applied and hourly rates per consultant", "evidence of meetings, surveys"; "knowledge of whether those who executed it have professional experience", for, beyond being information that normally will not be accessible to one who contracts a foreign company for canvassing services, there will be little concern on the part of the purchaser when it comes to payments which are made only based on results.

It should even be said that the requirement of "identification of human resources involved" and the determination of their professional experience in an activity with the dimension described is beyond the limits of reasonableness, for, in its literal reading, it will encompass the identification of all those who provided airline transport services, services in restaurants and hotels, taxi drivers, etc."

Thus, it must be considered that sufficient proof exists that the payments in question correspond to actually executed operations.

Regarding the Respondent's considerations, based on the circumstance that the invoices in question, in the period now in question, were registered in its accounting as services of "Marketing and Publicity", beyond having been duly explained by the witness evidence produced, it should only be noted that it is today settled that "For purposes of Corporate Income Tax, the document proving and justifying costs for purposes of articles 23(1) and 42(1)(g) of the Corporate Income Tax Code, does not have to assume the essential formalities required for invoices for purposes of VAT, since the requirement of documentary proof is not confused nor exhausted in the requirement of an invoice, requiring only a written document, in principle external and with mention of the essential characteristics of the operation, since, unlike what occurs with VAT, for purposes of Corporate Income Tax, the justification of the cost constitutes a probative formality and therefore replaceable by any other type of proof."

In fact, invoices for purposes of Corporate Income Tax do not have a substantive nature, whereby their possible insufficiencies or irregularities do not, in any way, contend with the materiality that may be established, especially when, as is the case, such insufficiencies or irregularities do not assume, in light of that materiality, any relevance with respect to the calculation and determination of tax due.

Thus, there is no fiction here, on the contrary (fiction would be to consider that certain services are involved, in the face of clear evidence that such is not the case), but only to assess the "compliance with the requirements that prevent the disregard as expenses of the fiscal period" of the payments in question.

Regarding the non-existence of proof that would allow assessment of the real importance of the benefits gained by entering into a contract with the entity based in Hong Kong, it is considered that the same results evident, both from the evolution of the business volume of the Claimant before and during the existence of the business relationship with B..., and from the weight of the clientele resident in China, during the term of that same relationship, and from the evolution of the price of the units transacted by the Claimant, of which the billing thereof gives account.

b.

Regarding the normal character and lack of excessiveness of the operations in question, it is also considered that proof thereof has been sufficiently produced.

In fact, taking into account both the dimension of the operation of canvassing, transporting and accompanying clients to properties valued at hundreds of thousands of euros, from China to Portugal, bridging the notoriously existing geographic and cultural gap, and considering the publicly known state of the real estate sector in Portugal in 2012 and following years, and considering the appreciation of properties that occurred, and which the documentation collected by the Tax Administration itself denotes, the order of values of the commissions that the Claimant paid will be understood.

It is further noted that, as results from the proven matters, the Claimant was heavily indebted, and that the disposal of its inventory, by way of the Chinese clientele provided by B..., allowed a substantial reduction of its liabilities, in the order of 46% between 2014 and 2013 and 50% between 2015 and 2014, and correspondingly of the financial expenses incurred, a gain which must necessarily be taken into account in the assessment of the normality and non-excessiveness of the operations in question.

It is further noted that in the present case the commissions in question amounted to values between 15% and 25%, and it is proven that identical values were paid by companies competing with the Claimant, such values having even been accepted, in some cases, by the Tax Administration itself in the course of inspection.

From this it follows that there are no doubts that the values in question correspond, in their context, to normal operations and do not have an excessive character.

Restating what was written in the already-mentioned arbitral judgment delivered in case 198/2017T:

"In order to decide whether there is excessiveness or not, one cannot take as comparison terms the percentages of commissions which the Tax Administration states are usually charged by real estate companies, between 3% and 5%, since the activity carried out by B... is not limited to what is normally undertaken in real estate brokerage, which does not involve expenses of the order of those proven to be incurred by B... (payment of travel, accommodation, food, transport, interpreters, etc.).

On the other hand, assessment of the requirement of non-excessiveness should be carried out taking into account the situation of the taxpayer, seeking to ascertain whether the payment should be considered excessive, from its perspective, in the context in which it has to decide to pay for the services.

From this perspective, a payment will be excessive when it is demonstrated that the taxpayer could obtain the same service for a lower amount.

It results from the evidence produced that the Claimant wanted to sell the properties as quickly as possible, as it was expected that the process of construction and sale of properties be completed by 2010, five years after the start of the construction process, and it had still not managed to sell them by 2013 and 2014, due to the economic and financial crisis situation affecting Portugal.

The evidence produced is also to the effect that the Claimant could not obtain the canvassing of customers with payment of commissions lower than those paid to B..., which did not accept them, nor to other service providers of canvassing, for none provided it with customers who paid the selling prices that the Claimant wanted to obtain for itself.

Under these circumstances, the payment cannot be considered excessive, as it is justified by the need to obtain the canvassing services and the absence of an alternative at a lower price.

The reasonableness of the payments made to B... is further reinforced by the fact that the Claimant was not adversely affected by the payments it made to B..., for it only paid B... when it completed the sale of properties and what it paid to B... was added to the selling price that the Claimant itself set and wanted to obtain for itself.

From the above, it is concluded that the Claimant proved that the payments made to B... were not abnormal nor excessive."

As referred to in the judgment transcribed, it is considered that the assessment of the normal and non-excessive character of the operations should relate to the specific case, taking into account the specific situation in which such operations were carried out, and one cannot formulate "tables" or a priori formulas, which mechanically exclude certain types of operations from the scope of reasonableness, or remit them to the plane of excessiveness.

In the case, the commissions in question arise in the scenario of acute economic crisis, in which the market was practically at a standstill, and in which the services remunerated by those commissions bring significant added value to the product sold, from the outset, and in the case, by allowing its sale, releasing funds for the reduction of liabilities and corresponding associated financial expenses.

On the other hand, as the service is paid solely based on results, there is increased risk for the service provider, which must bear – notoriously – substantial costs to bring customers "from the other side of the world", and additional security for the purchaser of the services, which is limited to the obligation to pay, having assured the return arising from the completion of its sales, and it should be noted that the activity in question allowed the accommodation of the additional cost, ensuring a profit margin for the seller.

Finally, in the case there is detected, nor is substantiated by the Tax Administration, any concrete indication of fraud or tax evasion.

Thus, and in light of all the foregoing, it is considered that, in the part now in question, the tax act which is the subject of the present arbitral action is affected by error in the factual prerequisites, and consequent error of law, and should therefore be annulled, and the arbitral request should consequently proceed on this point.

The assessment of compensatory interest corresponding has as its prerequisite the assessment of the tax whose annulment determines the consequent annulment thereof.

Given the non-annulment of assessment no. 2017..., relating to fiscal year 2015, the final request formulated by the Claimant remains, seeking the annulment of the part of this assessment relating to compensatory interest, for defect of lack of substantiation.

On this matter, and in addition to the considerations of the case law previously cited with regard to the alleged lack of prior hearing for the assessment of compensatory interest, to the extent applicable, what is stated in the Judgment of the Supreme Administrative Court of 04-12-2013, delivered in case 01111/13, is followed, where it can be read that:

"The substantiation of a compensatory interest assessment must disclose, on the factual plane, the amount of the tax on which the interest is charged, the rate or rates applicable and the period of its calculation."

On this defect invoked by the Claimant, the Respondent did not comment, either in its response or in its written submissions.

Examining the assessment in question, it is verified that it is indeed omissive as to the essential elements listed by the case law set out.

Thus, although mention is made in the assessment that the substantiation would have been sent previously, the fact is that in the Tax Inspection Report only information is provided that compensatory interest will be assessed, with no indication whatsoever of the said essential elements of substantiation.

Thus, it cannot be concluded otherwise than that there is a lack of substantiation of the compensatory interest assessment included in assessment no. 2017..., relating to fiscal year 2015, which should, on that point, be annulled, for violation of article 77 of the General Tax Law, and the arbitral request should consequently proceed on this point.

C. DECISION

In these terms, this Arbitral Tribunal decides to partly grant the arbitral request filed and, in consequence:

1. Annul the act of assessment of Corporate Income Tax and autonomous taxation no. 2017... and corresponding compensatory interest, for fiscal year 2014;

2. Partially annul assessment no. 2017..., relating to fiscal year 2015, in the part relating to compensatory interest;

3. Maintain, for the remainder, assessment no. 2017..., relating to fiscal year 2015;

4. Order the parties to bear the costs of the proceeding, in proportion to their respective degree of success, fixing the amount of €330.00 to be borne by the Claimant, and €8,238.00 to be borne by the Respondent.

D. Value of the Proceeding

The value of the proceeding is fixed at € 573,097.15, in accordance with article 97-A(1)(a) of the Code of Procedure and Process in Tax Matters, applicable by virtue of article 29(1)(a) and (b) of the RJAT and article 3(2) of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €8,568.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective degree of success, as fixed above, since the request was partly granted, in accordance with articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the said Regulations.

Let notification be made.

Lisbon, 10 December 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Sérgio de Matos)

The Arbitrator Member

(José Nunes Barata)